A small developer of predictive analytical software tools for stock traders recently signed a $5 million international licensing agreement for its technology. The deal gives its licensing partner exclusive marketing rights in China. In return, the licensee will pay a $250,000 advance and $100,000 in monthly royalty payments that escalate based on sales milestones.
This is one example of how licensing lets you partner with a local company who’s got the management, resources and know-how to capitalize on opportunities in the international market. Especially in a big market such as China. Not only does your company generate more revenue, it validates your intellectual property, and increases your business value. Plus it provides cash flow to support ongoing development and marketing efforts in your home market.
Licensing is a low risk and low-cost way to plant your flag internationally. It’s less expensive than launching joint ventures or wholly owned subsidiaries. Licensing is an especially good strategy if you’re a startup or small business with limited financial resources.
Internationally, licensing is growing and it’s a strategy being used more often by companies large and small. While no one really knows the exact amount, global royalty revenues are estimated at several hundred billion dollars annually.
Although intellectual property laws vary from country to country, the process of licensing – the money-making side – operates the same. As does the registration process for patents, trademarks, and copyrights. Several agreements between the US and other countries enable the concurrent registration of patents and trademarks in multiple countries with one set of documents. The same holds true for copyrights. The US has registration relationships with many countries around the world that provides for automatic recognition of copyright works of authors.
Government resources are also similar. For example, in the US, it is the Patent and Trademark Office (USPTO) and the Copyright Office. In other countries, you’ll find similar types of government organizations, such as Intellectual Property Australia or UK Intellectual Property. All of these government bodies support the development, protection and commercialization of intellectual property.
Even licensing agreements have become standardized. Today, all types of licensing agreements for patents, trademarks, and copyrights are similar in terms and used in multiple countries. I’ve worked with many licensing agreements that were the same format for Europe and the US. This is a big reason licensing operates just about anywhere in the world.
While at the studios, I developed several international licensing deals. The most common deal was for English-speaking territories (that is the US, Canada, UK, Australia, New Zealand and South Africa). In these cases, the licensees were leveraging the revenue opportunities both in the US and internationally.
Licensing offers a number of strategies for entering international markets. Which one you use depends on your IP and business goals. Cross licensing and sub-licensing are two examples. What works for one company doesn’t necessarily work for every business.
In most cases, it starts with marketing your IP successfully in your home market. Success there is a good sign that it could work well internationally. Some technologies are easier than others, especially IP that’s integrated into global products, such as smart phones and computers.
In some countries such as China and India, local laws prohibit or restrict 100% ownership by foreign companies. In this situation, licensing is the best way to enter these markets, as well as limit your risk. .
Using licensing to expand internationally isn’t limited to just startups and small businesses. Many of the worlds largest corporations in the computer, pharmaceutical, entertainment, consumer products, and other industries use licensing to build and expand their international marketplace. Some of the companies generating one billion dollars or more in global licensing revenues include IBM, Texas Instruments, Qualcomm, Microsoft and Ericsson.
Your partner is the most critical part of an international licensing agreement. If your partner doesn’t have the right capabilities to successfully get your IP into the commercial marketplace, it can damage your IP value, or worse, you wind up losing control of your IP rights. Especially if it’s an emerging market where IP laws are not as mature.
That’s why it ‘s critical to thoroughly research your potential partner. Time spent doing a good job of due diligence will save you lots of time and money trying to get out of a bad partnership, as well as lower risk of damaging your IP.
Keep in mind finding the right licensing partner takes time. If you don’t have someone internally, consider retaining the services of a licensing professional. Their expertise in managing the licensing process is well worth the investment, especially if you’re licensing more than one international partner.
Here’s some pointers to consider when searching for international licensing partners:
- Before entering an international market, do your homework and find out who the key players are in each market.
- Visit an international trade show to learn about the markets and meet potential licensing candidates. Trade associations are a great resource to get information about both the local markets and companies.
- Try to meet your prospective licensee in person. Although most licensing is done by phone, video call, and email, establishing a personal relationship is important since you’re licensing agreement will run for a couple of years or longer.
- Be flexible on your royalty rate. What works in one country may not work in another due to production costs or lower profit margins.
- If a potential partner is new to an industry but is a company you’d like to work with, consider doing short-term agreement with sales milestone. You can learn about their capabilities, such as the strength of their distribution into different countries or whether they can successfully produce your product at a competitive price, before committing to a long-term licensing agreement.
I used this last strategy with a client who invented a new tie-down flexible cord (i.e. a better bungee cord). They introduced it into the market, and got immediate interest from an international distributor. We structured a two-part deal – first as an exclusive distributor to test the market. Based on their sales success, we expanded it to an international licensing deal, with rights to make and sell the product in Europe.
As far as the legal pitfalls go, some of the biggest ones to watch out for are not understanding the local market laws, not protecting your IP internationally, and signing a poorly structured licensing agreement. Before signing any licensing agreement, be sure to review it with a qualified attorney who knows the local market laws. Make sure your licensing agreement is very clear about royalty payments, development milestones, performance benchmarks, and most important, IP control, so you don’t wind up trying to settle a dispute in a foreign court.
Today, every type of business, from startup to operating company, needs to think globally. Expanding internationally through licensing is a great way to capture new growth opportunities with less risk. Licensing let’s you quickly tap into your partners resources and market expertise. Before licensing out internationally, you’ll need to decide if you want to operate internationally or just in the US. It requires protecting and managing your IP in each international market. You can start small, such as licensing your IP to one licensing partner in one market. As your business grows, international licensing gives you the flexibility to add more licensing partners or expand directly.