Aspects to Consider: Licensing or Franchising of Trademark

Published on May 7, 2025

Our lawyers in Costa Rica experts in Intellectual Property Law, share this article on the ability to generate income without direct risk, while strengthening brand positioning and achieving expansion into new markets.

Currently, the market has expanded significantly, offering an innumerable range of options. Due to the influence of the internet, the dynamics of supply and demand have evolved, resulting in consumers developing new needs to satisfy. With the widespread diffusion of information, companies seek to create novel experiences that foster consumer loyalty and emotional connection to their brand, distinguishing themselves from existing competitors. Likewise, the abundance of options has made the market highly dynamic and ever-changing.

In many cases, developing an attractive product or service for consumers has become increasingly complex. The time it takes for a business owner, manufacturer, or entrepreneur to introduce and position a product often coincides with competitors launching similar or even superior alternatives.

Every company, among other marketing strategies, strives to achieve strong brand positioning and consumer preference. To do this, they aim to create a perceived need for their product or service and, most importantly, cultivate customer loyalty over time, ensuring they become the leading choice within their category. This, in turn, drives sustained sales growth, often through word-of-mouth recommendations.

Through brand licensing, a trader, investor, or any individual wishing to market an already established product or service can enjoy a less burdensome and more profitable experience. Investing in a successful business model offers not only a faster return on investment but also the possibility of expanding the brand across multiple territories.

However, if the intention is to acquire a full business model, along with all the marketing and advertising strategies, then opting for a Franchise Agreement would be appropriate. In a franchise, the party not only receives authorization to use the brand but also gains access to the business "know-how” including production processes, trade secrets, operational methods, recipes, sales strategies, and more. It is important to note that brands typically available for licensing have already reached a point of operational equilibrium, with a clear business structure, thereby offering greater chances of success compared to brands still seeking market recognition.

Moreover, not only has the initial phase of investment and loss generally been overcome, but there is also a much clearer understanding of communication strategies, promotional activities, and sales models, along with a deep knowledge of the target audience and effective ways to achieve consumer preference.

All these business model tools become critical components of the intellectual property of the owner, in addition to the protection afforded to the brand itself, as brand licensing requires formal authorization through registration with the relevant Trademark Office.

In conclusion, one of the major advantages of opting for a business model based on brand licensing or franchising is the potentially shorter time and lower cost needed to achieve profitability. Additionally, this approach allows faster investment in new regions considered attractive for business expansion.

Brands offer an attractive, innovative concept — and more importantly, a unique consumer experience — succeed provided that their core brand values are maintained across all markets and that consistent quality is delivered.

In the following sections, we will discuss the characteristics and relevant aspects of the Brand License Agreement and the Franchise Agreement.

BRAND LICENSE AGREEMENT

A Brand License Agreement is a contract through which the holder of a trademark, known as the "licensor,” grants another party, the "licensee,” the right to use a registered or pending trademark for a specific period in exchange for compensation.

The main elements that should be included in the agreement are:

Identification details of the licensor

Identification details of the licensee

Description and identification of the trademark: This includes the name, class, list of products or services covered, trademark owner, logo, registration number, and registration and expiration dates.

Purpose of use: In cases where a brand is registered under multiple classes (e.g., clothing, jewelry, and bags under different classes), it must be clearly stated which specific products or services the license covers.

Territory: Specify the countries or regions where the license is valid, ensuring clear geographical boundaries.

Term: Establish the duration of the license and any renewal terms, such as automatic renewals unless otherwise agreed.

Scope of License: Indicate whether the license is exclusive or non-exclusive. For example, a single company may be appointed as the exclusive distributor of a vehicle brand in a country.

Quality control: Ensure the licensee maintains the product or service quality standards associated with the brand. This could involve submitting samples, periodic reports, or permitting audits.

Usage guidelines: Specify how the brand (name, logo, slogan, etc.) can be used, ensuring proper brand representation.

Ownership acknowledgment: It must be clearly stated that the brand remains the property of the licensor, not the licensee.

Other critical aspects include:

Defining a payment model:

One-time payment: A fixed amount for the agreed usage period.

Royalties: A percentage of the licensee’s sales over a defined period, often with a minimum threshold.

Hybrid model: A higher upfront payment combined with a small royalty percentage on total sales.

Usage limitations:

Sub-licensing: Define whether the licensee can grant sublicenses and under what conditions.

Advertising and marketing: Require licensor approval for marketing campaigns to preserve brand image.

Prohibited sales channels: Restrict brand use in unauthorized online or offline sales platforms.

Termination and dispute resolution clauses:

Termination for breach: Allow contract termination if the licensee fails to meet obligations.

Dispute resolution: Establish mechanisms such as arbitration or mediation to avoid court proceedings.