How Does Licensing Work?

When it comes to expanding your product overseas, licensing is an option that can allow you to turn manufacturing and distribution of your product over to another party, alleviating you of some of the labor. A license agreement gives rights to use any patents and/or trademarks you hold on your product. Once a license agreement is in place, you can receive royalties from the sale of your product overseas from the licensee. Royalty rates start at about 3% of wholesale costs. Licensing agreements are usually for a specified amount of time at the end of which time, the licensee may want to renew the contract or have first refusal. Keep in mind that license agreements may also stipulate exclusivity or specific territories for sales. It will be important that you draft your license agreement with a qualified attorney to protect both you and the licensee. You will want to make sure you have final say over the quality of the overseas manufacturing and that you understand and approve of the distribution channels. It is important to stay involved with the process throughout the agreement and be aware that your brand is managed appropriately.

Also – make sure you’ve got the appropriate legal protections in place such as trademarks, patents or copyrights, to protect your product as much as possible and to allow for some recourse if needed.

Are You Ready To Go For It?

So how do you find the right partner to who will be interested in your product and motivated to sell it? Licensing is a great incentive and once you’ve identified the countries interested in your product, done the research on your target markets and determined competition in the market and the appropriate price point, then reach out to manufacturers domestically or abroad who are producing products similar to yours. They will have valuable insights and may even have existing distribution channels in place. Or, you may choose to contract with an individual directly. Remember, your local SBA office can lead you to resources that can provide you with market research and the Centers for International Trade Development can even put you in touch with country desks around the world, connecting you with international buyers.

You’ve Got An Licensing Agreement – Now What?

You may want a licensing agreement with “performance obligations” written into the contract, requesting that your product be brought to market within a certain timeframe. You may decide a tiered approach for sales and royalties is the best way to share the burden and make the offer more enticing for both parties. A tiered approach may offer X-amount of sales with Y-amount of royalties in year one, X increasing and Y decreasing with each subsequent year as long as sales increase accordingly. This also allows you, the licensor to gain a bit more financially up front while providing incentive for ever increasing sales. Licensing contracts can be terminated by breech of contract (such as failure to pay royalties), by preset time limits, or by a failure to meet performance obligations. Don’t forget to determine what should be done with any remaining inventory, what happens if you add other territories and include any penalties or fees, to off-set losses in the event the agreement does not go according to plan. Another option is to permanently Assign (Assignment Agreement) by irrevocable sale and transfer of ownership of your product including intellectual property, patents, trademarks, etc. This is typically a one-time lump sum payment for ownership of your product or invention.

What Are You Waiting For?

Licensing is an indirect way to enter foreign markets and mitigate some of the expense and risk associated with exporting. Do your homework, research your markets and your partners, get appropriate legal advice and get going!