Most people have a basic understanding of franchises. They understand, for example, that they’re often visiting a franchise when they visit their favorite fast food restaurant chain, list property with a national real estate brand or workout at their neighborhood gym that has additional locations around the country.
Licensing, however, may be less obvious. Consider Green Bay Packers apparel or Aveda hair salons, for example, both of which are most often made available to local business owners through licensing agreements.
Essentially, licensing is defined as granting permission to use certain products, procedures, techniques, processes, trade secrets or other intellectual property rights that would otherwise be illegal to use.
Because licensing is a less obvious path, many local business owners overlook opportunities to license their intellectual property, including business practices, brands, etc. But if a business has a demonstrated record of success with its intellectual property, licensing can present an excellent opportunity to grow its market and revenues.
If you think licensing may be in your company’s future, as licensor or licensee, consider the following key questions. The answers — all of which should be spelled out in any licensing agreement — will help you determine whether it makes sense for your business.
- Who is granting the license, and who is the licensee? If your company is granting the license, consider who actually owns the intellectual property and whether the licensing proceeds should come under another business entity. You may want to establish a separate corporation or DBA (doing business as) for the licensing side.
- What rights are being licensed? The license must include sufficient rights to make it worthwhile for the licensee but not so many as to eliminate the licensor’s control of the brand.
- What is being paid for the licensure and how is payment made? Licensees typically, but not always, will pay a one-time licensing fee or make guaranteed minimum payments in addition to royalties on sales (usually ranging from 6 to 10 percent).
- Are there any geographic restrictions for use of the license? Licensors will want to be sure the licensee’s rights won’t impinge on their own core sales, while licensees will need enough latitude to make it a smart investment.
- How long does the license last? You’ll want to include renewal options and termination conditions. In some cases, licensors require licensees to meet certain sales figures to qualify for renewal.
- Are the rights exclusive or nonexclusive? In most cases, businesses selling licensing rights are not doing so exclusively. Exclusive rights make sense, however, if you are relying on one licensee to take your product or process to the next level in terms of marketing, branding and/or distribution.
- Who pays for advertising and promotional costs, and does the licensor have the right to approve advertising and/or promotional materials before they are used?
- Does the licensor retain rights under license (besides ownership of the rights)? What are the respective rights and obligations of the licensor and licensee? Does it make sense to allow licensees to sublicense or transfer licenses?
- What is the process or procedure to resolve disputes, and what law applies to a dispute?
- How and when does the license terminate, and what happens?
- Is the license agreement covered by franchise laws? Franchises are regulated by the government under securities laws, whereas licenses fall under contract law. Each state has different franchise laws, and it is important to view the state laws to determine if a licensing agreement falls within the scope of franchise laws. (Wisconsin laws are covered under Chapter 553 of state statutes.)
Generally, franchising gives the right to operate a business whereas a license grants a right to use intellectual property. Think of it as the difference between operating a Disney Store versus having the right to sell Disney products.
Whether you’re considering pursuing a licensing agreement as a licensor or licensee, an experienced business attorney can help you explore the many decisions to be made and help you understand how they may affect your future operations.
For many businesses, licensing agreements have been the key to expanding sales well beyond state and even international borders.
Originally appeared in the River Valley Business Report, November 4, 2012. Reprinted with permission.