Welcome to the step-by-step video tutorial on ways you can scale and expand your small business – part of Farillio's video series designed to make law simpler, faster, better and more affordable for small businesses.
All the materials we’ll be discussing in the following series of videos are available via your Farillio account, and if you'd like to chat to one of our experts, like Jeremy, directly, you're welcome to use our Speak To A Lawyer feature.
For this tutorial, we were joined by Jeremy Parkin, a very experienced commercial lawyer from Wilkes.
We’ve worked very closely with both Jeremy and the wider team at Wilkes to produce many of the guides and templates you’ll find on Farillio.
And today, we’re discussing the different options you have when it comes to growing and scaling your business.
Agency is the option that allows you to maintain the most control over your operations and your IP.
But what does agency entail? And how do you go about choosing an agent?
Agency works by appointing someone to enter into contracts on your behalf. So, you retain the customers, they’re your sales, you maintain a level of control over pricing and the terms of sale and instruct your agent to act in accordance with your instructions.
However, as the contract is made between you and the customer directly, any credit risk with those customers is yours, and not the agents.
It’s a good way to explore new markets and regions. As a way to learn about demand or opportunities, agency can give you a good sense of what things are like on the ground and give you a good idea about where to expand to.
When choosing an agent, it’s important to do your research, as the choice of a partner is crucial to the success of the relationship.
So, you’ll want to look at somebody who has knowledge of your sector or product and/or services.
Have they got a database of potential customers they can call on to try and sell your product?
Do they have a strong track record sales-wise?
Do you want a sole agent (i.e. exclusive) or a non-exclusive relationship? If the agent is investing lots of their own time or money in a project, you’d likely have to offer some degree of exclusivity, as a way of protecting their investment.
This will depend on the terms of your agreement, whether you want to build a long-term partnership with the agent or if you have other plans. For example, you may be testing the waters and looking to set yourself up in competition with the same agent in the near future.
Key rules when setting up a relationship with an agent.
There's an EC directive that regulates commercial agents, which is implemented in the UK and all other EU member states. You can not contract out of it, so there’s no avoiding it.
These rules surround certain things such as notice periods, and importantly, you can not contract out of them. The real sting in the tail is they provide for compensation to be paid to the agent on either the expiry or termination of the agreement. The only exception to that being if you terminate the agreement due to a breach on behalf of the agent.
So, in the event the agreement expires or ends because of a breach on your part, you will end up owing compensation to the agent.
These rules are there to protect the agent, who as we mentioned previously, may have invested significant resources into your product and/or service. As such, they are entitled to be compensated for losing the value of such investment on the expiry of the agreement.
Compensation may be made in one of two ways, one of which – the indemnity method – is more favourable than the other – default, and less favourable – compensation method, which may cost you a lot more.
While these are EU rules, we expect these will continue beyond the UK’s current relationship with the EU and through Brexit and beyond.
So, unlike a traditional business relationship where parties go their separate ways after a business agreement has run its course, agency agreements are slightly different.
Compensation is calculated on the increase in sales since the agency started the relationship, and while it’s capped at a maximum of one year’s gross commission, this could be a considerable amount of money, particularly if you have enjoyed some success moving into a new market.
The less favourable compensation method looks at the value of the whole agency as a business and this could possibly result in twice as much compensation being owed.
And finally, while a lot of people may think their business is too small to be affected by these rules, they do apply to everybody.
However big or small you are, licensing is a potentially attractive option and another good way to test out new markets and see if you potentially have a scalable business on your hands.
You can license - and generate revenue from - practically anything, but the most obvious form of licensing is that of patents (inventions and innovative products), trademarks (brands and logos), copyright (written works, drawings, designs and software etc.), know-how (confidential technical information and the knowledge of valuable processes like a secret recipe) and design rights (aesthetic or manufacturing forms, such as the shape of a bottle).
But what would you expect to see in a good licensing agreement? First and foremost, you need to identify the subject of the license, the license rights. They’re intellectual property rights, covered by one form of IP protection or another, such as copyright or a patent.
Then you’ll need to look at where you’re going to be licensing it, i.e. which geographic territory the licensee can use it in and for how long and whether it’s an exclusive or non-exclusive license.
A lot of these terms will be up to you as the licensor to decide, and each one will have major commercial implications.
As you control the IP rights in what you’re licensing, you get to impose whatever limits you like through the license agreement, allowing the licensee to exercise some rights but these can be limited quite tightly, such as how long the license lasts and the circumstances the rights may be used in.
A license agreement shouldn’t dilute your IP ownership if you’ve got the wording right. You retain all the rights, you’re simply granting a license of the rights to another party.
A good licensing agreement should deal with updates and technical improvements too. This refers to situations where the licensee takes a product of yours and builds upon it.
It’s important to include wording that covers this, because if an improvement supersedes your product or otherwise makes the licensee's product more desirable than your own you may lose out. Such improvements could be loaned back to you, possibly for a small royalty allowing you to make use of the licensee’s innovation, but this must be set out in your agreement from the get-go.
That initial agreement could be the start of a long fruitful relationship. One that evolves with each innovation and possibly results in a new business being set up between you and the licensee, either as a joint venture or collaboration agreement.
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