ACCESSING INTERNATIONAL MARKETS

A Guide to Successful Licensing

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INTRODUCTION

Why A LicenSinG Guide?

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

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

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AN INTRODUCTION TO LICENSING

Licensing is often poorly understood, especially in some of the new and emerging economies of the world. it does, however, offer businesses a very real opportunity to maximise income streams on technology and to exploit technology in new markets.
mAkinG money fRom technoLoGy
Licensing is basically the grant of a right to do something, usually in return for a payment also known as a royalty. The situation in respect of licensing is analogous to someone owning a house and letting different parts of the house to different tenants. As with a multiple occupancy building, different tenants can be granted a variety of rights to occupy, exploit and use some parts of the property. However, a licence does not grant the tenants any rights in the physical bricks and mortar of the property. The licensee has the right to use the patent, know-how, trade mark, design right or copyright etc, but the licensee does not own the legal title to it, nor (unless specifically permitted by the licence) are they often granted rights to grant sub-licences of the intellectual property. Most people are vaguely aware of licensing through the software industry. At some point most people will have clicked to accept a Microsoft software licence or something similar. In fact, the wealthiest companies today are ones such as Microsoft and IBM who depend on clicks not bricks as assets. Licensing is therefore much more widespread than would first appear. 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.

RoyALty StReAmS And VALuAtionS of inteLLectuAL PRoPeRty

One of the most common questions asked is What is a particular piece of technology worth in terms of outright sale value? or indeed When licensed, what could one expect as a royalty stream?. A number of factors affect this and it is essential to take expert advice. It is extremely difficult to value intellectual property and it is a very different process from valuing bricks and mortar. With tangible assets such as commercial buildings there will be an acceptable norm in any particular locality for a type of building. Unfortunately, technology is often unique in the market place and it can therefore be a complex and time consuming process to fix any sort of value to it. To a certain extent the same happens with royalty streams, although different industries do have accepted norms as royalty values. A number of accountants and solicitors specialise in this area and it is important to get the right advice early on so that negotiations can proceed on a proper commercial basis. Factors affecting the value of technology will include the cost of creating the technology, the uniqueness of the technology, barriers for other people entering the market, whether or not the technology can be licensed and so on. When considering licensing it is vital to consider the income streams that are likely to be generated once the product is licensed. Obviously, products with mass market appeal can generate huge income streams even if the royalty payable on each individual item is very small. On the other hand, technology which is in a niche arena may attract a much higher individual percentage royalty payment simply because it is not capable of mass exploitation.

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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.

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AdvANTAGES
A licence allows a company to take a product to market without the expense of setting up locally and all the risks and costs associated with that.

dISAdvANTAGES
It is important for the company to find the right partner to licence with in a local situation. Understanding 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. It is important to ensure that there are proper control provisions in the licence. It is especially important with 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. In the long term, royalty payments from a licence may not provide the maximum return for a licensor. It could be that setting up locally can generate better profits in the long run. It is absolutely key to the success of the licence for it to be properly negotiated and drafted. Licensing can be a complex arrangement and it is important for a licensor to be properly guided in terms of royalty payments, audit provisions and minimum sales. The licensor is often required to provide technical assistance and training in brand standards etc. depending upon where the licensee is based. This will need to be factored into the licensing arrangements.

A larger and more powerful licensee in a new market can provide instant market access and deter competitors and imitators.

A licence can be used to enable products to be supplied locally where there is no opportunity to manufacture in the locality. It is possible with the right kind of licence and overseas business partner to create an extensive market presence very early on in the products life cycle. This will help make maximum profits for the licensor. In certain circumstances it is possible to divide up a particular market so that different companies can licence the same product but apply it in different areas. For example, it is possible to take disinfection kits and divide 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 market and learn from them. For example, it may be possible to improve products or to adjust them so that they meet local market needs. This can often be done early on in the products 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.

The licensor must be satisfied that the licensee can make a local market from the products. Some products are more popular in some cultures than in others.

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HOW TO BE SUCCESSFUL WHEN LICENSING

chef WoRkS
Chef Works has been manufacturing and distributing chefs apparel and clothing for over thirty five years and began exporting 15 years ago from its initial base in South Africa. The business comprises various companies owned by the founding family plus numerous independent distributors across the globe. Clothing is manufactured in Southern Africa, China and Bangladesh. A new company has been created to house all the intellectual property which consists of a variety of trademarks and a design right registration. Licensing is key to the companys intellectual property strategy and is held in an off shore holding company. The company enjoys the following benefits: 1 It has a clear system of registering and protecting its brand. 2 The IP is held in one company to ensure no disputes evolve regarding creation and ownership. 3 The company has the opportunity of licensing to third parties in the future should it wish to do so, 4 The licensing process is simple, 5 The assets of the holding company can be valued due to the income stream, 6 The ringfencing and valuation of IP could enable the company to seek a higher valuation in the event of a takeover/ flotation, 7 The IP holding company is ring fenced from any of the trading companies thus ensuring a high level of asset protection.

In the first instance the key to any successful contract is to find the right business partner. Successful licensees may come from an existing pool of associates, such as suppliers, manufacturers and agents already in the target market. Beware, however, of not doing your research. Make sure any partner has the right infrastructure and reputation locally to take the project forward. Do some due diligence on the company by reviewing their company accounts and legal structure. Meet with key members of staff and find out what future plans the company has. Ask yourself whether or not key staff members are likely to move on, taking valuable market information and customers with them.

it is also important to consider the impact of licensing on your business. do you have people in place that can trouble shoot or assist in the success of the venture. is it appropriate to set up a number of consultation days in which you provide your expertise to make sure items are manufactured and sold to your specification? how hands on do you want to be in an overseas market? Will you need a local go-between because of language or cultural barriers?
Both parties need to be clear about the structure of any licence. Heads of terms should be put forward pro-actively from day one. In addition your business needs to consider the worst case scenario. How would both parties walk away in a dignified manner if the relationship just does not work? Be clear with your licensees as to what you expect. If you want a minimum royalty or sales, then say so from the beginning. Remember that different cultures have their own 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.

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Finally, get advice from expert lawyers and accountants. What royalty figures will work for you and how and when will they be paid? The royalty rate of 5% of net sales is frequently negotiated in many industries, including automative, chemical, communications, computers, defence, energy, electronics, food, franchises, glass, household products, mechanical, medical, photography, sports, toys and waste treatment. Higher royalty rates, for example above 15%, exist in some industries, but they are rare and are usually associated with profitable technologies or where higher margins can be justified. A specialist lawyer and accountant will help steer you through the minefield of net versus gross royalty payments and how to calculate them. They will also advise on upfront payments and minimum and maximum royalties. This is by far one of the most complex areas of negotiation and one which heavily influences the profitability of the licensor. It may be expensive to get advice, but getting the basics wrong will prove far more expensive in the long run.

toP 10 tiPS foR neGotiAtinG LicenSeS

1 2 3 4 5 6 7 8 9 10

Consider the type of licence that you are going to grant, e.g. exclusive, non-exclusive or sole licence, and whether it should be limited by field of use and/or territory. Consider carefully whether the licensee will be able to sub-license to a third party and on what basis. Consider asking a licensee to enter into a non-disclosure / confidentiality agreement before disclosing any information. Have a clear licensing strategy for who you are going to license to consider whether you need to establish a clear advantage in the marketplace before licensing to competitors. 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. 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? Consider a clause dealing with ownership of any improvements in licensed technology.

Duration of licence how long will the licence last?

Ensure the licence agreement clearly sets out the circumstances in which the arrangement may be terminated and consequences of termination. Consult specialist accountants or solicitors for advice on the value of your intellectual property and the terms of the licence agreement. LICENSING BROCHURE 07

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KEEPING THE PROJECT MOVING FORWARD

honeymAn GRouP
The Honeyman Group is a UK based consultancy company operating in the pharmaceutical and biotechnology sectors. Over the past few years, the company has successfully developed new process technology for which it obtained some worldwide patent and trade mark protection. The potential and scope for this technology went beyond the existing UK and Irish markets of the companys core business activity, and it also had the potential to move into several other market sectors. A strategy needed to be developed to move the company forward maximising rollout efficiency and returns. The method chosen by the Honeyman Group was to first spin out the IP into a new company. NewCo was formed as a vehicle with the specific purpose of rolling out the technology across the World and was geared to this task, unlike the core consulting business which clearly was not. As part of the process, NewCo gave an exclusive license back to the core business to use the technology in the UK and Irish pharmaceutical and biotechnology sectors, so there was no effective change for the existing business. Thus, NewCo was able to enter discussions with a number of potential licensees and partners around the world, and was free and unencumbered in these negotiations towards optimising the overall outcome on a case-by-case basis. Whilst IP was at the heart of this operational strategy, its use also enabled the Honeyman Group to optimise its wider business and commercial objectives in areas such as equity, funding, and tax planning. Trevor Honeyman, chairman of the Honeyman Group Ltd says: Overall, we are very happy with the outcome which made best use of IP to deliver our long-term goals and objectives.

Once you have got your licensing project up and running, it is important to maintain a good dialogue with and ongoing support for your licensee. Regular input on marketing strategy can be a useful way not just of steering your product, but also of gaining insight into what is happening in other markets. If your licensee gets useful feedback from customers, or indeed develops the product for a local market, then you will need to know. Regular visits will also reduce the likelihood of being hoodwinked over royalty payments. It is often quite easy to do a quick audit and see if the licensee is really being honest about what they sell. But it is almost impossible to do this from afar. A regular visit will also flush out why something is or is not working in a particular market. Poor sales could be due to a number of reasons not just poor performance of the local licensee. It can also help both parties plan what sales targets are realistic going forward. If the licensee provides raw materials or products then this information will help business planning back in the UK to ensure figures for required materials is accurate for the forthcoming period. It will also be useful information for investors, the bank and other interested parties such as shareholders. A good accountant who knows about licensing can help with things such as establishing benchmarks for sales and profit. They can also help establish auditing patterns and identify the best payment mechanisms for licensors. By way of example, payment of royalties may be best done in sterling rather than risk the vagaries of currency fluctuations. It may be better for cash flow purposes to be paid monthly rather than quarterly. You may also need to bear in mind whether or not certain countries can actually make payments overseas and how quickly. If you suspect royalties have not been paid correctly, the licence agreement should contain an audit clause that will allow you to instruct an accountant to check the books and records of your licensee.

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AN INTRODUCTION TO FRANCHISING

Franchising is a much abused term in the English language. It is used to describe many business relationships but, in its true legal sense, it is a particular form of licensing. Franchising usually occurs where one company has a tried and tested product and business model. This tried and tested business can then be rolled out to other potential businesses on a nationwide or indeed international basis. Franchising is particularly popular in the USA. 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 franchisors 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.

In order to avoid legal pitfalls and getting tied into onerous terms it is important to have the support you need from experienced legal advisors and accountants. Some franchise agreements contain unfair obligations and liabilities on you as the franchisee. Remember the old adage an ounce of prevention is worth a pound of cure. Other business support organisations may also be able to offer you advice and guidance on setting up such a business.

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WHERE TO GO FOR ADVICE AND SUPPORT

uk trade & investment is the Government organisation that supports both companies in the uk trading internationally and overseas enterprises seeking to locate in the uk. our role is to help companies realise their international business potential through knowledge transfer, and on-going partnership support. our position within Government, in-depth knowledge of uk regional business and a global network make us a unique strategic resource.
uk tRAde & inVeStment
Extensive information on all UK Trade & Investment services including a section on Investing Overseas. For more information, visit www.ukti.gov.uk

ciA WoRLd fActBook

The US Central Intelligence Agency (CIA), publishes information on many key characteristics of world markets. Categories include economy; people; geography; communications, transportation and the military. www.cia.gov/cia/publications/factbook

inteLLectuAL PRoPeRty office

Information regarding copyright, design, trademarks and patents. www.ipo.gov.uk

LicenSinG eXecutiVeS Society inteRnAtionAL

The Licensing Executives Society International (LESI) is an association of 33 national and regional societies, each composed of men and women who have an interest in the transfer of technology, or licensing of intellectual property rights from technical know how and patented inventions to software, copyright and trademarks. www.lesi.org

foReiGn And commonWeALth office

Country information and up-to-date travel advice. 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 10 LICENSING BROCHURE

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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

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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 uks dynamic economy acknowledged as europes 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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