Licensing Arrangement

A licensing arrangement is an agreement in which the licensing firm grants rights to another firm in another country or market to produce and/or sell a product. The license pays compensation to the licensing firm in return for technical expertise. A contractual arrangement in which the legal owner grants another permission to use intellectual property such as a brand. For example, a well-known regional real estate firm may reach a licensing agreement for another company to use the firm’s brand name in a different region of the country. Licensing is especially useful strategy if the trademark or brand name is well known, but the multinational company does not have sufficient funds to finances its entering the country directly.

Contractual agreement between two business entities in which the licensor permits the licensee to use a brand name, patent, or other proprietary right, in exchange for a fee or royalty. Licensing enables the licensor to profit from the skills, expansion capital, or other capacity of the licensee. Licensing is often used by manufacturers to enter foreign markets in which they have no expertise. The creators of popular comic strip and movie characters often license the use of a character’s likeness to manufacturers of lunch boxes, clothing, toys, and other children’s products. The popularity or familiarity of the character helps otherwise undistinguished products to stand out from their competitors.

A license is a permit granted by a government to carry out a regulated activity. Licensing is the most common form and method of health regulation. Most licensing in the United States is done by the states under their police powers. A state legislature must pass a law requiring a license to engage in a specific activity, such as practicing medicine or preparing food. The statute delegates the power to establish the conditions for licensure to an agency such as a department of health, or to a board such as a board of medical examiners. The agency publishes the conditions for licensure, which are often based on national codes, and every license holder must meet these standards. A license holder can be required to give up certain legal rights as a condition of licensure, such as agreeing to allow inspectors into a restaurant without a warrant. A license can be revoked or limited for not complying with the terms of licensure.

The arrangements between the licensor and the licensee are typically laid out in a legal document known as a licensing agreement. This formal agreement is an important component in a successful business venture. “While it is impossible to determine the future success of a product, much can be done in the earliest stages to ensure that a licensed product gets the best chance possible,” Salas wrote. “One might even say that the entire future of a licensed product is laid out, at least in part, during the process of negotiating a licensing contract.”

Licensing agreements usually include a number of provisions designed to protect the interests of both parties. Some of the most common elements of licensing agreements are outlined below:

Payments from the licensee to the licensor usually take the form of guaranteed minimum payments and royalties on sales. Royalties typically range from 6 to 10 percent, depending on the specific property involved and the licensee’s level of experience and sophistication. Not all licensors require guarantees, although some experts recommend that licensors get as much compensation up front as possible. In some cases, licensors use guarantees as the basis for renewing a licensing agreement. If the licensee meets the minimum sales figures, the contract is renewed; otherwise, the licensor has the option of discontinuing the relationship.

Many licensors insist upon a strict market release date for products licensed to outside manufacturers. After all, it is not in the licensor’s best interest to grant a license to a company that never markets the product. The licensing agreement will also include provisions about the length of the contract, renewal options, and termination conditions.

In order to ensure quality, the licensor may insert conditions in the contract requiring the licensee to provide prototypes of the product, mockups of the packaging, and even occasional samples throughout the term of the contract. Another common quality-related provision in licensing agreements involves the method for disposal of unsold merchandise. If items remaining in inventory are sold as cheap knockoffs, it can hurt the reputation of the licensor in the marketplace.