1. Basics of Licensing Deals
2. Items that Can Be Licensed
3. How Licensing Deals Work

Updated November 6, 2020:

What's a licensing deal? Basically, a licensing deal, which is also called a licensing agreement, is a contract that allows one person to use another person's property in exchange for a specified fee.

Basics of Licensing Deals

If you own a piece of property and want to allow someone else to use your property in exchange for something of value, you would need to write out a licensing agreement. In your licensing agreement, you can outline when and how another person can use your property. Typically, licensing deals cover intellectual property, but they are also used for real and personal property.

Intellectual property can come in several different forms:

  • Copyrights.
  • Patents.
  • Trademarks.

The majority of licensing deals will define the parties involved in the contract and the scope of what is being licensed. Outlining how the licensee can use the property is the main purpose of licensing deals. In general, the licensee's ability to use the property covered by the agreement will have either a time or a geographic limit.

Some licensing deals require that the licensee pay the licensor royalty fees after reusing the property numerous times. Businesses frequently use licensing deals. For instance, one company may want to allow another company to use or sell an asset.

Examples of common licensing agreements include:

  • A sports team allowing another company to produce t-shirts with the team's logo.
  • A movie company that allows another company to create a toy based on a character the movie company owns.
  • A company that owns a patent but isn't interested in manufacturing the product, so they allow another company to produce the patented item.
  • A company that allows another company to use a trade secret.

Licensing agreements are important tools for companies that own the rights to a valuable product but are not able to manufacture the product themselves.

Items that Can Be Licensed

A business has the ability to license virtually any of its assets. That being said, most licensing agreements involve intellectual property such as trademarks. In the modern age, many licensing agreements involve digital assets such as smartphone applications.

Types of intellectual property that you can get licensed include:

  • Copyrights: When licensing a copyright, the licensee may use or reproduce a copyrighted item such as a book or piece of music.
  • Patent: Licensing a patent gives the licensee the right to manufacture, sell, or use a patented invention.
  • Trademarks: Trademark licenses cover anything used to brand a company's product, including designs, phrases, and symbols.
  • Trade Secrets: A trade secret allows one company to use the trade secret of another. The owner of the secret can restrict the use of the trade secret however they wish.

How Licensing Deals Work

The most important part of the licensing deal is the exchange of value. To obtain the right to use the licensor's intellectual property, the licensee pays a fee, called a royalty.

When drafting a licensing agreement, there are several important issues to discuss. First, licensing agreements usually include a section covering geographic location and exclusivity. The licensor will agree to give the licensee sole rights to use the property in a specific location. Usually, exclusive rights will expire after a set time period.

Next, the licensor and the licensee will need to discuss if subsidiary licensing will be possible. If subsidiary licensing is permissible, the licensee will be able to allow a third-party to make or use the licensed property. The two parties will also need to discuss how and when payments should be made. As discussed, the licensee will provide royalties for the right to use the product. Usually, the licensee will need to pay an upfront royalty and then regular payments for the duration of the agreement.

Depending on the property being licensed, royalty payments can either be a flat amount or can be a percentage of what the licensee makes from using the product. When licensing a product, the licensor will almost always require monitoring of the product to make sure that it's used correctly. For instance, the licensor may request testing of the product quality before the licensee makes any sales. In addition to an initial check, many licensors require regular quality monitoring throughout the duration of the licensing deal.

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