For an IP license to be effective, three basic conditions must be met: 

• the licensor must have ownership of the relevant IP or authority from the owner to grant a license;
• the IP must be protected by law or at least eligible for protection;
• the license must specify what IP rights it grants to the licensee; 
• the payment or other economic or IP assets to be given in exchange for the license must be clearly stated. 

A company that owns rights in a patent, know-how, or other IP assets, but cannot or does not want to be involved in the manufacturing of products, could benefit from the licensing out of such IP assets and rely on the better manufacturing capacity, wider distribution outlets, greater local knowledge and management expertise of another company (the licensee). Licensing out could also help a company to commercialize its IP or expand its current operations into new markets more effectively and with greater ease than on its own. 

Similarly, licensors with experience in the field of research and product development may find it more efficient to license out new products rather than take up production themselves. A company that owns IP rights in a technology that it cannot afford to manufacture could consider licensing out the IP rights in that technology for manufacturing and selling products embodying the technology in a specific manner for a specific time and region. Thus, the licensor continues to have the IP rights in the technology and has only given a defined right to the use of that technology.