Licensing
Licensing allows one or more licensees to obtain the right to use an asset commercially from a licensor. The licensing agreement may cover technology, products, trademarks, designs, patents, know-how and more. The right is usually granted for a specific geographical market, industry, field of use or a combination of these.
In many industries worldwide, products have short lifecycles, making it important to reach the market quickly. Licensing is therefore common in these industries. In industries where technology is complex and innovations often depend on each other, cross-licensing is both common and necessary.
Benefits for the licensor
- Licensing allows you to focus on the markets you know while earning revenue from your product or service in other markets.
- You can enter new geographical markets with significantly less effort and risk.
- You can adapt and sell the product/service to other industries and for other applications.
- You can reach the market faster through a licensee with the resources and knowledge of the relevant geographical market or market segment.
- You need less capital because you can avoid production, marketing and sales costs if the licensee already has production facilities, distribution channels and marketing resources.
- By licensing out technology at an early stage, you can reduce development costs.
- You can earn licensing income from royalties.
- There are benefits for the licensee.
- Access to attractive technology, knowledge and trademarks – potentially on an exclusive basis – that can give your business a competitive advantage.
- You gain access to new technology and knowledge without having to conduct your own research and development. This enables you to offer the latest and most effective solutions in the field and position your business as innovative in the market.
- Your company's own products can benefit from synergies with licensed-in technology, making them more attractive, and vice versa.
The licensor usually takes the initiative
A licensing process often starts with initial discussions. Sometimes a potential licensee will contact you, but in most cases, you as the licensor will need to identify and contact potential licensees. You may find licensees among your competitors and business partners.
The aim of the initial discussions is to reach a letter of intent confirming that you intend to work towards agreeing a licensing agreement, subject to resolving a number of outstanding points.
Get legal assistance
When it comes to the negotiations themselves, you should seek legal assistance. There is no simple formula for drafting a licensing agreement and then negotiating a satisfactory outcome.
You need to tailor the agreement to your needs, and you should always seek professional legal assistance with this work. A lawyer can also support you directly in the negotiations and, importantly, advise you on how to proceed.
Active follow-up is essential
Once both parties have signed the agreement, the follow-up begins. As the licensor, you need to take an active role and follow up with the licensee as agreed. Remember, it is also in your interest for the licensee to maximise sales.
Content of licence agreements
Before you start negotiations with a potential licensing partner, you need to assess the value of the asset you intend to license and decide which terms of the licensing agreement matter most to you.
Valuing a licensed asset can be challenging, and there are many methods available. Here are some questions you should consider carefully when negotiating with the licensee:
- What protection does the licensed asset have?
- How strong is the protection?
- How easy is it to copy the product, service or knowledge?
- How far have you come in developing the product or service? Has it been tested commercially?
- What investments will the licensee need to make?
- How large is the market potential?
Key factors for achieving benefits
A licensing agreement involves more than just the royalty rate. Several factors affect how much you can earn from the agreement. Here are some points you need to consider:
What is being licensed?
Describe this in as much detail as possible, including how it is protected and the knowledge associated with it.
What should the agreement cover?
The agreement may cover production, sales and further development.
What should the agreement cover?
An agreement may be exclusive or non-exclusive. An exclusive agreement gives the licensee the sole right to the product or service. Licence agreements commonly include restrictions relating to geographical areas, market segments or industries, fields of use and duration.
To get the most from an agreement, look for a licensing partner who can generate the best possible returns within its scope. You need to decide whether you want to work with one partner or several. More partners give you more opportunities – but also more work.
Ownership rights
In a licensing agreement, the licensor usually retains ownership of the product or service and the underlying idea.
Costs
It is important to agree on who will cover the costs of renewing, extending and maintaining the protections. The agreement should also specify who will be responsible for following up on these activities.
Any extensions to the protections are usually agreed between the licensor and the licensee, but the licensor may maintain the rights outside the scope of the agreement at its own expense.
Requirements for the licensee's activity
To get the most out of the licensing partnership as a licensor, you should ensure that the licensee does everything possible to promote the licensed asset. It is therefore important to specify the licensee's minimum level of activity in the licence agreement.
Royalties and payment methods
The three most common payment methods are:
- Lump sum
- Ongoing royalties
- Lump sum + royalties
The most common arrangement combines a smaller upfront payment with subsequent royalties, so that payment reflects actual sales. Securing an upfront lump-sum payment can be difficult, as can calculating the appropriate amount.
What basis do you use for your calculation?
The basis used to calculate royalties affects the amount payable. The challenge is to find a basis for calculation that both parties can easily verify. Royalties can be calculated based on the sales price, production cost, number of units produced, sales price to the end customer or sales price from production. The basis for calculation varies between industries.
Require a minimum royalty
If you choose ongoing royalties, you should agree on a minimum royalty. Otherwise, you risk earning nothing if your licensing partner proves to be a poor choice.
The licensor should receive 25 per cent of the profit
A widely used rule of thumb is that the licensor should receive at least 25 per cent of the profit from a product. This means that if the typical profit margin is 20 per cent, the licensor should receive a royalty of at least 5 per cent. This is based on products and services that have been commercially tested in the market.
Allocate royalties across several factors
If an agreement is based on a patent, trademark and know-how, for example, it may be wise to allocate the royalties across these three factors. This ensures that the agreement remains valid even if one of the factors falls away, for example if the patent is declared invalid.
Many royalty agreements fall within the following ranges.
- 2–4% on consumer goods
- 5–8% on standard goods
- 3–15% on medicines
Use these rates with caution, but they can serve as one of several starting points.
Examples of agreements
Remember that these agreements are not templates and must be adapted to your specific situation. Consult a lawyer before signing any agreements: