Licensing arrangements – the pros and cons

There are many ways to enter a foreign market, and your choice will have a big influence on the success or otherwise of your international expansion efforts. I’ve already covered acquisitions and greenfield investments. Here are three more options.

Licensing

This is a contractual arrangement whereby a company transfers the right to distribute or manufacture a product or service in a foreign country, or the right to use any type of expertise that may include patents, trademarks, company name, technology and technological know-how, design and/or business methods. The licensee pays a fee and/or percentage of sales in exchange for the rights.

Licensing is a good choice in cases where there are barriers to import and investment, where legal protection is possible in the target environment, and where there is a low sales potential in the target country.

The advantages of a licensing arrangement include:

  • quick, easy entry into foreign markets, allowing a company to “jump” border and tariff barriers
  • lower capital requirements
  • potential for large return on investment (ROI), which can be realised fairly quickly
  • low risk, since you enter with an established product and you take fewer financial and legal risks.

On the downside:

  • You will have only a low level of control.
  • Your licensee may become a competitor.
  • You may lose intellectual property.
  • The licence period is usually limited.
  • Poor quality management can damage your brand’s reputation in other licence territories.

Technology licensing

You can sell or make available to a licensee your patents, trademarks, service marks, copyrights, trade secrets or other intellectual property, for compensation negotiated in advance.

This approach can bring two main benefits:

  • “Reverse flow” of technology will mean that you share in any technical improvements that your licensee develops.
  • The licensee uses intangible property and receives technical assistance.

On the other hand, technology licensing can result in:

  • loss of control over the technology
  • loss of intellectual property
  • weakened control over the technology because it has been transferred to an unaffiliated company.

Franchising

Franchising is an efficient means of distributing goods and services. The franchisee gains control over operations in exchange for some type of payment and the promise to abide by the terms of the contract.

The three main benefits are:

  • Market entry carries less financial, legal and political risk.
  • Economies of scale are achievable through ordering with the owner and other franchisees.
  • Partners can see the business up close, first hand.

Against the above benefits:

  • The licensor has little direct control.
  • The licensee’s profits are lower than they would be if it owned the business or exported its own goods.

For more information about licensing arrangements, please email me or call me on 020 7099 2621. My next post will cover exporting in its various forms.