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Understanding Licensing Agreement

I intend to open up my business but I don’t think I have enough money and resources to do it. I have invented a mug that not only keeps your food from leaking but also has different segments. I want to create a plan to sell my product but I don’t know how to go about it. I lack expertise in this field.

Also, I thought of raising money from investors but it takes a lot of time. I think it is a big risk since I am not an expert in this.  People have told me to team up with a well-known company that already has a market value so that my product survives in the long run. What should I do? Should I buy the license of a company? Is it better than owning my own business since I lack resources? Is licensing similar to Franchising?

Licensing has two meanings: one in common parlance such as a carry permit, and another in business and commerce. In its broadest meaning, a license is a permit that allows someone to accomplish something.

In the business world, licenses are often granted by companies that seek to grant rights to their property in exchange for money. These are usually rights to create, sell, or utilize anything that the company owns.

A licensing agreement is a formal contract that allows you to utilize the property of another party under specified terms. The licensor (the one who grants permission) and the licensee are the two parties engaged in this arrangement (the one gaining permission).

Basically, the licensor agrees to supply the licensee with intellectual property rights such as the licensor’s technology, brand name, or product creation know-how in a normal licensing deal. The licensee often pays an upfront fee and/or a royalty fee to the licensor in return for the licensor’s intellectual property.

A royalty fee is a recurring charge paid to the licensor for the right to utilize the intellectual property of the licensor. Licensing agreements must define how licensed parties may utilize properties in evaluation to identify, including the conditions such as the geographic areas in which the commodity would be used, the amount of time that parties have to access the property.

Licensing agreements guarantee that you have the legal authority to utilize the property of another person or business. For example, if you wanted to feature a song from an artist in a commercial, you’d have to sign a licensing deal. If you use the song without authorization, you may be violating copyright rules and might face a lawsuit or a fine or if you want to use an artist’s piece of work on the cover of your book, you would have to seek a license from the artist.

Licensing agreements for intellectual property, such as patents, trademarks, and copyrighted content, are the most prevalent. Music, cinema, video, and artwork are examples of copyrighted materials. While a license agreement does not provide you ownership of another entity’s asset, it does let you use it as long as you adhere to the agreement’s terms.

Example: A McDonald’s franchisee has a licensing deal with the McDonald’s Corporation that allows them to utilize the company’s marketing and advertising materials as an example of a licensing agreement in the restaurant industry. Toy companies frequently enter into license deals with movie studios, granting them the legal right to make figurines based on popular movie characters’ likenesses.

Netflix and other entertainment platforms frequently enter into license deals. The title/content owners provide the online streaming service the right to broadcast content either solely or in collaboration with other firms.

For example, a prominent television series’ creators may engage in a license arrangement with Netflix, enabling the show to be included among its titles for a set period of time. Netflix would agree to pay the content owner royalties from the revenue it collects from its customers in exchange.

For more understanding of a Franchise Agreement, read the article below:

6 Essential Elements of Franchise Agreement.


How Does It Work?

A licensing agreement contains various parts and elements, each with its own set of specifics that the parties must negotiate.



The licensee is given the only right to manufacture and sell the product in a given region. The licensor commits not to market the goods in that territory to anybody else. A term restriction is frequently connected to this section of the contract. Also, A non-exclusive license allows the licensor to license the IP to several licensees. These license agreements are frequently less expensive for the licensee.



The payment of royalties for the usage of a license is common in many licensing agreements. Royalties are paid in a variety of ways depending on the sort of goods being licensed. Music royalties, for example, are determined based on performances, whereas royalties for a given item, such as a book, are computed determined by the number of units sold. There might be a cash advance against royalties at first.



It can be either temporary or permanent. A temporary license can be structured in one of two ways: either the licensee pays a one-time price for a certain period of time, or the licensee pays per usage like the traditional royalties. In all industries, temporary licenses are significantly more prevalent. Although many people don’t realize it, part of your OTT platform’s monthly cost includes a license to use their patented digital technology.


Licensing Vs. Franchising

Licensing differs from franchising in that licensing is limited to the authorized use of a brand name or innovation, whereas franchising is a wider legal relationship that requires a business to be developed and operated in accordance with the franchisor’s quality standards, specific requirements, and other requirements.

Licensing is a method of monetizing trademarks and technology so that they may be utilized by other businesses under their own brand. Franchising is a method of expanding a single brand over several locations.

For more information, you can read the article below:
Franchise or License: Pros and Cons.


Licensing Vs. Joint Venture

Licensing is a relationship between Licensor and Licensee, an arrangement between them to use the intellectual property of the former whereas a Joint venture means an agreement between two companies to share resources or provide assistance for a set period of time in exchange for payment.
They are employed in a broad variety of industrial, mining, and service sectors, and they typically entail technology licensing. A joint venture merges the assets of the two firms and lasts longer than a licensing deal, as a licensing agreement typically results in a local company becoming a rival.


Advantages of Licensing Agreement

  • There is frequently a hurry to get new items to market. A license agreement that allows an organisation to use technologies that are previously established or easily accessible can help it go to market faster.
  • Small businesses may lack the means to do the essential research and development to generate new or better goods. A firm might benefit from a license agreement by gaining access to technological advancements which would otherwise be challenging to get.
  • The criteria, restrictions, and requirements that govern the use of the licensor’s business, patent, or trademark are explicitly laid out in licensing agreements.
    Both the licensor and the licensee understand exactly what is expected of them. This covers when and how much payment is due, any additional royalty’s payable as a factor in the relationship, the type of contract, the length of time the licensee is allowed to use the asset, copyright claims, and the agreement’s expiration date.

Disadvantages of Licensing Agreement

  • In terms of quality control, losing control in a license environment is a significant drawback. The licensing of a brand name is especially important since any quality control issues on the licensee’s part will affect the licensor’s parent brand.
  • Having to rely on a foreign partner comes with its own set of hazards for the company’s success. Licensing, like investing in a company on the stock market, necessitates research into which company to partner with.
  • One of the disadvantages of having a licensing agreement is the possibility of entering into a deal with the wrong class. In certain circumstances, licensors may be so eager to enter a market that they neglect to conduct due diligence.
    As a result, a distributor may be trapped in a long-term contract with a corporation whose values conflict with its own. The licensee is subject to the same rule, especially if it believes a new product or brand would do well in a particular area without doing market research.

    Now, if you are interested to start a business via Franchising, maybe you should take a look at this article:
    5 Best Ways to Run a Franchise.

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