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Why do companies pay for licensing agreements?

A licensing agreement isn't free. The company that wants to be allowed to use someone else's trademarked and copyrighted material has to pay for that right, and this is done up front, with royalties, or both.

If you're a business owner and you're considering this, you may be wondering why you'd ever want to pay. Why not just produce your own goods that you have the rights to already and then sell those without having to pay royalties on every item sold or pay a fee at the beginning?

There are many reasons why licensing agreements are used, such as when one company holds the patents and there is no feasible way for others to make the same product. Much of the time, though, it's just about branding.

For example, take the professional sports. There are clothing companies that have licensing agreements with the leagues so that they can use the logos, team names, fonts, numbers, player names, and the like. They then produce clothing for the fans of the team.

What sells those shirts isn't the quality of the shirts or the way they're made; it's the brand. Professional sports teams -- and bands, car companies, and colleges, just to name a few more examples -- spend a lot of money building up their brands and creating a group of fans. These are really just consumers who are ready to buy related products, and the licensing agreement then makes it possible for the clothing company to sell to those individuals.

In the end, the goal of the licensing agreement is to increase sales so much that the fees are worth it. If you're thinking about signing one -- or drafting one for someone else to sign -- be absolutely sure you know what rights it provides, what the fees look like, how long it will last, and what other legal regulations it puts in place in California.

Source: INC, "Licensing Agreements: The Basics," accessed Oct. 07, 2016

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