When to Use Licensing for Global Expansion

A client recently told me they wanted to license other companies to produce their software in other countries due to language/translation differences.  When I asked what the desired result was that looked at me quizzically and said “like...why not?’  I have implemented select licensing agreements-some have been successful-some not.  If you go into it thinking it’s a quick way to grow without a significant investment-think it through, it it’s too good to be true then it’s probably not true.  What differentiated the successful license arrangements was that the success took time to bear fruit e.g. 5 years, there was a mutual investment in time and effort and the scope of the project was very well defined.  It is truly a partnership.

Licensing is not a verbal agreement-it needs to be written so it is best to discuss the goals of the licensing arrangement nose to nose at the outset.  Once there is verbal agreement on the roles and responsibilities of the licensor and licensee, the limits of the agreement and the desired outcomes then you can start drafting an agreement.  Licensing is a contractual agreement whereby the licensor transfers the rights to distribute or manufacture a product or service usually in a foreign country or in a specific market.  In exchange, the licensee pays a flat fee, a % of sales or some other type of consideration in exchange for these rights.  The licensee takes the risks and makes capital investments for manufacturing the licensed goods, managing the supply chain linkages and selling the products in the licensed market.   In one case, we provided a life of machine part for sale to customers and the licensee provided the consumable mating part.  This licensing arrangement was very successful because we were mutually dependent.

Licensing works best when:

• There a trusted partner that will respect the boundaries of the agreement and has successfully licensed other products in the past.
• It takes place In difficult countries where there may be logistical, regulatory or import tariff issues that make exporting prohibitive.Country examples may be India, Russia or Brazil.Always specify that these products cannot be re-exported from the licensee country.
• It takes place in specific market segments e.g. food, medical where the licensee has a distinct market advantage over the licensor
• There are high volume opportunities, but not enough licensor capital to devote to local factories, logistics infrastructure and a sales network.

There are risks manage because you are ceding control by understanding:

• Your licensee could become a future competitor.
• Your IP could be lost in this territory.
• Poor quality management by the licensee will harm your brand because the world knows it’s your product under license.
• That license periods are time limited so project the post license period.

Essential parts of the license agreements for the licensor are:

• Exclusivity rights in a specific territory or market segment.
• Inability to reassign the license.
• Payment schedules.
• Audit.Unfettered Access to Product samples, product quality and sales data.
• Term of agreement.
• Termination of agreement.
• Confidentiality of all transferred IP.

Licensing arrangements must be set up properly, continually nurtured and monitored for maximum success.  One can’t grant a license, walk away and hope for quick results or I would have embarked on this career path 40 years ago.  One of the members of our Tradewinds Council © https://www.jimthomasintl.com/the-tradewinds-councilcopy.html stated that their company uses licensing as a last resort due to import restrictions.  It was ceding too much  control for a client where brand is king.

Do you want to have a free fifteen-minute call on the profile of a potential licensing arrangement?  Sign up on my web site or contact me directly by phone.

Good Selling!