What is a licensing agreement: basics and benefits

What is licensing in business?

A licensing agreement is a legally backed written document between you (the licensor) and another party (the licensee) to take your product to market. In return, you receive either a lump sum or royalty payments for each item sold.

The definition of a licensing agreement can often be misunderstood, but it typically involves permission and restrictions to use intellectual property.

Some basic building blocks of a licensing agreement

• Performance: Includes performance requirements of the licensee, such as sales goals. If the licensee doesn’t live up to the agreement, you’ll have the power to terminate the contract.
• Exclusivity: If your licensee agrees to an exclusivity clause, they cannot establish a licensing agreement with your competitors.
• Distributors: Licensees often hire external distributors to improve sales. To protect yourself and the interest of your product, you should have approval over distributors.
• Liability: Includes details about who is liable in the event of product failures, recalls and other problems.

What are the benefits of a business licensing agreement?

Once you license your product, someone else assumes the responsibility for manufacturing, marketing and distributing it. This is especially attractive to business owners who like to develop one product, sell it and move on to the next.

A business licensing agreement also makes sense for products that can be sold to multiple companies you might have difficulty accessing yourself. For example, sports-team branding can be vital to the success of your product but difficult to secure as a business.

Rather than approach all the professional teams in a league, you work out a licensing agreement with one company that already has a deal with the league. That company then manufactures your product with the proper logos as part of the design.

What are the drawbacks of a business licensing agreement?

You should be aware that licensing agreements can limit your share of the profits and once you shift the licensing rights, you may lose control over aspects such as production and quality. It’s advisable to consult with an attorney to fully understand the implications and to ensure that your interests are protected.

Tips for seeking a licensee

Finding a company interested in licensing your product is challenging. Only a small percentage of entrepreneurs establish a successful licensing agreement. To approach a licensee, you might consider:

1. Broadening your vision: Don’t just know your product, know your industry. Research companies that may be good licensing partners.
2. Polishing your presentation: Show the prospective licensee how easily your product fits with theirs and share your insights about the market and competition to spark enthusiasm in them.
3. Turning negatives into positives: Even if your product is ultimately turned down, you can use this as an opportunity to learn and improve. Find out why you were turned down and how those obstacles can be overcome in the future.

How can you protect yourself?

When you license your product, you need to be sure to protect your interests.

1. Hire an intellectual property attorney: You need someone with experience in drawing up confidentiality agreements and licensing agreements. This is definitely not a do-it-yourself project.
2. Have your patents in order: This will establish your ownership of the ideas and is a standard procedure for licensing in business. Also, many companies may not be willing to talk to you unless you already have a patent issued for your product. The patent process can take time, so apply as soon as you can.
3. Follow the plan: When you submit a product to a potential licensee, follow their instructions and the terms of the contract to the letter. Remember, you now have a contract. Any changes or shortcuts on your part can kill the deal.
4. Follow up: Have a follow-up plan to ensure the licensee is fulfilling their agreement terms. This monitoring should often be included in the initial contract.

Licensing isn’t simple, but it can be highly lucrative for people who understand the process and know how to protect their interests. If you have an idea or product that fits, it might be worth exploring.