54022 UKTI License BroAW

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ACCESSING INTERNATIONAL MARKETS

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Why A LicenSinG Guide?

Trading internationally is good or business andi approached correctly it can be very protable.This guide has been produced to provide a basicintroduction to licensing and ranchising. It will help

UK companies who are considering developing urthertheir interests in overseas markets particularly thosethinking about licensing or ranchising. UK Trade &

Investment provides a range o services to help UKcompanies develop business in overseas markets, notonly or those companies looking to export productsor sell services into their chosen markets, but also or

those thinking o establishing a permanent presencein an overseas market as a means o accessingopportunities in that particular country or region.

Investing in an overseas market is oten bothcomplex and risky. The purpose o this guide is

to help UK companies understand how they mightreduce some o the risks associated with licensingand maximise the opportunities to benet rom this

type o investment.

It shows how adopting a structured approachcan reduce some o the risks. It also highlights

the various sources o advice and other assistancethat UK companies can access both rom UKTrade & Investment and other partners.

This guide has been produced by UK Trade &Investment in conjunction with Virtuoso Legal, a

boutique law rm specialising in intellectual property,licensing and ranchising. UK Trade & Investment is the

UK Government organisation that helps UK companiestrade successully in international markets. It comes

to you ree because we are committed to helping UKcompanies trade protably and eectively overseasand that always means evaluating the most benecialapproach to accessing customers in those markets.

In this guide you will nd a range o useul tips -

other inormation including access to training andsupport can be ound by visiting our websiteat www.ukti.gov.uk

Who ShouLd uSe it?

This guide is aimed at UK companies o any size who

are seeking to capitalise on overseas opportunities.In particular, it is aimed at those companies who arelooking to take their international business a stage

urther than simple exporting and who are consideringwhether licensing might be the best next step or themto expand urther.

This guide can be used by both manuacturing and

service companies, by companies with no experience othe market under consideration and by those who arealready trading with the target market.

Likewise, the guide can be used by your managementteam as a useul planning tool or by a UK companyalready planning urther international expansion.

While the guide ocuses on licensing and ranchising,much o the material is equally relevant to other orms

o overseas investment, or instance establishing a jointventure or a wholly owned subsidiary.

INTRODUCTION

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RoyALty StReAmS And VALuAtionS

o inteLLectuAL PRoPeRty

One o the most common questions asked is Whatis a particular piece o technology worth in terms o

outright sale value? or indeed When licensed, whatcould one expect as a royalty stream?. A number oactors aect this and it is essential to take expertadvice. It is extremely dicult to value intellectual

property and it is a very dierent process rom

valuing bricks and mortar. With tangible assets suchas commercial buildings there will be an acceptable

norm in any particular locality or a type o building.Unortunately, technology is oten unique in the marketplace and it can thereore be a complex and timeconsuming process to x any sort o value to it.

To a certain extent the same happens with royaltystreams, although dierent industries do have acceptednorms as royalty values. A number o accountants andsolicitors specialise in this area and it is important to

get the right advice early on so that negotiations canproceed on a proper commercial basis.

Factors aecting the value o technology will includethe cost o creating the technology, the uniquenesso the technology, barriers or other people entering

the market, whether or not the technology can belicensed 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 hugeincome streams even i the royalty payable on eachindividual item is very small. On the other hand,

technology which is in a niche arena may attract amuch higher individual percentage royalty paymentsimply because it is not capable o mass exploitation.

AN INTRODUCTION

TO LICENSING

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Licensing is basically the grant o a right to dosomething, usually in return or a payment alsoknown as a royalty. The situation in respect o licensingis analogous to someone owning a house and letting

dierent parts o the house to dierent tenants. Aswith a multiple occupancy building, dierent tenantscan be granted a variety o rights to occupy, exploit

and use some parts o the property. However, a licencedoes not grant the tenants any rights in the physical

bricks and mortar o the property. The licensee has theright to use the patent, know-how, trade mark, design

right or copyright etc, but the licensee does not ownthe legal title to it, nor (unless specically permitted

by the licence) are they oten granted rights to grantsub-licences o the intellectual property.

Most people are vaguely aware o licensing through

the sotware industry. At some point most people willhave clicked to accept a Microsot sotware licenceor something similar. In act, the wealthiest companiestoday are ones such as Microsot and IBM who depend

on clicks not bricks as assets. Licensing is thereoremuch more widespread than would rst appear.

Licences are widely used in the automotive industry.Licensing allows a car manuacturer to invest a greatdeal o resources in developing new technology, such

as new brakes or gearing, and then to licence thistechnology to other car manuacturers in return or aroyalty. This type o cross-licensing is widespread and

by collaborating in this way many manuacturers canrecoup the costs o research and development muchsooner than they would by simply using the technologypurely to their own advantage in their own products.

UKTI LICENSING BROCHURE 03



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key AdVAntAGeS o LicenSinG oVeR

otheR StRuctuReS

Many companies look at joint ventures or partnershipsand collaborations especially when considering

developing overseas markets. The big problem withjoint ventures and similar vehicles is that the partiesbecome jointly responsible or a number o issues, suchas nances and management o the company, when in

practical terms it is likely to be more commercial or one

party to have responsibility or certain decisions alone.Joint ventures can work well but they are inherently

fawed in terms o joint management decisions andthis is oten where disputes arise. On the other hand,licensing permits the exploitation o new technology

without the burden o managerial decisions or both

parties. Having said that, however, it is important orboth licensor and licensee to understand commerciallywhere the markets lie and to agree a joint marketingstrategy o some kind in order to achieve maximum

sales. Unortunately joint ventures oten ail as theyrequire a like-minded business culture, which can bedicult to achieve especially in an overseas market

where business practices, attitudes and cultural valuescan vary widely.

Joint ventures can also be extremely expensive toset up as the legal costs involved may be signicant.There are countries, however, where it is impossible

to trade unless one has a local party who is domiciledin that country. An arms length licence may avoidsuch problems.

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AdvANTAGES dISAdvANTAGES

A licence allows a company to take a product tomarket without the expense o setting up locally andall the risks and costs associated with that.

It is important or the company to nd the right partnerto licence with in a local situation. Understanding

what an overseas partner can do is essential to makinglicensing a success. UK Trade & Investment can help in

nding the right individual or company.

A larger and more powerul licensee in a new marketcan provide instant market access and deter

competitors and imitators.

It is important to ensure that there are proper controlprovisions in the licence. It is especially important with

licensing to have a well-drated licence drawn up byexperts. The licence should contain things such as ullaudit provisions and as licensor it may be importantto police those audit provisions.

A licence can be used to enable products to besupplied locally where there is no opportunity tomanuacture in the locality.

In the long term, royalty payments rom a licence maynot provide the maximum return or a licensor. It could

be that setting up locally can generate better prots inthe long run.

It is possible with the right kind o licence and overseasbusiness partner to create an extensive market presencevery early on in the products lie cycle. This will helpmake maximum prots or the licensor.

It is absolutely key to the success o the licence orit to be properly negotiated and drated. Licensingcan be a complex arrangement and it is important ora licensor to be properly guided in terms o royalty

payments, audit provisions and minimum sales.In certain circumstances it is possible to divide up aparticular market so that dierent companies can licencethe same product but apply it in dierent areas. For

example, it is possible to take disinection kits and divideup the market into human and animal markets then nddierent companies with the right market presence.

The licensor is oten required to provide technicalassistance and training in brand standards etc.depending upon where the licensee is based. This will

need to be actored into the licensing arrangements.

It is possible to work with a licensee in a oreign

market and learn rom them. For example, it may bepossible to improve products or to adjust them so thatthey meet local market needs. This can oten be done

early on in the products lie cycle to help achieve

better market coverage.

The licensor must be satised that the licensee can

make a local market rom the products. Some productsare more popular in some cultures than in others.

An overseas licensee may well save a lot o expensein terms o research and development. For example,

reciprocal licensing in the car and telecommunicationsindustries enables companies to exploit the ruits oresearch carried out by one company alone.

Where well known brands are licensed overseas, the

local licensee can take advantage o an establishedbrand with a known name and goodwill. It is veryimportant or the licensor to ensure that brand

standards are maintained in an overseas market.

It is possible to negotiate urther income streams romsupport services and training.

LICENSING BROCHURE 05



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In the rst instance the key to any successul contractis to nd the right business partner. Successul licenseesmay come rom an existing pool o associates, suchas suppliers, manuacturers and agents already in

the target market. Beware, however, o not doingyour research. Make sure any partner has the rightinrastructure and reputation locally to take the projectorward. Do some due diligence on the company by

reviewing their company accounts and legal structure.Meet with key members o sta and nd out what

uture plans the company has. Ask yoursel whetheror not key sta members are likely to move on, taking

valuable market inormation and customers with them.

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Both parties need to be clear about the structure oany licence. Heads o terms should be put orwardpro-actively rom day one. In addition your business

needs to consider the worst case scenario. How wouldboth parties walk away in a dignied manner i the

relationship just does not work? Be clear with yourlicensees as to what you expect. I you want a minimum

royalty or sales, then say so rom the beginning.Remember that dierent cultures have their owntraditions and culture, and even language can be open

to varying interpretations. UK Trade & Investment canhelp companies overcome some o these issues as theyknow the local business people and can be a source oinvaluable inormation not available elsewhere.

HOW TO BE SUCCESSFUL

WHEN LICENSING


che WoRkS

Che Works has been manuacturing anddistributing ches apparel and clothing orover thirty ve years and began exporting15 years ago rom its initial base in South Arica.

The business comprises various companies

owned by the ounding amily plus numerousindependent distributors across the globe.

Clothing is manuactured in Southern Arica,China and Bangladesh.

A new company has been created to house all the

intellectual property which consists o a varietyo trademarks and a design right registration.

Licensing is key to the companys intellectualproperty strategy and is held in an o shoreholding company.

The company enjoys the ollowing benets:

1 It has a clear system o registering and protecting

its brand.

2 The IP is held in one company to ensure nodisputes evolve regarding creation and ownership.

3 The company has the opportunity o licensing to

third parties in the uture should it wish to do so,

4 The licensing process is simple,

5 The assets o the holding company can be valued

due to the income stream,

6 The ringencing and valuation o IP could enable

the company to seek a higher valuation in theevent o a takeover/ fotation,

7 The IP holding company is ring enced rom anyo the trading companies thus ensuring a highlevel o asset protection.



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Finally, get advice rom expert lawyers and accountants.What royalty gures will work or you and how andwhen will they be paid? The royalty rate o 5% onet sales is requently negotiated in many industries,

including automative, chemical, communications,computers, deence, energy, electronics, ood,ranchises, glass, household products, mechanical,medical, photography, sports, toys and waste treatment.

Higher royalty rates, or example above 15%, existin some industries, but they are rare and are usually

associated with protable technologies or wherehigher margins can be justied. A specialist lawyer andaccountant will help steer you through the mineeldo net versus gross royalty payments and howto calculate them. They will also advise on upront

payments and minimum and maximum royalties.This is by ar one o the most complex areas onegotiation and one which heavily infuences the

protability o the licensor. It may be expensive toget advice, but getting the basics wrong will provear more expensive in the long run.


toP 10 tiPS oR neGotiAtinG LicenSeS

Consider the type o licence that you aregoing to grant, e.g. exclusive, non-exclusiveor sole licence, and whether it should be

limited by eld o use and/or territory.

Consider careully whether the licensee will

be able to sub-license to a third party andon what basis.

Consider asking a licensee to enter into anon-disclosure / condentiality agreement

beore disclosing any inormation.

Have a clear licensing strategy or who youare going to license to consider whether

you need to establish a clear advantage in themarketplace beore licensing to competitors.

Remuneration or a licensor can be by wayo a license ee or by way o royalties. Decideon what basis the licensee will be expectedto make payment.

I you are providing a license o yourtechnology consider i you will provide the

licensee with technical assistance and supportand i you will charge or these services?

Consider a clause dealing with ownershipo any improvements in licensed technology.

Duration o licence how long will thelicence last?

Ensure the licence agreement clearly setsout the circumstances in which thearrangement may be terminated and

consequences o termination.

Consult specialist accountants or

solicitors or advice on the value oyour intellectual property and the terms

o the licence agreement.

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honeymAn GRouP

The Honeyman Group is a UK based consultancy

company operating in the pharmaceutical andbiotechnology sectors. Over the past ew years,the company has successully developed new processtechnology or which it obtained some worldwide

patent and trade mark protection. The potential andscope or this technology went beyond the existing

UK and Irish markets o the companys core businessactivity, and it also had the potential to move into

several other market sectors. A strategy neededto be developed to move the company orwardmaximising rollout eciency and returns.

The method chosen by the Honeyman Groupwas to rst spin out the IP into a new company.

NewCo was ormed as a vehicle with the specicpurpose o rolling out the technology across the

World and was geared to this task, unlike the core

consulting business which clearly was not. As parto the process, NewCo gave an exclusive license back

to the core business to use the technology in the UKand Irish pharmaceutical and biotechnology sectors,

so there was no eective change or the existingbusiness. Thus, NewCo was able to enter discussionswith a number o potential licensees and partners

around the world, and was ree and unencumberedin these negotiations towards optimising the overalloutcome on a case-by-case basis.

Whilst IP was at the heart o this operationalstrategy, its use also enabled the Honeyman Group

to optimise its wider business and commercialobjectives in areas such as equity, unding,

and tax planning.

Trevor Honeyman, chairman o the HoneymanGroup Ltd says: Overall, we are very happy with

the outcome which made best use o IP to deliverour long-term goals and objectives.


Once you have got your licensing project up andrunning, it is important to maintain a good dialogue

with and ongoing support or your licensee. Regularinput on marketing strategy can be a useul way not

just o steering your product, but also o gaininginsight into what is happening in other markets. I yourlicensee gets useul eedback rom customers, or indeeddevelops the product or a local market, then you will

need to know.

Regular visits will also reduce the likelihood o beinghoodwinked over royalty payments. It is oten quiteeasy to do a quick audit and see i the licensee isreally being honest about what they sell. But it is

almost impossible to do this rom aar. A regular visitwill also fush out why something is or is not workingin a particular market. Poor sales could be due to

a number o reasons not just poor perormanceo the local licensee. It can also help both partiesplan what sales targets are realistic going orward.I the licensee provides raw materials or products

then this inormation will help business planningback in the UK to ensure gures or required materials

is accurate or the orthcoming period. It will alsobe useul inormation or investors, the bank andother interested parties such as shareholders.

A good accountant who knows about licensing canhelp with things such as establishing benchmarks orsales and prot. They can also help establish auditing

patterns and identiy the best payment mechanismsor licensors. By way o example, payment o royaltiesmay be best done in sterling rather than risk the

vagaries o currency fuctuations. It may be better

or cash fow purposes to be paid monthly ratherthan quarterly. You may also need to bear in mind

whether or not certain countries can actually makepayments overseas and how quickly. I you suspectroyalties have not been paid correctly, the licenceagreement should contain an audit clause that willallow you to instruct an accountant to check the

books and records o your licensee.

KEEPING THE PROJECT

MOVING FORWARD



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AN INTRODUCTION

TO FRANCHISING

Franchising is a much abused term in the Englishlanguage. It is used to describe many businessrelationships but, in its true legal sense, it is a particularorm o licensing. Franchising usually occurs where one

company has a tried and tested product and businessmodel. This tried and tested business can then be rolledout to other potential businesses on a nationwide orindeed international basis. Franchising is particularly

popular in the USA.

Successul ranchising occurs in a range o industriesand oten works well where there is a customer serviceelement as well as a recognised product and brand.

Examples o successul ranchising include McDonalds

as a ast ood retailer and AutoGlym which sells carcare products.

In ranchising the know-how o a business i.e.its underlying business strategy is key to its success.

Franchising works particularly well where the ranchisor

advertises on a national basis and brings a well-known,tried and tested brand to the market. The ranchiseegets the benet o a head start in business by selling

well-known goods and services. In simple termsa ranchise is a sophisticated know how and trademark licence. In order to maintain brand standardsthe ranchisor will oten control the supply chain and

direct that products are sourced rom specic suppliersand are sold in a particular way. The ranchisor mayalso speciy things such as sta training and may

coordinate new customer enquiries which will comein via their national network.

As with licensing, ranchising can be extremely fexibleand can work very well or both parties provided thatthe ranchise agreement is drated airly. Franchisees

pay a royalty or the benet o using the brand, theknow-how and the ranchisors expertise. In returnthe ranchisor gets the benet o nationwide marketpenetration and can enjoy considerable success rom

a royalty stream.

Exhibitions are held around the country where youcan visit businesses oering a ranchise and discusshow 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 oer and is alsothe source o valuable advice and inormation.

In order to avoid legal pitalls and getting tied intoonerous terms it is important to have the support youneed rom experienced legal advisors and accountants.Some ranchise agreements contain unair obligations

and liabilities on you as the ranchisee. Remember theold adage an ounce o prevention is worth a poundo cure. Other business support organisations may also

be able to oer you advice and guidance on setting up

such a business.



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ciA WoRLd ActBook

The US Central Intelligence Agency (CIA), publishesinormation on many key characteristics o world

markets. Categories include economy; people;geography; communications, transportationand the military.

www.cia.gov/cia/publications/factbook

inteLLectuAL PRoPeRty oice

Inormation regarding copyright, design, trademarksand patents.

www.ipo.gov.uk

LicenSinG eXecutiVeS Society

inteRnAtionAL

The Licensing Executives Society International(LESI) is an association o 33 national and regional

societies, each composed o men and womenwho have an interest in the transer o technology,or licensing o intellectual property rights rom

technical know how and patented inventionsto sotware, copyright and trademarks.

www.lesi.org

uk tRAde & inVeStment

Extensive inormation on all UK Trade & Investmentservices including a section on Investing Overseas.

For more inormation, visitwww.ukti.gov.uk

oReiGn And commonWeALth oice

Country inormation and up-to-date travel advice.

www.fco.gov.uk

hm ReVenue And cuStomS (hmRc)

HMRC provide a wide range o inormation and guidesto assist companies trading overseas. Guides includeintroductions to import & export; classiying yourgoods; relies and exemptions; monthly updates on

taris, duty schedules and trade statistics.

www.hmrc.gov.uk

doinG BuSineSS the WoRLd BAnk GRouP

Contains individual country and regional proles whichocus on regulations, protection o property rights and

constraints with quantitative indicators or each.

www.doingbusiness.org

coRRuPtion PeRcePtion indeX

Produced by Transparency International Limited,and providing an index o the perception levels ocorruption worldwide.

www.transparency.org


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WHERE TO GO FOR ADVICE

AND SUPPORT



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Liz Ward is Principal at Virtuoso Legal, a specialist legalpractice. Liz is acknowledged as a Leader in her eld

by the 2010 edition o Chambers and is also ranked inthe Legal 500.

Liz has specialised in Intellectual Property andInormation Technology law and her expertiseencompasses an in-depth knowledge relating to

patents, trade marks, copyright, design rights, sotwareand condential inormation.

The work undertaken by Virtuoso Legal includesboth litigation in the High Courts and also licensingsotware, know-how, technology and brands in order tomake income streams or companies.

A member o the Chartered Institute o Patent Agents(CIPA) and the Institute o Trade Mark Attorneys

(ITMA), Liz is also currently Chair o the North EastSection o the Licensing Executives Society (LES) andregularly lectures and writes on matters relating to IPlaw.

For more inormation: www.virtuosolegal.com

ELIzABETH WARD

PRINCIPAL VIRTUOSO LEGAL




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ACCESSING INTERNATIONAL MARKETS

54022 UKTI License BroAW

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