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What are provisions in a licensing agreement?

Businesses that have developed a product idea but do not have the manufacturing capacity to bring it to market may license their products to a larger company that has the ability to mass-produce them. To set up this kind of relationship, you will need to compose a licensing and distribution agreement with your company of choice.

In a licensing relationship, you are the licensor since you have developed the product while the company that will manufacture your product is the licensee. Your licensing agreement should have a number of provisions to protect your interests.

Time and geographic boundaries

According to Chron, a licensing agreement may explain how long the licensee can produce the licensed product. You may set up a short or a prolonged period of time depending on your priorities. Your agreement may also establish the geographic location for your licensee to market your product in case you do not want your licensee to market to certain cities, states or countries.

Quality standards

The licensee should make sure that the products it creates do not damage your professional and personal reputation due to any failures to perform as intended for customers. A licensing agreement can protect the image of a licensor by establishing quality standards for the product. You may dictate that your licensee cannot alter your trademark, design, or other features important to your product.

Methods of payment

Your agreement should also detail how the licensee will pay you for the license. There are different ways to go about payment. You might favor a royalty derived from the sales of the products. As an alternative, you could require the licensee to pay you a flat fee, perhaps monthly or at whatever intervals you prefer.

Exclusivity of the agreement

Consider whether you want to give multiple companies a license to make your products. If so, your licensing agreement may state that you have a nonexclusive arrangement with the licensee. Otherwise, the licensee might litigate you if you sign licensing agreements with other businesses.

Licensing agreements have a lot of room to protect your interests while helping establish a potentially lucrative business relationship. Consider taking the time to learn the options available to you.