What is the purpose of a licensing agreement in business?

A licensing agreement in business serves the specific purpose of allowing one firm, known as the licensor, to grant permission to another firm, referred to as the licensee, to produce and market a product or service under certain predetermined conditions. This arrangement typically involves the payment of royalties or fees by the licensee to the licensor in exchange for the rights to use intellectual property such as patents, trademarks, or copyrights associated with the product.

By entering into such an agreement, the licensor can expand their market reach without the direct costs associated with manufacturing and distribution, while the licensee gains access to a proven product or brand, often with established customer loyalty. This symbiotic relationship can be particularly beneficial in industries like pharmaceuticals, technology, and consumer goods, where innovation and brand recognition play crucial roles in market success.