A licensing agreement is a contract between two parties (the licensor and licensee) in which the licensor grants the licensee the right to use the brand name, trademark, patented technology, or ability to produce and sell goods owned by the licensor. In other words, a licensing agreement grants the licensee the ability to use intellectual property owned by the licensor. Licensing agreements are commonly used by the licensor to commercialize their intellectual property.
A licensing agreement is a contract between a licensor and licensee in which the licensee gains access to the licensor’s intellectual property.
The party providing the intellectual property is called the licensor while the party receiving the intellectual property is called the licensee.
In a licensing agreement, the licensee typically pays an upfront fee in conjunction with a royalty fee.
Understanding a Licensing Agreement
In a typical licensing agreement, the licensor agrees to provide the licensee with intellectual property rights such as the licensor’s technology, brand name, or product creation know-how. In exchange for the licensor’s intellectual property, the licensee typically plays an upfront fee and/or a royalty fee to the licensor. A royalty fee is an ongoing fee paid for the right of use of the licensor’s intellectual property.
It is important to remember that:
The party that is providing intellectual property rights to another party is called the licensor
The party that is receiving intellectual property rights from another party is called the licensee
Example of a Licensing Agreement
In May 2018, Nestle and Starbucks entered into a $7.15 billion coffee licensing deal. Nestle (the licensee) agreed to pay $7.15 billion in cash to Starbucks (the licensor) for exclusive rights to sell Starbucks’ products (single-serve coffee, teas, bagged beans, etc.) around the world through Nestle’s global distribution network. Additionally, Starbucks will receive royalties from the packaged coffees and teas sold by Nestle.
The licensing agreement provided Starbucks with the ability to drive brand recognition outside of its North American operations through Nestle’s distribution networks. For Nestle, the company gained access to Starbucks’ products and strong brand image.
Advantages of Licensing
The advantages of licensing can be viewed from two perspectives: licensor and licensee.
Advantages to the licensor include:
The licensor being able to utilize the licensee’s distribution network to quickly enter into new geographical regions and foreign markets
The licensor facing lower capital requirements and lower costs due to not having to invest in distribution
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.