When considering distribution options for export, licensing agreements can be a less risky and more affordable option to take your brand global. Rebecca Spicer takes a look at what’s involved and talks to exporters who are using licensing to their advantage.
Licensing can be an effective channel to export, especially for first-timers and SMBs in the early stages of growing their brand internationally. This type of export involves a company licensing the rights, for example, to its technological know-how, design or intellectual property to a foreign company in return for royalties or other kinds of payment.
There are many advantages to licensing your exports, including very little draw on capital, quick returns, and quick entry into foreign markets through experienced locals on the ground in chosen markets. “Licensing is very useful for companies that don’t have the capital to invest in expanding their manufacturing facilities, but at the same time allows them to export their IP and receive royalties,” explains Alexander Veneziano, export adviser with Austrade.
When Ken Done Australia started exporting the artist’s famous artwork and fashion ranges to Japan, the US and Canada in 1982, setting up licensing agreements proved the best option for its global expansion plans. “What it gave was exposure into new markets with minimal risk,” explains Paul Lister, general manager of Ken Done Australia. “The company could enter into a new market, somebody else would look after the manufacturing and distribution, and it would get the brand out there.
“You still get to oversee the quality of the product, the presentation and marketing of it,” he adds, “without the risk of having to either put people on the ground or having to fund the stock and so on.”
For the Ken Done brand, it was about partnering with larger organisations with experience in the market, so they had a team of people working that market. “It meant we started on the front foot, rather than the back foot.”
While licensing may be on the lower end of the risk scale, like any export venture there are some potential pitfalls to consider. “Potential problems that can arise include a distributor not fulfilling their part of the agreement or the possibility of intellectual property (IP) infringement,” warns Veneziano. “Even if a company has taken all possible steps to protect their design and trade mark, if they are not willing to legally defend it, often in a foreign court, it is advisable to rethink their export strategy.”
While Ken Done Australia still has licensing agreements in different countries around the world—one has been running with a Japanese magazine for 15 years—by the early 90s they pulled back on some of the agreements. “Licensees wanted specific things for their market,” explains Lister. “They wanted Ken to create things just for a small part of their market, and what we wanted to do was, say, a fashion range that caters to everybody. Over time, I think with some of the license agreements, we were heading in different directions to what they were, so then we looked at exporting the product [direct].”
However, Lister says it can really depend on the actual product and market you’re selling into that will determine whether exporting direct or licensing is the better option. He uses the example of the US, where there’s a 25 percent duty added to swimwear imported into the country, which can often make it tougher to be price competitive. “At the moment we have a license agreement for bags into the US, where the bags are manufactured offshore and sold into the US, but then we directly export other product ranges.”
There’s also the risk that the licensor could lose a degree of control over manufacturing and marketing, and the licensee may become your competitor if too much knowledge and know-how is transferred. Consequently, it’s crucial to protect all trade marks and intellectual property in Australia and in the export market where possible. “If you commercialise your products in Hong Kong, then it’s a good idea to make checks in Hong Kong that you can, for example, use that product name and obtain a trade mark in that particular country,” says Michael Sutton, associate with Dibbs Abbott Stillman lawyers. IP Australia (www.ipaustralia.gov.au) is a good resource to access the international trade mark system.
If your product or service is a new invention, you may also be able to patent it in overseas markets to stop other people commercialising your idea. One option is to make an application to the patent office in the particular country you’re targeting or you can make a single international application under the Patent Cooperation Treaty, which is administered by the World Intellectual Property Organisation. IP Australia provides an application kit outlining this process. It’s also worth consulting a lawyer to ensure all your intellectual property is protected.
Export Agreements
Following the Tsunami on Boxing Day 2004, Ric Berenger came up with a solution to assist with the reconstruction efforts in Sri Lanka. With the help of an inventor in Australia, he came up with a method of constructing pre-fabricated homes within a week, and went through the process of patenting the Easybuild system. “Once we did that we recognised we didn’t want to enter the building industry itself, we wanted to remain just a technology company, and so we decided the best way to go would be to start in Sri Lanka,” explains Berenger. “There was a company in Sri Lanka who was interested in using the system and the simplest form was to set up a license agreement and go over there and train them.”
While Berenger was initially able to secure his first licensee through contacts he already had in Sri Lanka, he has since used the help of the Queensland and Federal Governments to source other licensees. “We’re talking with people in South Africa and India—that could be a very big market for us—and we’ve been working with Austrade and also the state development department in Queensland who provide us with leads.”
Austrade is a good starting point for Australian companies needing help to find licensees in potential export markets. “The process often involves liaising with the Australian company to ascertain exactly what type of partner they are looking for,” says Veneziano. “From there we identify a potential licensee in the market and then relay that opportunity to the Australian company.”
It’s essential for Australian companies to check the credentials of any potential licensees. Austrade and legal firms specialising in international work can help with this.
Lister recommends the Licensing Industry Merchandisers Association (LIMA, www.licensing.org), an international association for companies and individuals engaged in the marketing of licensed properties. “Once you join you get all the contacts and people that might have products to license. And similarly people who are looking to use licensed products,” he explains.
Essentially Lister believes it comes down to finding a licensee who will work well with you and your business. “Find somebody to partner with who has similar thinking to what you do in terms of how they’re going to treat the brand and where they see the brand going; how it’s going to be sold; where it’ll be distributed; what marketing support will be offered to the brand; and where they see it today, as well as in three or five years time.”
In terms of actually forming the licensing agreement, you’ll need to engage an Australian lawyer who knows about the country you plan to do business in. Even with previous experience i
n using licensing agreements, Berenger believes it’s crucial to engage a lawyer as soon as possible given there could be huge ramifications if something goes wrong. “There’s also stages before you even get to the license agreement. Initially we signed a confidentiality agreement, then a memorandum of understanding [MoU], then set about setting up the license agreement,” he says.
Given your licensing agreement is initiated by the licensor in Australia, it will be based on Australian law. But Sutton says you’ll still need to consider any export restrictions out of Australia and into certain countries for your particular product or service.
The essential part of any licensing agreement is exactly what rights you are granting the licensee, Sutton explains. “You could grant somebody an exclusive or a non-exclusive licence, you can grant a licence in relation to different territories for a specific duration,” he says. “You can restrict them to doing certain things with your product, you could allow somebody to adapt or modify your software for their particular territory, you can let them sell it or let them grant sub-licences to other companies within the territory.”
So, how do you establish which are the best terms for your agreement? “It’s really about what two people want to do and being able to come to some sort of agreement,” says Sutton. An advantage to using licensing agreements is they can be extremely flexible in terms of what rights you want to grant your licensee and how much control you retain over your product or service. In making that decision, you’ll need to find a balance between risk and the potential reward.
Sutton suggests first deciding if you’re going to give the licensee exclusive or non-exclusive rights. “Your decision may depend on what potential you see that third party as having in successfully exploiting it. Generally, but not always, if you grant somebody an exclusive licence, it’s more valuable.
“In terms of duration, you may want to just have a short licence initially, but it also depends how long it would take to build up brand recognition and a following within that country,” he adds. “But you may want to have a shorter duration with an option to extend if everything is going well. Or you could have an exclusive licence but it could revert to being a non-exclusive licence if they’re not hitting certain targets.”
Given Berenger’s Easybuild system works in the housing and construction industry, he says it’s almost impossible for one person to handle it, and consequently gave his Sri Lankan licensee a non-exclusive licence. “This meant that further down the track there could be other builders in other parts of the country that would also want to use the system.”
In order to maintain control over the quality of their products being manufactured by licensees oversees, Ken Done includes a ‘right of refusal’ on products in its licensing agreements. “We get sent samples of the finished product before it goes into production,” explains Lister. “But along the way, through the design process, you work with the people on all stages whether it’s the image, the artwork, the colours—it’s an integrated decision-making process.”
Your agreement should also include clauses setting out rights of termination and, Sutton says, in most cases should include a dispute resolution clause. And on an ongoing basis, he adds, both parties need to be aware of the terms of the agreement and abide by them, and the licensor needs to keep all IP protection current.
Berenger believes it’s a matter of always working together with the licensees towards the benefit of both parties. “If it doesn’t work for the licensee, it won’t work for the licensor.”
