Product Licensing Agreement: Everything You Need to Know
A product licensing agreement is a key document you’ll need to protect your business interests. Licensed products are attributes that individuals exchange money for, not free giveaway items. 4 min read
Updated November 19, 2020:
A product licensing agreement is a key document you’ll need to protect your business interests. Licensed products are attributes that individuals exchange money for, not free giveaway items. In essence, your service or product has to pinpoint a certain demographic that will pay for your service or product. Also, you’ll have to get a license that ties into the preferences and lifestyles of your target audience.
When it comes to a licensing agreement, you must be aware of royalties and how to use them effectively. In most cases, you would get an advance royalty (a flat price paid to you upfront) and ongoing royalties (paid as a certain percentage for each sale). Advance royalties are guarantees that a licensor will get a portion of the money, even if the product does not sell. After, when and if the product sells, the licensor gets a percentage on the sale. You would usually get five percent of a wholesale price of every product that’s sold.
A licensor will decide the royalty, and the rates are set in stone. This is why you should know what the rates will be and how they’re detailed in the agreement to avoid any confusion. If you are unclear regarding the terms of a licensing agreement, you should contract a lawyer for further assistance. The assistance you receive will save you money in the long-run, so you can agree to a licensing contract that works in your favor. Also, if you’re turned off by the idea of royalties, you should know that all parties will benefit from the agreement.
From the licensor’s standpoint, the advantage is simple:
- By granting the person a license, marketing and manufacturing costs are cut for the launch of a new product, and the royalties yield direct profits. Moreover, the licensor has added value to a product that will turn into more sales.
For an easier licensing process, you can use the service of a licensed firm or agent. A licensing professional helps with such matters as:
- Contract negotiations
- Product development
If you go ahead with a licensing product agreement, you may discover that your business grows rapidly. The issue of where you seek a license largely depends on:
- Product type
- Licensing knowledge
- Prior experience
To know the people you wish to market to, observe or talk to people within that demographic. You should also know the following qualities:
- How they spend their time
- What products they buy at a mall or store
- How they spend their time
Also, you should read newspapers and magazines, and search websites/blogs regarding your target market.
The word license has two distinct meanings. There is the common usage (driver’s license, for instance), and another for commerce and business. A license is a permit from an authoritative body to use or own something. In a company, licenses are usually given by a business that wishes to bestow rights to another business in return for payment. Such rights pertain to making, selling, or using assets.
Examples of licensing include:
- Sports teams offer licenses to businesses that make products with a team’s name on them
- A movie company offers licenses to businesses who make products based on movie characters
- A business that patents a product does not wish to sell or make the product, so it sells licenses to make the products
- A business with a trade secret sells a right to use or promote the process to another business
For a business with a quality product, but no ability to create it, licensing is a good way to make that product. Essentially, licensing is the best way to get a return on investment and has the best chance of success.
Copyright licenses entail the right to replicate and sell a copyrighted asset. The right to conduct the work publicly may then be under license. Patent licenses entail the right to distribute, export, use, or sell and export the product that’s patented. Trademark licenses mean the right to use trademarks on certain items, or in certain manners. Trade secret licenses mean the right to use trade secrets, at certain locations, and for a specific process.
Other License Types
Product licensing is a faster way to transform an idea into a product that’s ready to sale. To license a product, you must:
- Think of a good idea
- Safeguard your intellectual property via the United States Patent and Trademark Office (USPTO).
- License a company to distribute and manufacture your service or product
- Garner royalties
If you need help with a product licensing agreement, post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.