Licensing
Licensing involves obtaining permission from a company (licensor) to
manufacture and sell one or more of its products within a defined
market area. The company that obtains these rights (the licensee)
usually agrees to pay a royalty fee to the original owner.
Why Would a Company Look for Products it Can Produce Under License?
In today's world of rapid technological change, new technologies are
the key to economic growth. Today, many products have very short life
cycles and are readily replaced in the marketplace by new technology.
If a company wants to survive, it needs to continually add new
products to replace declining products.
Also, a company may want to grow and diversify by expanding its
product line to take up excess manufacturing or marketing capacity,
level out seasonal highs and lows, or simply add to profitability with
a proven product. Companies may not have the internal skills, time, or
money to develop their own new products so obtaining a proven product
quickly through licensing may be very attractive.
What Are the Advantages of Licensing?
You get access to the experience and know-how of the company that
developed the product. This company may be much larger than yours,
with development capabilities that you cannot afford.
You get to break into a new market with this new product, but with the
benefit of the experience gained in another market.
It makes competition easier if you're a small company with limited
resources.
You minimize your costs and risks:
it costs less than buying an entire company;
you don't pay for expensive and time consuming research and
development;
you don't pay development costs up front; you pay royalties when you
start making sales; and
you won't have large losses if the product doesn't become successful
in your market area.
What Are the Disadvantages of Licensing?
The license agreement is normally for a considerable period of time
and there may be an annual minimum royalty required.
New technology may become available making the licensed opportunity
obsolete.
The agreement may force the licensee to accept restrictions on its
marketing.
The licensee may lose the capacity to develop its own technology
internally.
What Does a Typical Licensing Agreement Cover?
Subject Matter of the Agreement - may be (1) Patent, (2) Copyright,
(3) Trademark, (4) Industrial Design, (5) Trade Secret (Know-How,
Technology- Experience, etc.)
Granting of Rights - defines what licensor is transferring to licensee
Licensor's Obligation - sets out how transfer is to take place in
terms of assistance, support, training and co-operation
Licensee's Obligation - sets out financial requirements, guarantees of
licensee, secrecy, costs
License Fee - fee paid to licensor on signing agreement
Royalty - ongoing share of proceeds paid to licensor for the rights.
May be a lump sum, or percentage of proceeds or amount per unit sold,
etc., usually a minimum royalty is required.
Term - how long the agreement is to last
Designated Area and Exclusivity - define manufacturing and marketing
area of license
Termination - describes rights of both licensor and licensee to
terminate agreement
Guarantees - licensor will normally not guarantee the results of using
the rights granted. The licensee may be required to provide
warranties, public liabilities, etc.
How Does a Company Search and Find Products that May Be Available for
Licensing?
Steps to Take:
Prepare a Profile of Your Company
name of contact person and title;
reason (e.g. diversification, complement present products,
efficiency);
facilities for manufacturing/marketing;
present products/services;
marketing area presently serviced;
sales volume;
description of search requirements (i.e. product/process, etc.);
markets desired for licensed opportunity with special note if
different from markets normally being serviced; and
exclusivity, protection requirements desired.
Search Sources:
There are a large number of sources that may be used in searching for
products/processes, etc., under License that can be contacted
licensing consultants with clients offering opportunities;
international licensing exhibitions;
publications offering licensing opportunities by subscription;
canadian consulates in foreign countries;
provincial trade offices in foreign countries;
federal/provincial/state agencies in foreign countries;
trade directories of manufacturers in foreign countries;
Chambers of Commerce in foreign countries;
banks with international branches;
universities with research facilities;
research and development companies;
trade associations;
trade publications; and
import replacement.
Providing a profile of your company and its search requirements to any
or all of the foregoing would result in you receiving names and
addresses of prospective Licensors for your direct contact. When
contacting prospective Licensors, you should enclose your company
profile and request assurance that they are prepared to license.
It would be important to ask as well if they have licensed others, and
if so, request that they provide the names, addresses, etc., and
permission to contact.
Determine Feasibility of Opportunities Found:
Licensor should provide licensee sufficient information to determine
feasibility of the opportunity in the proposed area.
Licensor should provide: product brochure, bill of materials and
specifications, labour and time, how long marketed and growth, other
licensees (where located and right to contact), benefits over
competition, estimated total market, warranties, marketing, training
provided, financial terms, etc.
Prospective licensee does a feasibility study based on his area and
the market he will have.
Licensor may require the potential licensee to sign a Confidential
Disclosure Agreement before he provides a full package of information.
If negotiation is lengthy the licensor may request a letter of intent
and some partial payment for keeping the opportunity available for a
period of time until licensee determines feasibility.
Negotiating a License Agreement:
Usually a licensing agreement will be provided by the licensor once it
has established the licensee is serious with regard to the
opportunity. The terms of the agreement are negotiable. Using the
information obtained from your feasibility study and considering the
financial requirements of the licensing agreement, you should be
positive the licensing opportunity will provide an acceptable profit
and return. Minimum annual royalties should be carefully studied to
ensure they can be reasonably met.
A license opportunity from an inventor, if one is the first licensee
should be very reasonable, as the inventor is looking for credibility,
which will be established by the first licensee.
What Is the Procedure if You or Your Company Has a Product to License
to Others?
You've invented something, it has received a positive evaluation, and
has a patent pending. Or maybe your company doesn't have the capital
or expertise to manufacture and market it's product to a global
market. Inventors often find it is better to license their technology
rather than try to manufacture and market it themselves. Similarly,
licensing may be the only practical way for a company to maximize the
potential for its existing products.
Licensing companies in other areas of Canada or in other countries
expands your potential while minimizing your risk by using companies
that have the necessary manufacturing capability and marketing
networks already in place.
Licensing can be done by a single company, however if this is not
possible, an alternative is to consider a multi-prong approach to your
licensing with several component parts being done by different
manufactures, final assembly by another, and possibly distribution by
yet another. This may divide up the risk if the magnitude of the
project is perceived too large by any one licensee.
Licensing out of a product, process, technology, etc., will follow
much the same procedures as licensing in or searching for
opportunities. You will need to prepare a formal presentation to
explain the functionality and marketability of the concept containing
the following:
letter of introduction;
pictures of the product;
product description;
manufacturing information;
product variations;
product benefits;
market research results;
objectives for your project; and
pricing breakdown.
Your presentation should be sent to the same sources listed previously
in this handout, and you would request that names and addresses of
likely licensees be provided to you.
As a licensor, you will be expected to provide the legal agreement
that will ensure both parties are fully aware of their respective
rights and responsibilities, over and above simply determining
royalties. Good legal advice is usually required to negotiate such
things as:
exclusive rights to the invention;
territories allocated;
what exactly is being licensed (technology transfer, engineering
specs, use of trademark);
who pays for obtaining patents in licensed territories;
are future improvements to the product included under the license;
what resources is available if the licensee is late on payments;
can either party transfer it's rights under the agreement to another
party;
who bears liability resulting from injuries sustained from the
product; and
what are termination provisions of the agreement.
Determining an acceptable royalty rate for a product is difficult, as
there is no quick-fix percentage that can be applied as a general
measure. Although rates ranging from 3% to 8% of net sales are common,
each licensing agreement is unique and the only consensus that maters
with respect to royalty rates is the one that occurs between the
licensor and the licensee as a result of negotiations.
Several factors that may influence the potential royalty rate of a
licensed product include:
if the product is already patented;
is the product "market ready"; and
does the licensor have a track record of successful products.
If you are an inventor and wish to approach a large company with your
invention, you may find that they have very specific policies on how
they will consider unsolicited proposals. Your first response from
them will usually be to spell out the terms and conditions of their
corporate policy on submissions. |
