Licensing can be a smart business strategy

Whether your company is looking for new ways of generating income, or searching for a new process to improve internal operations, licensing is a means of achieving those goals.

Jim Roberts
For The Spokesman-Review

Licensing of technology is hardly new. But it has become an increasingly viable and potentially lucrative method of operation for companies and entrepreneurs alike.

Licensing is a deliberate strategy to tap a wider market or get more profit from in-house assets. It’s also a way of obtaining much-needed technology relatively inexpensively. Whatever the reason, businesses can use this route to expand profitability.

Many companies that I talk to regard licensing as an activity that should be followed only by major corporations. They think that licensing is best practiced only by firms that have in-house attorneys and separate departments to specialize in license negotiation. Nothing could be further from the truth.

Many managers of small and mid-size businesses have found additional profitability by incorporating licenses into their business program either licensing in to gain a new product, design or process, or licensing out to sell a technology to others for increased profits through royalties.

A license is the granting of permission or rights to make, use and/or sell a certain product, design, or process or to perform certain other actions, the granting being done by a party who has the right to do so. Practically anything a company owns — its technology, know how, patents, and other intellectual property — are commodities that can be licensed.

"License in" is a term used with respect to the acquisition of these rights through a license, whereas "license out" is the term applied to the sale or provision of those rights. Both the licensee (one who is obtaining the rights) and licensor (one who is granting the rights) must be careful that a license is very specific as to the precise terms of the deal, and is fair and mutually beneficial for both parties. A competent attorney should always be a party to any license agreement.

The advantages to a licensor are many: increased income with little or no capital investment, expansion of business opportunities, greater market penetration, equity potential and faster company growth. Rights can be licensed on an exclusive or non-exclusive basis, for a specific territory or worldwide, for a defined period of time or perpetually, and for a limited field of use or without use limitations.

Advantages for a licensee include expanded rights (including new products and expertise), expanded assistance, increased marketing and sales, and stronger profits. The research time and development costs necessary to create a needed technology can be both expensive and time consuming. Purchasing the technology outright from the owner may not be possible or prohibitively expensive. Licensing may be the only way to obtain use of a needed technology for a new product in a timely and cost-effective way.

The real beauty of a licensing program is that you can sell a possession only once; however, you can license a valuable commodity several times, and in many cases, simultaneously. Licensing has the additional advantage of returning to the licensor any improvements to the licensed technology the licensee makes.

Licensing can be used as both a primary or secondary income source and can provide a company income for a long time. There is much less risk and commitment than is involved with raising investment capital, manufacturing and all the other expenses needed to establish a company that sells a product.

A valuable technology license may also enhance the reputation and goodwill of either party, and make it easier for the party to obtain financing and other licensing opportunities.

For entrepreneurs and startup companies, licensing is a great way to bootstrap the way to growth. It can make sense to license technology for certain markets, while retaining other markets for internal development. This allows for a certain amount of royalty income from the licensing program to use for operations, equipment and other expenses needed to address the market that the company keeps.

Licensing is an opportunity with great rewards if handled properly and professionally. For a licensing relationship to be successful the reasons for licensing must be clearly understood and the license agreement carefully drafted to reflect the understanding of both parties. There must be a shared vision of success and a solid relationship in order to achieve business objectives.

With the right partner and a good license agreement, licensing can be advantageous for any business. Just having or owning technology or expertise won’t make money, but a good licensing deal will provide for solid, dependable income for a long time to come.

Jim Roberts is a principal with Foresight Science & Technology, a nationwide firm that specializes in moving technology into the marketplace.

http://www.spokesmanreview.com/news-story.asp?date=042003&ID=s1338082&cat=section.business