A sublicense agreement lets a licensee pass some of its rights to a third party. It can extend the reach of a brand or technology, but it also adds a layer of risk, because the rights you can give away depend entirely on what you were given in the first place.
What a sublicense agreement is
Suppose a company licenses a brand to you. A sublicense agreement is a separate contract in which you grant someone else the right to use part of what you licensed. You become the middleman between the original owner, the licensor, and the sublicensee.
Many licenses prohibit sublicensing unless the licensor agrees in writing, so the first question is always whether you have the right to do it.
The rule of thumb is simple: you can only sublicense what you are allowed to sublicense. When in doubt, ask the licensor to confirm in writing before you speak to any potential sublicensee.
Check your own license first
Before you offer a sublicense, read your original agreement carefully. A sublicense cannot give more than you received, and breaking the rules of your license could put it at risk.
- Does the license allow sublicensing, and under what conditions?
- Do you need the licensor’s approval for each sublicensee?
- Which territories, products, and channels may be sublicensed?
- Are there limits on fees or terms?
- What happens to sublicenses if your license ends?
Terms to include
A sound agreement should be clear about the scope of rights, fees, quality standards, and reporting. Be sure it matches the obligations in your own license, so you can meet your duties to the licensor. Our licensing agreement checklist covers the terms to review, and licensing royalty rates explains how payments work.
Pay attention to reporting and audit rights as well. If you collect royalties from sublicensees, you will need records that let you report accurately to the licensor.
Risks to understand
If you sublicense, you are responsible to the licensor for how the sublicensee behaves. Poor quality or unpaid royalties can become your problem. Think about how you will monitor performance and what you will do if a sublicensee breaches the agreement.
Also consider whether your activity may be regulated like franchising, which has disclosure rules in many places. Ask an attorney before you offer sublicenses, and read about related models in the master franchise agreement.
Build a simple process for reviewing sublicensee quality and sales each quarter, so problems come to light early instead of at renewal time.
Get advice on any sublicense agreement
A licensing attorney can review your original license and draft or review the sublicense so the two fit together. For a wider view of how these models compare, see our guide to partner and licensing opportunities. A carefully written sublicense agreement protects both you and the brand owner.
More reading on the sublicense agreement and licensing terms
- Low-Cost Franchise Options: What to Compare Before You Buy
- Home-Based Franchise: Is It Right for You?
- Brand Licensing Opportunities: How to Evaluate Them
- Franchise vs. Independent Business Opportunity: Which Fits?
- Types of Business Opportunities: Franchise, Turnkey, Direct Sales and More
- Business Opportunity Scams: 12 Red Flags to Check
- FTC business guidance
Sources and background: Harvard Business School.
Keep reading
If this topic is useful to you, these related guides on SmartBizOpps are a good next step.
