Licensing your business can be a good approach for you if you want to grow your business geographically without the regulations that come with franchising.
What Is Business Licensing?
A licensing agreement is a contract between a business owner (licensor) and purchaser (licensee) to allow the licensee the right to use licensor’s intellectual property. This business agreement can be used for licensee to produce and sell licensor’s products or services.
Businesses from large corporations down to solo business owners use licensing.
When licensing your business intellectual property can include your brand, name, likeness, character, technology, patents, trade secrets, content, and more. Licensees can use these rights as they wish – and as agreed to – in manufacturing, design, advertising, labeling, marketing, etc.
As examples, licensing can be used to add a imagery or verbiage to t-shirts, baseball caps, shoes, and other apparel … to use a character on children’s toys, games, food, or beverages … to apply names, logos, colors, art, and branding to a wide variety of materials.
Licenses can be purchased outright and/or earn royalties.
Licensing Benefits Both Parties
Licensing your business generates profits through licensing cost plus ongoing royalties or consulting fees.
May increase product or service distribution in new geographic areas or demographic groups.
Has the option of pulling out of the workforce while their business lines or services continue.
May gain any improvements made by licensee in software or technology.
Allows them to more quickly enter the marketplace.
Adds to their company’s reputation or legitimacy via the goods, branding, network, or other purchased intellectual property.
Offers a new product or service.
Reduces costs for in-house staff to perform design, marketing, artwork, etc.
Achieves quick business start-up through potential gains in the licensor’s expertise, connections, skills, research, development, or clientele.
Disadvantages for both parties with business licensing
Without proper legal protection through licensing agreements, licensors may experience lack of control over areas like product quality, marketing, and distribution.
Potential damage to reputation from licensee errors, modifications, low quality, poor management, and other factors.
Licensee may become a competitor or take over an existing market.
Adhering to agreed-upon standards and agreements. Will possibly incur unanticipated costs in rework, added staff, and inability to get products into the marketplace.
Potential failure in sales resulting in loss of licensing costs and other investments.
What to include when licensing your business
Make sure you have a licensing agreement that covers:
- Designated items covered – such as software, imagery, or products
- Costs – The price of the license and associated fees or other financial responsibilities; charge for consultation, support, or other professional services from licensor to licensee
- License limitations – for example: maximum number of users or deployments; use of third parties; access to existing vendors, suppliers, consultants, customer lists; availability of assistance for installation, repair, or maintenance; use of logos, company names, or other branding
- Duration of license
- Protection of trade secrets and confidentiality – outlines agreed upon restricted sharing of company’s proprietary patents, data, products, practices, reports, processes, etc.
- Agreed upon liability from third-party claims; may specifically address being held harmless due to claims stemming from errors, omissions, misuse, or modifications committed by licensee.
- Definitions of important terms – which can include:
- roles and titles
- technological terminology
- software and hardware
- business functions
- industry-specific jargon/terms
Licensing your business can reap lots of rewards for both parties. Becoming informed and covering all the details can make it a great option.