Licensing guide for businesses

ACCESSING INTERNATIONAL MARKETS

A Guide to
Successful Licensing

54022 UKTI License BroAW.indd 1 14/01/2011 16:50

INTRODUCTION

Why A LicenSinG Guide?
Trading internationally is good for business and It shows how adopting a structured approach
if approached correctly it can be very profitable. can reduce some of the risks. It also highlights
This guide has been produced to provide a basic the various sources of advice and other assistance
introduction to licensing and franchising. It will help that UK companies can access – both from UK
UK companies who are considering developing further Trade & Investment and other partners.
their interests in overseas markets – particularly those
This guide has been produced by UK Trade &
thinking about licensing or franchising. UK Trade &
Investment in conjunction with Virtuoso Legal, a
Investment provides a range of services to help UK
boutique law firm specialising in intellectual property,
companies develop business in overseas markets, not
licensing and franchising. UK Trade & Investment is the
only for those companies looking to export products
UK Government organisation that helps UK companies
or sell services into their chosen markets, but also for
trade successfully in international markets. It comes
those thinking of establishing a permanent presence
to you free because we are committed to helping UK
in an overseas market as a means of accessing
companies trade profitably and effectively overseas
opportunities in that particular country or region.
and that always means evaluating the most beneficial
Investing in an overseas market is often both approach to accessing customers in those markets.
complex and risky. The purpose of this guide is
In this guide you will find a range of useful tips -
to help UK companies understand how they might
other information including access to training and
reduce some of the risks associated with licensing
support can be found by visiting our website
and maximise the opportunities to benefit from this
at www.ukti.gov.uk
type of investment.

Who ShouLd uSe it?
This guide is aimed at UK companies of any size who
are seeking to capitalise on overseas opportunities.
In particular, it is aimed at those companies who are
looking to take their international business a stage
further than simple exporting and who are considering
whether licensing might be the best next step for them
to expand further.

This guide can be used by both manufacturing and
service companies, by companies with no experience of
the market under consideration and by those who are
already trading with the target market.

Likewise, the guide can be used by your management
team as a useful planning tool or by a UK company
already planning further international expansion.

While the guide focuses on licensing and franchising,
much of the material is equally relevant to other forms
of overseas investment, for instance establishing a joint
venture or a wholly owned subsidiary.

02 UKTI LICENSING BROCHURE


AN INTRODUCTION
TO LICENSING

Licensing is often poorly understood, RoyALty StReAmS And VALuAtionS
especially in some of the new and of inteLLectuAL PRoPeRty
One of the most common questions asked is “What
emerging economies of the world.
is a particular piece of technology worth in terms of
it does, however, offer businesses outright sale value?” or indeed “When licensed, what
a very real opportunity to maximise could one expect as a royalty stream?”. A number of
factors affect this and it is essential to take expert
income streams on technology and
advice. It is extremely difficult to value intellectual
to exploit technology in new markets. property and it is a very different process from
valuing bricks and mortar. With tangible assets such
mAkinG money fRom technoLoGy as commercial buildings there will be an acceptable
norm in any particular locality for a type of building.
Licensing is basically the grant of a right to do
Unfortunately, technology is often unique in the market
something, usually in return for a payment – also
place and it can therefore be a complex and time
known as a royalty. The situation in respect of licensing
consuming process to fix any sort of value to it.
is analogous to someone owning a house and letting
To a certain extent the same happens with royalty
different parts of the house to different tenants. As
streams, although different industries do have accepted
with a multiple occupancy building, different tenants
norms as royalty values. A number of accountants and
can be granted a variety of rights to occupy, exploit
solicitors specialise in this area and it is important to
and use some parts of the property. However, a licence
get the right advice early on so that negotiations can
does not grant the tenants any rights in the physical
proceed on a proper commercial basis.
bricks and mortar of the property. The licensee has the
right to use the patent, know-how, trade mark, design Factors affecting the value of technology will include
right or copyright etc, but the licensee does not own the cost of creating the technology, the uniqueness
the legal title to it, nor (unless specifically permitted of the technology, barriers for other people entering
by the licence) are they often granted rights to grant the market, whether or not the technology can be
sub-licences of the intellectual property. licensed and so on. When considering licensing it is
vital to consider the income streams that are likely to
Most people are vaguely aware of licensing through
be generated once the product is licensed. Obviously,
the software industry. At some point most people will
products with mass market appeal can generate huge
have “clicked” to accept a Microsoft software licence
income streams even if the royalty payable on each
or something similar. In fact, the wealthiest companies
individual item is very small. On the other hand,
today are ones such as Microsoft and IBM who depend
technology which is in a niche arena may attract a
on “clicks not bricks” as assets. Licensing is therefore
much higher individual percentage royalty payment
much more widespread than would first appear.
simply because it is not capable of mass exploitation.
Licences are widely used in the automotive industry.
Licensing allows a car manufacturer to invest a great
deal of resources in developing new technology, such
as new brakes or gearing, and then to licence this
technology to other car manufacturers in return for a
royalty. This type of cross-licensing is widespread and
by collaborating in this way many manufacturers can
recoup the costs of research and development much
sooner than they would by simply using the technology
purely to their own advantage in their own products.

UKTI LICENSING BROCHURE 03


key AdVAntAGeS of LicenSinG oVeR
otheR StRuctuReS
Many companies look at joint ventures or partnerships
and collaborations especially when considering
developing overseas markets. The big problem with
joint ventures and similar vehicles is that the parties
become jointly responsible for a number of issues, such
as finances and management of the company, when in
practical terms it is likely to be more commercial for one
party to have responsibility for certain decisions alone.
Joint ventures can work well but they are inherently
flawed in terms of joint management decisions and
this is often where disputes arise. On the other hand,
licensing permits the exploitation of new technology
without the burden of managerial decisions for both
parties. Having said that, however, it is important for
both licensor and licensee to understand commercially
where the markets lie and to agree a joint marketing
strategy of some kind in order to achieve maximum
sales. Unfortunately joint ventures often fail as they
require a like-minded business culture, which can be
difficult to achieve – especially in an overseas market
where business practices, attitudes and cultural values
can vary widely.

Joint ventures can also be extremely expensive to
set up as the legal costs involved may be significant.
There are countries, however, where it is impossible
to trade unless one has a local party who is domiciled
in that country. An arms length licence may avoid
such problems.

04 LICENSING BROCHURE


AdvANTAGES dISAdvANTAGES
A licence allows a company to take a product to It is important for the company to find the right partner
market without the expense of setting up locally and to licence with in a local situation. Understanding
all the risks and costs associated with that. what an overseas partner can do is essential to making
licensing a success. UK Trade & Investment can help in
finding the right individual or company.
A larger and more powerful licensee in a new market It is important to ensure that there are proper control
can provide instant market access and deter provisions in the licence. It is especially important with
competitors and imitators. licensing to have a well-drafted licence drawn up by
experts. The licence should contain things such as full
audit provisions and as licensor it may be important
to police those audit provisions.
A licence can be used to enable products to be In the long term, royalty payments from a licence may
supplied locally where there is no opportunity to not provide the maximum return for a licensor. It could
manufacture in the locality. be that setting up locally can generate better profits in
the long run.
It is possible with the right kind of licence and overseas It is absolutely key to the success of the licence for
business partner to create an extensive market presence it to be properly negotiated and drafted. Licensing
very early on in the product’s life cycle. This will help can be a complex arrangement and it is important for
make maximum profits for the licensor. a licensor to be properly guided in terms of royalty
payments, audit provisions and minimum sales.
In certain circumstances it is possible to divide up a The licensor is often required to provide technical
particular market so that different companies can licence assistance and training in brand standards etc.
the same product but apply it in different areas. For depending upon where the licensee is based. This will
example, it is possible to take disinfection kits and divide need to be factored into the licensing arrangements.
up the market into human and animal markets then find
different companies with the right market presence.
It is possible to work with a licensee in a foreign The licensor must be satisfied that the licensee can
market and learn from them. For example, it may be make a local market from the products. Some products
possible to improve products or to adjust them so that are more popular in some cultures than in others.
they meet local market needs. This can often be done
early on in the product’s life cycle to help achieve
better market coverage.
An overseas licensee may well save a lot of expense
in terms of research and development. For example,
reciprocal licensing in the car and telecommunications
industries enables companies to exploit the fruits of
research carried out by one company alone.
Where well known brands are licensed overseas, the
local licensee can take advantage of an established
brand with a known name and goodwill. It is very
important for the licensor to ensure that brand
standards are maintained in an overseas market.
It is possible to negotiate further income streams from
support services and training.

LICENSING BROCHURE 05


HOW TO BE SUCCESSFUL
WHEN LICENSING

In the first instance the key to any successful contract
chef WoRkS is to find the right business partner. Successful licensees
Chef Works has been manufacturing and may come from an existing pool of associates, such
distributing chefs apparel and clothing for as suppliers, manufacturers and agents already in
over thirty five years and began exporting the target market. Beware, however, of not doing
15 years ago from its initial base in South Africa. your research. Make sure any partner has the right
infrastructure and reputation locally to take the project
The business comprises various companies forward. Do some “due diligence” on the company by
owned by the founding family plus numerous reviewing their company accounts and legal structure.
independent distributors across the globe. Meet with key members of staff and find out what
Clothing is manufactured in Southern Africa, future plans the company has. Ask yourself whether
China and Bangladesh. or not key staff members are likely to move on, taking
valuable market information and customers with them.
A new company has been created to house all the
intellectual property which consists of a variety it is also important to consider the impact
of trademarks and a design right registration.
of licensing on your business. do you
Licensing is key to the company’s intellectual have people in place that can trouble
property strategy and is held in an off shore
holding company. shoot or assist in the success of the
venture. is it appropriate to set up a
The company enjoys the following benefits:
number of consultation days in which
1 It has a clear system of registering and protecting you provide your expertise to make sure
its brand.
items are manufactured and sold to
2 The IP is held in one company to ensure no your specification? how hands on do
disputes evolve regarding creation and ownership.
you want to be in an overseas market?
3 The company has the opportunity of licensing to Will you need a local go-between
third parties in the future should it wish to do so,
because of language or cultural barriers?
4 The licensing process is simple,
Both parties need to be clear about the structure of
5 The assets of the holding company can be valued any licence. Heads of terms should be put forward
due to the income stream, pro-actively from day one. In addition your business
needs to consider the worst case scenario. How would
6 The ringfencing and valuation of IP could enable both parties walk away in a dignified manner if the
the company to seek a higher valuation in the relationship just does not work? Be clear with your
event of a takeover/ flotation, licensees as to what you expect. If you want a minimum
7 The IP holding company is ring fenced from any royalty or sales, then say so from the beginning.
of the trading companies thus ensuring a high Remember that different cultures have their own
level of asset protection. traditions and culture, and even language can be open
to varying interpretations. UK Trade & Investment can
help companies overcome some of these issues as they
know the local business people and can be a source of
invaluable information not available elsewhere.



Finally, get advice from expert lawyers and accountants. toP 10 tiPS foR neGotiAtinG LicenSeS
What royalty figures will work for you and how and

1
when will they be paid? The royalty rate of 5% of Consider the type of licence that you are
net sales is frequently negotiated in many industries, going to grant, e.g. exclusive, non-exclusive
including automative, chemical, communications, or sole licence, and whether it should be
computers, defence, energy, electronics, food, limited by field of use and/or territory.

2
franchises, glass, household products, mechanical,
medical, photography, sports, toys and waste treatment. Consider carefully whether the licensee will
Higher royalty rates, for example above 15%, exist be able to sub-license to a third party and
in some industries, but they are rare and are usually on what basis.
associated with profitable technologies or where

3
higher margins can be justified. A specialist lawyer and Consider asking a licensee to enter into a
accountant will help steer you through the minefield non-disclosure / confidentiality agreement
of “net” versus “gross” royalty payments and how before disclosing any information.
to calculate them. They will also advise on upfront
payments and minimum and maximum royalties.

4
This is by far one of the most complex areas of Have a clear licensing strategy for who you
negotiation and one which heavily influences the are going to license to – consider whether
profitability of the licensor. It may be expensive to you need to establish a clear advantage in the
get advice, but getting the basics wrong will prove marketplace before licensing to competitors.
far more expensive in the long run.

5
Remuneration for a licensor can be by way
of a license fee or by way of royalties. Decide
on what basis the licensee will be expected
to make payment.

6 If you are providing a license of your
technology consider if you will provide the
licensee with technical assistance and support
and if you will charge for these services?

7
Consider a clause dealing with ownership
of any improvements in licensed technology.

8
Duration of licence – how long will the
licence last?

9
Ensure the licence agreement clearly sets
out the circumstances in which the
arrangement may be terminated and
consequences of termination.

10
Consult specialist accountants or
solicitors for advice on the value of
your intellectual property and the terms
of the licence agreement.



KEEPING THE PROJECT
MOVING FORWARD

Once you have got your licensing project up and
honeymAn GRouP running, it is important to maintain a good dialogue
with and ongoing support for your licensee. Regular
The Honeyman Group is a UK based consultancy input on marketing strategy can be a useful way not
company operating in the pharmaceutical and just of steering your product, but also of gaining
biotechnology sectors. Over the past few years, insight into what is happening in other markets. If your
the company has successfully developed new process licensee gets useful feedback from customers, or indeed
technology for which it obtained some worldwide develops the product for a local market, then you will
patent and trade mark protection. The potential and need to know.
scope for this technology went beyond the existing
UK and Irish markets of the company’s core business Regular visits will also reduce the likelihood of being
activity, and it also had the potential to move into hoodwinked over royalty payments. It is often quite
several other market sectors. A strategy needed easy to do a quick audit and see if the licensee is
to be developed to move the company forward really being honest about what they sell. But it is
maximising rollout efficiency and returns. almost impossible to do this from afar. A regular visit
will also flush out why something is or is not working
The method chosen by the Honeyman Group in a particular market. Poor sales could be due to
was to first spin out the IP into a new company. a number of reasons – not just poor performance
“NewCo” was formed as a vehicle with the specific of the local licensee. It can also help both parties
purpose of rolling out the technology across the plan what sales targets are realistic going forward.
World and was geared to this task, unlike the core If the licensee provides raw materials or products
consulting business which clearly was not. As part then this information will help business planning
of the process, NewCo gave an exclusive license back back in the UK to ensure figures for required materials
to the core business to use the technology in the UK is accurate for the forthcoming period. It will also
and Irish pharmaceutical and biotechnology sectors, be useful information for investors, the bank and
so there was no effective change for the existing other interested parties such as shareholders.
business. Thus, NewCo was able to enter discussions
with a number of potential licensees and partners A good accountant who knows about licensing can
around the world, and was free and unencumbered help with things such as establishing benchmarks for
in these negotiations towards optimising the overall sales and profit. They can also help establish auditing
outcome on a case-by-case basis. patterns and identify the best payment mechanisms
for licensors. By way of example, payment of royalties
Whilst IP was at the heart of this operational may be best done in sterling rather than risk the
strategy, its use also enabled the Honeyman Group vagaries of currency fluctuations. It may be better
to optimise its wider business and commercial for cash flow purposes to be paid monthly rather
objectives in areas such as equity, funding, than quarterly. You may also need to bear in mind
and tax planning. whether or not certain countries can actually make
Trevor Honeyman, chairman of the Honeyman payments overseas and how quickly. If you suspect
Group Ltd says: – “Overall, we are very happy with royalties have not been paid correctly, the licence
the outcome which made best use of IP to deliver agreement should contain an audit clause that will
our long-term goals and objectives”. allow you to instruct an accountant to check the
books and records of your licensee.



AN INTRODUCTION
TO FRANCHISING

Franchising is a much abused term in the English In order to avoid legal pitfalls and getting tied into
language. It is used to describe many business onerous terms it is important to have the support you
relationships but, in its true legal sense, it is a particular need from experienced legal advisors and accountants.
form of licensing. Franchising usually occurs where one Some franchise agreements contain unfair obligations
company has a tried and tested product and business and liabilities on you as the franchisee. Remember the
model. This tried and tested business can then be rolled old adage an ounce of prevention is worth a pound
out to other potential businesses on a nationwide or of cure. Other business support organisations may also
indeed international basis. Franchising is particularly be able to offer you advice and guidance on setting up
popular in the USA. such a business.

Successful franchising occurs in a range of industries
and often works well where there is a customer service
element as well as a recognised product and brand.
Examples of successful franchising include McDonalds
as a fast food retailer and AutoGlym which sells car
care products.

In franchising the “know-how” of a business i.e.
its underlying business strategy is key to its success.
Franchising works particularly well where the franchisor
advertises on a national basis and brings a well-known,
tried and tested brand to the market. The franchisee
gets the benefit of a head start in business by selling
well-known goods and services. In simple terms
a franchise is a sophisticated know how and trade
mark licence. In order to maintain brand standards
the franchisor will often control the supply chain and
direct that products are sourced from specific suppliers
and are sold in a particular way. The franchisor may
also specify things such as staff training and may
coordinate new customer enquiries which will come
in via their national network.

As with licensing, franchising can be extremely flexible
and can work very well for both parties provided that
the franchise agreement is drafted fairly. Franchisees
pay a royalty for the benefit of using the brand, the
know-how and the franchisor’s expertise. In return
the franchisor gets the benefit of nationwide market
penetration and can enjoy considerable success from
a royalty stream.

Exhibitions are held around the country where you
can visit businesses offering a franchise and discuss
how it works. The British Franchise Exhibition is one.
Attending a show like this can give you the opportunity
to have an initial look at what is on offer and is also
the source of valuable advice and information.



WHERE TO GO FOR ADVICE
AND SUPPORT

ciA WoRLd fActBook
uk trade & investment is the Government The US Central Intelligence Agency (CIA), publishes
organisation that supports both companies information on many key characteristics of world
in the uk trading internationally and markets. Categories include economy; people;
geography; communications, transportation
overseas enterprises seeking to locate and the military.
in the uk. our role is to help companies www.cia.gov/cia/publications/factbook
realise their international business
potential through knowledge transfer, and inteLLectuAL PRoPeRty office
on-going partnership support. our position Information regarding copyright, design, trademarks
within Government, in-depth knowledge of and patents.
uk regional business and a global network www.ipo.gov.uk
make us a unique strategic resource.
LicenSinG eXecutiVeS Society
inteRnAtionAL
uk tRAde & inVeStment The Licensing Executives Society International
Extensive information on all UK Trade & Investment (LESI) is an association of 33 national and regional
services including a section on Investing Overseas. societies, each composed of men and women
For more information, visit www.ukti.gov.uk who have an interest in the transfer of technology,
or licensing of intellectual property rights – from
technical know how and patented inventions
foReiGn And commonWeALth office to software, copyright and trademarks.
Country information and up-to-date travel advice.
www.lesi.org
www.fco.gov.uk

hm ReVenue And cuStomS (hmRc)
HMRC provide a wide range of information and guides
to assist companies trading overseas. Guides include
introductions to import & export; classifying your
goods; reliefs and exemptions; monthly updates on
tariffs, duty schedules and trade statistics.
www.hmrc.gov.uk

doinG BuSineSS – the WoRLd BAnk GRouP
Contains individual country and regional profiles which
focus on regulations, protection of property rights and
constraints with quantitative indicators for each.
www.doingbusiness.org

coRRuPtion PeRcePtion indeX
Produced by Transparency International Limited,
and providing an index of the perception levels of
corruption worldwide.
www.transparency.org



ELIzABETH WARD
PRINCIPAL VIRTUOSO LEGAL

Liz Ward is Principal at Virtuoso Legal, a specialist legal
practice. Liz is acknowledged as a “Leader in her field”
by the 2010 edition of Chambers and is also ranked in
the Legal 500.

Liz has specialised in Intellectual Property and
Information Technology law and her expertise
encompasses an in-depth knowledge relating to
patents, trade marks, copyright, design rights, software
and confidential information.

The work undertaken by Virtuoso Legal includes
both litigation in the High Courts and also licensing
software, know-how, technology and brands in order to
make income streams for companies.

A member of the Chartered Institute of Patent Agents
(CIPA) and the Institute of Trade Mark Attorneys
(ITMA), Liz is also currently Chair of the North East
Section of the Licensing Executives Society (LES) and
regularly lectures and writes on matters relating to IP
law.

For more information: www.virtuosolegal.com



ACCESSING INTERNATIONAL MARKETS

A range of uk Government support is available from a portfolio of initiatives
called Solutions for Business. the “solutions” are available to qualifying
businesses, and cover everything from investment and grants through to
specialist advice, collaborations and partnerships.
uk trade & investment is the government organisation that helps uk-based
companies succeed in the global economy, and is responsible for the delivery
of the two SfB products “developing your international trade Potential” and
“Accessing international markets”.
We also help overseas companies bring their high-quality investment to the
uk’s dynamic economy – acknowledged as europe’s best place from which
to succeed in global business.
uk trade & investment offers expertise and contacts through its extensive
network of specialists in the uk, and in British embassies and other diplomatic
offices around the world. We provide companies with the tools they require
to be competitive on the world stage.
for further information please visit www.ukti.gov.uk
or contact us at our regional office below:
uk tRAde & inVeStment
yorkshire & humber Victoria house,
2 Victoria Place, Leeds LS11 5Ae
tel: 0113 394 9825
fax: 0113 394 9834
email: info@uktiyh.org.uk

Whereas every effort has been made to ensure that the information given in this document is
accurate, neither uk trade & investment nor its parent departments (the department for Business,
innovation and Skills (BiS), and the foreign & commonwealth office), accept liability for any errors,
omissions or misleading statements, and no warranty is given or responsibility accepted as to the
standing of any individual, firm, company or other organisation mentioned.
the paper in this document is made from 50 per cent genuine waste pulp and 50 per cent ecf pulp
from well managed forests. the inks are vegetable oil-based and contain resins from plants/trees and
the laminate on the cover is sustainable, compostable and can be recycled. Published January 2010
by uk trade & investment © crown copyright.
Published october 2010 by uk trade & investment
© crown copyright
uRn 10/1180 - A Guide to Successful Licensing


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