An interview with guest blogger Megan Walker, Director, Market Savvy (www.marketsavvy.com.au) and Brad Postma, Principal, Spruson & Ferguson
What is licensing?
Here’s a bit of background…
Licensing refers to the ability to sell or lend specific intellectual property assets to third parties for a one-off fee or ongoing fee. Ongoing fees are often referred to as royalties.
A license provides an individual or company with the right to use material that would be otherwise considered illegal.
Licensed rights can be exclusive or non-exclusive, and gives the licensee the ability to use (but not own) the copyright, patent, trade mark or design (source: www.business.gov.au).
Non-exclusive rights can be sold to multiple parties and every license is unique with its own requirements, aims and objectives.
One of the things I like most about licensing is its accessibility. You don’t need to own or operate a manufacturing plant or large workforce, all you need is a good idea and somebody else can do the work for you.
Examples of licensing arrangements
- When Apple launched the iPod there was an immediate need for accessories such as headphones, charging and syncing stations and carrying cases. Apple decided not to manufacture these products and instead chose to have a licensee make the products. By doing so, Apple could offer branded “Earbud Headphones”, “iPod docking stations” and “iPod socks.” Each is made by a separate company but together offer the consumer an elegant solution. All of these accessories are sold by licensees (source: wikipedia.com)
- James Dyson used product licensing to build his multi-million pound company. In 1985, after finding that no UK manufacturer or distributor was interested in his newly-invented bagless vacuum cleaner, he licensed the product to a Japanese company. Using the revenue from the Japanese licence, he set up his own manufacturing company in the UK, producing and selling the cleaners under his own name (source: businessadvisersdirect.co.uk)
- Universities often license their technology to other organisations. For example, the University of Queensland developed the GARDASIL vaccine which protects young women from the strains of Human Papilloma Virus (HPV) that causes 70 per cent of cervical cancers. The University does not actually produce the vaccine commercially, rather it licenses others to produce the vaccine in large quantities to service the National Cervical Cancer Immunisation Campaign whilst receiving royalties. Similarly, the University of Queensland has developed Medical Resonance Imaging (MRI) Technology which is licensed to manufacturers of such technology all over the world.
- Content can also be licensed under a copyright license. Academic training programs can be licensed along with physical fitness training programs ie. PUMP is licensed to gyms under the trade mark by the owner Les Mills.
Opportunities for Brisbane businesses and not for profits – Q & A with Brad Postma from Spruson & Ferguson
Q. Megan – Can any business or organisation enter into licensing?
A. Brad – In order to enter into a licensing agreement, you need to have something to license. Intellectual Property is most commonly licensed. The most common types of intellectual property licenses are:
- Patents which protect inventions
- Trade marks which protect brand names
- Registered designs which protect the visual appearance of a product
- Copyright which protects artistic works
You should secure your intellectual property before proceeding with entering into licensing negotiations.
Q. Megan – Are there particular types of businesses that licensing is best suited to?
A. Brad – Licensing is particularly suitable for businesses that cannot meet demand for their own products. It is not unusual for companies to first develop a product, and then partner with a larger company which has established distribution channels and markets to assist with providing that product to the masses.
Q. Megan – How can local businesses make licensing work for them?
A. Brad – Once intellectual property has been protected, the business can then seek to license its products. The best thing to do is to initially generate interest in the product rather than focusing on the detail of the licensing agreement. If a large company cannot see any merit in your intellectual property, then they will never buy a license from you regardless of the cost.
Q. Megan – Can non for profits gain from licensing as well?
A. Brad – There are many examples where non-for-profits gain from licensing. A notable example is the Heart Foundation tick. The Heart Foundation has a certification trademark for their tick which they use to promote healthier foods. Any food suppliers which meet the certification standard is entitled to use the tick on their products and in doing so are therefore effectively awarded a royalty-free license. The tick on the products is appealing to consumers who then understand that the product meets a healthy standard.
Q. Megan – How much money can people make and can they really earn while they sleep?
A. Brad – A typical licensing royalty rate would be about 10 per cent% of profits. This value can vary considerably, however, based upon many considerations such as the industry, the volume of products being sold, and the condition of the license such as whether or not the license is exclusive or non-exclusive to other users. In many cases, the intellectual property owner has very few duties and can earn a great passive income through licensing.
Licensing “pros”
- A License agreement can be established within a week
- Licensing allows you to expand your business reach without having to invest in new locations and distribution networks
- Licensing allows you to use other people’s time and other people’s labour to make money
- You can earn while you sleep / holiday / do other things
- You can use licensing to expand your business and operations without significant capital outlay
Licensing “cons”
- There is less control over how the licensee makes money
- You receive a large reduction in profits
- Licensing involves entering into a business relationship with somebody else. Like any relationship, there can be strain and even fracture if the license does not suit both parties.
Getting started with licensing
Q. Megan – what is your advice for getting started with licensing?
A. Brad – Business owners should first seek to protect their intellectual property before considering licensing. The next step is then to generate interest in the products which are protected by the intellectual property. The final step involves negotiating the conditions of the license when you have an interested business partner.
Licensing tips for new players
In establishing your licensing arrangements you will want to check all parties’ responsibilities in relation to:
- Exclusivity and limitations on the license
- Minimum sale and production requirements
- Payment schedule (amounts and timing)
- Ownership of IP and responsibility for filing and maintaining patents
- Dispute resolution
- Guarantees
- Exit clauses
There may also be tax implications involved in selling your intellectual property so make sure you check your situation with a reputable accountant.
Seek legal advice to ensure that your licensing arrangements don’t fall into the definition of a franchise.