The Pros & Cons of Licensing

If you have a product but do not have the ability to sell it yourself, you may have the option of licensing your product to another company through a licensing agreement.  So, what exactly is a licensing agreement? A licensing agreement is a contract between the owner of a product (licensor) and someone who wants to use that product (licensee).  A licensing agreement transfers the right to sell, distribute, or manufacture a product or invention in exchange for continuous royalty payments or a one-time lump sum payment. 

Licensing agreements can be fairly lengthy and complex, but they all cover the same basic points.  The typical licensing agreement has several standard clauses including payment provisions and royalty calculations, exclusivity or territory restrictions, license term and renewal, intellectual property rights, territory considerations, minimum sales and inventory requirements, and quality control.  

Although licensing can unlock a variety of business opportunities, it is important to do your research because there are many pros and cons that come along with the licensing process. 

Advantages (Pros) of Licensing 

Licensing is a cost-effective way to get your product to market.  It will not cost a lot of money to enter into a licensing agreement and, if structured properly, the licensee will be responsible for the manufacture and distribution costs associated with selling your product on the market. Licensing also promotes easy entry into foreign markets and international sales.  

Licensing also creates an opportunity to receive passive income through royalty payments. Once the licensee starts earning money from the sale of your products, you will also receive royalty payments without the risk of losing your ownership rights. Depending on the terms of your agreement, these payments could go on for years without interruption. 

Product licensing also reduces risks for the licensor.  Unlike traditional “product to market” strategies, a licensor will not be responsible for building and managing a commercialization team, securing distribution and sales channels, or the risk of execution.  Rather, the licensor retains all intellectual property rights and will receive royalty payments while the licensee assumes the risk of sale. Conversely, the licensee assumes less risk in association with product development.   

Disadvantages (Cons) of Licensing

When you do not have a properly structured license agreement, it can be very easy to lose control of your product. This means that you no longer have control over things such as packaging, distribution, cost, sales, or even marketing. If the company delays the manufacture or distribution of your product, you may be left with smaller royalty payments than you originally expected or delayed royalty payments.  Additionally, the terms of some licensing agreements only require quarterly royalty payments. This means that you will get paid every three months, provided that your product sells. 

Licensing also creates a dependency relationship.   The licensor is dependent on the terms and conditions agreement and is depending upon the licensee in order to receive royalty payments. It’s always possible that the licensor asks for a renewal of the agreement that ends up costing more than the initial license.  Also, since there is no guarantee of exclusivity, there is a chance that multiple businesses are competing in the same market. 

Despite having safeguards in place, licensing agreements increase changes of intellectual property theft.  As you license your intellectual property and products, there are increased opportunities for theft, piracy, and misuse because you do not have full control over how the licensee operates his or her business.  If your products are distributed illegally, you will miss out on earning royalties for product sales. You may also face potential patent infringers if your product is patent protected. 

Product licensing starts with a licensing agreement and whether you can maximize the business opportunity depends on the agreement made between you and your licensee. Understanding that you can make a lot of money from something like this is important, but it is even more important to know how to manage the licensing relationship without neglecting your intellectual property rights. People tend to lose sight of the bigger picture, but as long as you have your priorities set and know what it is you want to accomplish with a product, then you will have no trouble reaching whatever goals you have set for yourself. 

At IPS Legal Group, P.A., our goal is to make sure that you understand the licensing process.  Contact us today if you want to learn more about the product licensing and licensing agreements.  We work hand-in-hand with our clients to help navigate through the licensing process. 

Disclaimer: This blog is not intended to be a substitute for legal advice or instruction.  Every legal question calls for a different legal answer, and the above might not be applicable to your situation.  Contact IPS Legal Group, P.A. today to discuss your intellectual property needs.

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