Licensing – Definition, Examples, Advantages and Disadvantages

Published by: Madhubala Minda

What is Licensing?

Licensing is a contractual relationship or a legal contract between two parties where the licensor gives the permission to use his intellectual property, invention, patent, new technologies, new products, trademark, website, property or services to an individual or small business or any other interested party for a license fee and royalty rates.

In simple terms one company allows other companies to manufacture or sell its new product or services for specified payments or fees through a binding legal contract

What is a Licensing Agreement?

Licensing Agreement is defined as a business arrangement or a written contract where the property owner gives permission to another company, party or companies to use their trademark, patent or brand for a fee.

The licensing agreement between the licensor and licensee includes every single detail for instance the type of licensing agreement both parties are interested to sign, how the licensor will be compensated for the use of the license, the terms of usage, what are the royalty rates that the licensee will have to pay, how much actual money the licensor will derive from the arrangement and how disputes of any kind in the future related to sales, issues of quality or royalties will be settled.

Understanding Licensing Agreement

Licensing agreements are considered hot properties as it generates money or revenues (royalties) for the property owner. These agreements allow parties to enter new markets without having to spend money.

Small business entities might not have the money or resources to manufacture new products, create new technologies or enter new markets. The license agreement gives small businesses the chance to use the licensing opportunities for the growth and development of their business.

Both the licensor and the licensee should be fully aware of all the details mentioned in the license agreement as it is a binding contract. As per the agreements one party can use the property of another party for a lump sum amount or license fees.

The property mentioned in the licensing agreement can include any of the items like personal possessions, real-estate holdings, technology, software, sports team logos, song or intellectual property like trade names, patents or copyrights for visual art or written materials.

A key example of licensing opportunities can be found in the research and development department of several companies. Business entities often have a research team at their disposal who continue to develop technology and invention for their company. Other companies have a high interest in new products and inventions and hence are always on the lookout to obtain them from other businesses.

The government, as well as other companies, are ready to offer a huge payment to the licensor for the licenses of new technology

What Does a Licensing Agreement Cover?

Licensing Agreement Cover

The license agreement is often used to commercialize a new property or the marketing and distribution of new products. The licensing agreement covers the following key detail information

  1. The licensing agreement provides information of all the parties that are involved in the licensing process
  2. It mentions in detail how the licensed parties will be using the property mentioned in the licensing agreement
  3. It provides information about the licensor’s obligation and how he will be providing the assistance, support, cooperation and training to the licensee
  4. The geographical region or the market where the licensee will use the aforementioned property
  5. Define the manufacturing and marketing area of the license
  6. The specific period or term when the business entity can use the property
  7. Whether the licensing arrangement is exclusive or non-exclusive
  8. Details about the number of times the property can be used
  9. Scaling terms for instance new royalties if the property is reused after a specific number of times
  10. The amount of money the licensee will have to pay as the cost of using the license for instance royalties, initial fee or lump sum money
  11. Restriction on the usage by the licensor if any
  12. Describes the rights of both the licensor and the licensee in case any or both parties want to terminate the contract

What are Licensing Revenues?

Licensing Revenues are a source of revenue for the owners who are interested in licensing their products. The royalties are often described as a percentage of sales or as a payment per unit in the licensing agreement.

The terms of royalty payments are written in the licensing contract where the restrictions and limits of the royalties are also mentioned in vivid detail. These include geographic restrictions, duration of the agreement and the type of product with specific royalty cuts.

If the resource owner is the government or a private contract, then the license agreement will be fully regulated. The factors that have an impact on the said royalties or payments include exclusivity rights, risks involved, market demand, available alternatives of the property and scope of future innovation.

Examples of Licensing Agreement

A key example is a contract between a film producer and a distributor or a streaming platform which is interested in obtaining the rights of the film for showcasing it on their site.

Another example of such an agreement is between a software company and the individual who has a patent for new software in the town. The company will try to obtain its license or patent so that it can increase its revenue.

Most fast-food chains have licensing agreements in place that allow other companies or individuals in obtaining the licenses and open their shops. A primary example is Taco Bell which is located in several places in the world and is reaping the benefits of licensing agreements. The license helps Taco Bell to use the branding and marketing material of the company.

Entering Licensing Agreements

Entering Licensing Agreements

A licensing agreement should be willingly executed by both parties who must be fully aware of all the information written in the legal contract. Entering a licensing agreement is a big thing for both the licensor who offers the use of patents, trade names and other intellectual property and the licensee who gains exclusive rights over them for a license fee.

It is important for the person who enters into licensing arrangements to consult an attorney or an expert before signing any agreement because this step will inform them about the complexities of intellectual property law.

Setting up agreements beforehand saves a person from hassles later on. For example, if a company or a person decides to use a trademark or trade name without the support of a licensing agreement then he can be sued by the owner of the license. This could lead to lost time, court fees and legal battles and result in harming the brand value of the company

Cost of Licensing Agreements

The cost of an agreement can be anything between hundred to thousands of dollars as it depends upon the product and the company offering the license arrangement. They will also have to pay the fees to the lawyer on an hourly basis for drawing out a suitable contract

Advantages of Licensing Agreement

The advantages of licensing are as follows-

  1. Licensing patents, designs and other intellectual property helps in business expansion and growth
  2. Licensing is a legal contract that is binding for both the parties so there is little chance of disputes in the future
  3. The license helps the franchisee to tap into existing distribution, production and marketing systems that the other business entity has spent even decades building
  4. The licensing agreements lay out rules, regulations and guidelines so that both the parties are aware of what is expected from them
  5. The contracts are drawn to save a lot of hassles, time and effort for both the licensor and licensee in future
  6. The licensees do not have to pay for the research and development department instead it can sell a tried and tested product in the market and reap the benefits
  7. Licensed contracts help the licensor retain appropriate control over their product
  8. It gives the licensee access to local markets and the licensor can enter new markets without even spending any additional amount to enter it
  9. A license is a cost-effective marketing tool that when used properly can result in enhanced brand name and brand recognition
  10. In case the product does not do well then the loss incurred by the company is comparatively less

Disadvantages of Licensing Agreement

The disadvantages of license agreements are as follows-

  1. The license arrangement becomes a mockery if it is drawn with the wrong party
  2. Licensees need to research the licensor before agreeing. They might be stuck into a deal that will not be able to align with their work mindset. The arrangement then becomes a liability which can harm both the parties in the future
  3. If the terms of the agreement are not met the advantage is with the licensor who can then cancel the agreement. The licensee will have to incur a huge loss in such a scenario
  4. If either of the two parties that is the licensor or the licensee makes a marketing goof-up then both of them will have to suffer along with the other as it will result in losing the company’s reputation and brand power
  5. In case a new product or new technology is launched in the market then the license losses its actual value

Conclusion

The licensing agreement is a blessing for both the licensor and the licensee as they gain something or the other from the arrangement. It becomes imperative that both the parties go through the agreement properly before they sign to avoid any disputes in the future.

The arrangement ensures that the financial assets are taken care of and the interest of both the parties are safeguarded by the contract

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Madhubala Minda

Madhubala Minda is a content writer for Digiaide. She writes unique and research-driven content on various Brands, Competitors, Management topics and wellness. With years of content writing under her belt, Madhu Bala is one of the strengthening pillars of Digiaide content team.