Licensing is an agreement between two businesses with advantages and disadvantages for each. The licensor (business with the patent or other intellectual property) allows the licensee the right to use the intellectual property in exchange for a royalty or fee.
The licensor gains by not having to spend the time money and effort necessary to build a business with manufacturing, sales, marketing, etc. It can also be used by the licensor to get their product into a market they do not presently serve. Royalties can run from 3% to 25% of the wholesale price. (My experience has shown most royalty agreements to be 10% or below and may vary over the course of the agreement based either on time or on volume.)
The licensee gains by the addition of a new product to offer their market.
The agreement may contain provisions specifying the term, territory and renewal of the arrangement. Other issues may also be included. As in all legal matters, specific issues should be reviewed with legal counsel.
Inventors really need to fully understand their limitations when it comes to time, money and effort that they are willing to put into generating revenue from their product idea. Licensing is one option that reduces the demands on the inventor’s resources, potentially speeds the time to market and may also limit earnings. As with most things in life their are tradeoffs, but Licensing offers enough upside potential with lowered resource demands to be worth exploring further.