PRODUCT LICENSING

Licensing involves obtaining permission from a company (licensor) to manufacture and sell one or more of its products within a defined market area. The company that obtains these rights (the licensee) usually agrees to pay a royalty fee to the original owner.

Why would a company look for products it can produce under license?

In today's world of rapid technological change, new technologies are the key to economic growth. Today, many products have very short life cycles and are readily replaced in the marketplace by new technology. If a company wants to survive, it needs to continually add new products to replace declining products.

Also, a company may want to grow and diversify by expanding its product line to take up excess manufacturing or marketing capacity, level out seasonal highs and lows, or simply add to profitability with a proven product. Companies may not have the internal skills, time, or money to develop their own new products, so obtaining a proven product quickly through licensing may be very attractive.

What are the advantages of licensing?

• You get access to the experience and know-how of the company that developed the product. This company may be much larger than yours, with development capabilities that you cannot afford.
• You get to break into a new market with this new product, but with the benefit of the experience gained in another market.
• it costs less than buying an entire company;
• you don't pay for expensive and time consuming research and development;
• you don't pay development costs up front; you pay royalties when you start making sales; and
• you won't have large losses if the product doesn't become successful in your market area.

It makes competition easier if you're a small company with limited resources. You minimize your costs and risks: 

What are the disadvantages of licensing?

• The license agreement is normally for a considerable period of time and there may be an annual minimum royalty required.
• New technology may become available making the licensed opportunity obsolete.
• The agreement may force the licensee to accept restrictions on its marketing.
• The licensee may lose the capacity to develop its own technology internally.

What does a typical licensing agreement cover?

• Subject Matter of the Agreement—may be (1) patent, (2) copyright, (3) trademark, (4) industrial design, (5) trade secret (know-how, technology, experience, etc.)
• Granting of Rights—defines what licensor is transferring to licensee
• Licensor's Obligation—sets out how transfer is to take place in terms of assistance, support, training and co-operation
• Licensee's Obligation—sets out financial requirements, guarantees of licensee, secrecy, costs, etc.
• License Fee—fee paid to licensor on signing agreement
• Royalty—ongoing share of proceeds paid to licensor for the rights. May be a lump sum, or percentage of proceeds or amount per unit sold, etc., usually a minimum royalty is required.
• Term—how long the agreement is to last
• Designated Area and Exclusivity—define manufacturing and marketing area of license
• Termination—describes rights of both licensor and licensee to terminate agreement
• Guarantees—licensor will normally not guarantee the results of using the rights granted. The licensee may be required to provide warranties, public liabilities, etc.