Prof.

Ijaz Butt


Muhammad Rizwan Sarwar
L4F12MCOM0322
Section EB4
DEFINITION OF LICENSING
A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. In a
typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a
brand name or trademark, or use patented technology owned by the licensor. In exchange, the licensee
usually submits to a series of conditions regarding the use of the licensor's property and agrees to make
payments known as royalties.
Licensing agreements cover a wide range of well-known situations. For example, a retailer might reach
agreement with a professional sports team to develop, produce, and sell merchandise bearing the sports
team's logo. Or a small manufacturer might license a proprietary production technology from a larger firm
to gain a competitive edge rather than expending the time and money trying to develop its own
technology. Or a greeting card company might reach agreement with a movie distributor to produce a line
of greeting cards bearing the image of a popular animated character.
ELEMENTS OF A TYPICAL LICENSING AGREEMENT
Because of the legal ground they must cover, some licensing agreements are fairly lengthy and complex
documents. But most such agreements cover the same basic points. These include the scope of the
agreement, including exclusivity or territorial restrictions; financial aspects including required advances,
royalty rates, and how royalties are calculated; guarantees of minimum sales; time schedules involving "to
market" dates, length of contract, and renewal options; the lessor's rights of monitoring and quality
control, including procedures to be followed; minimum inventories required to be maintained; finally,
returns and allowances.
One of the most important elements of a licensing agreement covers the financial arrangement. Payments
from the licensee to the licensor usually take the form of guaranteed minimum payments and royalties on
sales. Royalties typically range from 6 to 10 percent, depending on the specific property involved and the
licensee's level of experience and sophistication. Not all licensors require guarantees, although some
experts recommend that licensors get as much compensation up front as possible. In some cases, licensors
use guarantees as the basis for renewing a licensing agreement. If the licensee meets the minimum sales
figures, the contract is renewed; otherwise, the licensor has the option of discontinuing the relationship.
Another important element of a licensing agreement establishes the time frame of the deal. Many
licensors insist upon a strict market release date for products licensed to outside manufacturers. After all,
it is not in the licensor's best interest to grant a license to a company that never markets the product. The
licensing agreement will also include provisions about the length of the contract, renewal options, and
termination conditions.
Most licensing agreements also address the issue of quality. For example, the licensor may insert
conditions in the contract requiring the licensee to provide prototypes of the product, mockups of the
packaging, and even occasional samples throughout the term of the contract. Of course, the best form of
quality control is usually achieved before the factby carefully checking the reputation of the licensee.
Another common quality-related provision in licensing agreements involves the method for disposal of
unsold merchandise. If items remaining in inventory are sold as cheap knockoffs, it can hurt the
reputation of the licensor in the marketplace.
Another common element of licensing agreements covers which party maintains control of copyrights,
patents, or trademarks. Many contracts also include a provision about territorial rights, or who manages
distribution in various parts of the country or the world. In addition to the various clauses inserted into
agreements to protect the licensor, some licensees may add their own requirements. They may insist on a
guarantee that the licensor owns the rights to the property, for example, or they may insert a clause
prohibiting the licensor from competing directly with the licensed property in certain markets.
ADVANTAGES OF LICENSING
Advantages
A license allows a company to take a product to market without the expense of setting up
locally and all the risks and costs associated with that.
A larger and more powerful licensee in a new market can provide instant market access and
deter competitors and imitators.
A license can be used to enable products to be supplied locally where there is no opportunity to
manufacture in the locality.
It is possible with the right kind of license and overseas business partner to create an extensive
market presence very early on in the products life cycle. This will help make maximum profits
for the licensor.
In certain circumstances it is possible to divide up a particular market so that different
companies can license the same product but apply it in different areas. For example, it is possible
to take disinfection kits and divide up the market into human and animal markets then find
different companies with the right market presence.
It is possible to work with a licensee in a foreign market and learn from them. For example, it
may be possible to improve products or to adjust them so that they meet local market needs. This
can often be done early on in the products life cycle to help achieve better market coverage.
An overseas licensee may well save a lot of expense in terms of research and development. For
example, reciprocal licensing in the car and telecommunications industries enables companies to
exploit the fruits of research carried out by one company alone.
Where well known brands are licensed overseas, the local licensee can take advantage of an
established brand with a known name and goodwill. It is very important for the licensor to ensure
that brand standards are maintained in an overseas market.
It is possible to negotiate further income streams from support services and training.
Disadvantages
It is important for the company to find the right partner to license with in a local situation.
Understanding what an overseas partner can do is essential to making licensing a success.
UK Trade & Investment can help in finding the right individual or company.
It is important to ensure that there are proper control provisions in the license. It is especially
important with licensing to have a well-drafted license drawn up by experts. The license should
contain things such as full audit provisions and as licensor it may be important to police those
audit provisions.
In the long term, royalty payments from a license may not provide the maximum for a licensor.
It could be that setting up locally can generate better profits in the long run.
It is absolutely key to the success of the license for it to be properly negotiated and drafted.
Licensing can be a complex arrangement and it is important for a licensor to be properly guided
in terms of royalty payments, audit provisions and minimum sales.
The licensor is often required to provide technical assistance and training in brand standards
etc. depending upon where the licensee is based. This will need to be factored into the licensing
arrangements.
The licensor must be satisfied that the licensee can make a local market from the products.
Some products are more popular in some cultures than in others
DEFINITION OF FRANCHISING
In a franchise business, the franchisor provides a developed way of doing business, ongoing
guidance, systems and assistance in return for periodic payment of fees and/or purchases.

Buying a franchise can be a viable alternative to starting your own business. Listed below are
some advantages and disadvantages of buying a franchise.
Advantages of buying a franchise
Franchises offer the independence of small business ownership supported by the benefits of a
big business network.
You don't necessarily need business experience to run a franchise. Franchisors usually provide
the training you need to operate their business model.
Franchises have a higher rate of success than start-up businesses.
You may find it easier to secure finance for a franchise. It may cost less to buy a franchise than
start your own business of the same type.
Buying a franchise means buying an established reputation and image, proven management and
work practices, access to national advertising and ongoing support.
Disadvantages of buying a franchise
Buying a franchise means entering into a formal agreement with your franchisor. Franchise
agreements dictate how you run the business, so there may be little room for creativity.
There are usually restrictions on where you operate, the products you sell and the suppliers you
use.
Bad performances by other franchisees may affect your franchise's reputation.
Buying a franchise means ongoing sharing of profit with the franchisor.
Franchisors do not have to renew an agreement at the end of the franchise term.
Franchising is seen by many as a simple way to go into business for the first time. But
franchising is no guarantee of success and the same principles of good management - such as
informed decision-making, hard work, time management, having enough money and serving
your customers well - still apply.