Question

John developed a food additive that replaces processed sugars. He granted the right to use this additive to a major cereal manufacturer, and John now receives a $0.50 royalty for every box of cereal sold that contains this additive. What is this an example of?

Answer 1

Answer: Licensing

Explanation:

John's ingredient is his intellectual property. By giving the right regarding the usage of the ingredient to another business entity and by receiving a sales volume related royalty payment for each box sold, John is involved in a licensing agreement.

Two parties are involved in each licensing agreement: the licencor and the licencee. In this example, John is the licencor and the cereal manufacturer is the licencee.  Both of the parties sign the licensing agreement, which is active over a specified amount of time.

Licensing is not to be confused with franchising. It refers to a specific business model when the franchisee operates under the brand (logo and trademark) of the franchiser, but essentially keeps its independence branch-wise. Best examples are McDonald's and KFC.