What type of agreement is defined as the transfer of the control of operations and management from one firm to another with the former becoming a unit of the latter?

What is Licensing?

Licensing is a business agreement that involves the shared use of a trademark, technology or other intellectual property asset. The agreement that creates a license relationship is a license agreement and the parties to a license agreement are the licensor and licensee. The licensor is the owner of the trademark or technology and, based on the terms of the license agreement, including the payment of a license fee, the licensee is granted a legal right to use the licensor's trademark or technology. License agreements can be exclusive or non-exclusive and can relate to a wide range of intellectual property assets that include trademarks, copyrights, patents, and music. License fees can be structured as a one-time fixed fee or on-going fees based on usage, sales, and other performance criteria.

License agreements are similar to franchise agreements in that they both relate to the shared use of business assets and intellectual property rights. License agreements are different from franchise agreements in that license agreements are more limited than franchise agreements and do not provide the licensor with control over how the licensee operates the underlying business. If a license agreement is prepared improperly and includes too much control over the underlying business, the license agreement may give rise to an illegal franchise relationship.

Examples of license agreements, include:

• The license of a trademark where the licensee is granted the right to use a trademark for a limited and specified purpose. Example: Walt Disney granting McDonalds a license for McDonalds to co-brand McDonalds Happy Meals with a Disney trademarked character.
• The license of a technology where the licensee is granted the right to use the licensor's software, or other intellectual property asset. Examples: Apple granting individual computer users a license allowing them to use the Mac operating system and, Spotify granting subscribers a license to listen to music on the Spotify network.
• The license of a patent where the licensee is granted the right to use a patented process or technology. Example: A patent owner granting a drug manufacturer a license to use the patented formula in manufacturing and selling a prescription drug.

In each licensing example, the underlying business operations of the licensor and licensee are distinct from one another and, unlike franchising, the degree of control that the licensor possesses over the licensee is limited to the underlying trademark or technology that is the subject of the license. Using the McDonalds and Disney Happy Meals example, although Disney will have say and control over how McDonalds uses Disney's trademarks on McDonalds Happy Meals, Disney does not have control over McDonald's overall business operations.

Why Licensing is Not an Alternative to Franchising?

Although licensing and franchising are very similar, licensing is not an alternative to franchising and there are important differences.

License agreements are limited in scope to a business relationship between two businesses that share a common brand element or technology but, overall, operate independent of one another and without control over how the other operates and conducts its own business. Any control involved in a license relationship is limited to the use of the shared brand element or technology and represents only a small portion of the overall business operations. On the other hand, franchise agreements are much broader and, in addition to a businesses shared use of a brand, technology, and systems, regulates and controls the entire branding and operations of the underlying business.

Every franchise agreement includes a license but not every license agreement creates a franchise. What qualifies as a franchise is determined by the Federal Franchise Rule issued by the Federal Trade Commission. Under the Federal Franchise Rule, a franchise is created by any written or oral agreement that:

1. Creates a continuing commercial relationship;
2. Grants a trademark license (although this is not required under certain circumstances);
3. Controls how a business is operated; and
4. Requires the payment of a fee.

Because points one through three are common to both licensing and franchising agreements, establishing whether a franchise relationship exists typically relies on the fees received at the time of sale and the level of control an agreement grants to a franchisor over the operations of a franchisee.

Under the federal Franchise Rule, if a business’ licensing agreement meets the criteria of a franchise, the legal relationship established by the agreement would be interpreted as a franchise – not a license.

If a franchise relationship is found to exist between the two parties in the agreement, the franchisor is then obligated to meet certain requirements under federal law. These requirements include issuing an FDD to prospective franchisees prior to offering or selling a franchise, properly preparing and disclosing the FDD and, in cases where a franchise operates within the Franchise Registration States, registering and filing additional paperwork in those states.

Because of the potential legal violations and penalties that could result from failing to meet those obligations, entrepreneurs should assess their legal agreements to ensure their business relationships are properly defined and legally compliant.

What is a combination of the operations and management of two firms to establish a new legal entity?

Is when one firm buys another through a stock purchase cash or the issuance of debt?

Which of the following describes a primary difference between international licensing and international franchising?

What is the best strategy for finding success with mergers and alliances using an institution based view?