For the last ten years we have been actively promoting and performing remote Audits, with the majority of the testing being performed and in advance of the meeting the Licensee. Covid has accelerated the acceptance of being of audited from afar.
The FAQs
Is there ever a good time?
Some Licensors feel hesitant to audit, or fear of damaging the business relationship, however it should be seen as a natural part of the relationship and be conducted in a professional yet sensitive way. It is advisable to carry out an audit of your licensee base approximately every two years, and certainly at least three months before the expiry of the agreement.
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What does it involve?
A Royalty Audit would compare actual sales made to those declared and in addition would cover other contractual issues such as stock discrepancies, deductions from the royalty basis, giveaways, territory of sale, type of sale and marketing spend.
How much additional revenue will be found?
This is impossible to detect without actually performing the audit. It may be that a Licensee has previously been visited and we can advise whether it would be appropriate to carry out a review. Although the majority of audits performed result in the collection of additional revenues, the audit process is about reviewing the agreement in its entirety, and should be seen as a way of confirming that all terms of a contract are being honoured.
Who drafts your licensee agreement? Whether you have an in-house legal team, use the company solicitor or you cut and paste someone else’s,...
We have been reviewing and advising as to what terms should be included in an Agreement.
Get in touch to discuss the essential terms of any License Agreement falls short and understand the latest Industry Trends...
Many Licensors suffer poor contract administration. Royalty declarations are often incorrectly booked with little attention paid to the article number (SKU), the licensed character or the royalty rate. Many potential audit findings, such as country of sale and deductions from the royalty basis, can be monitored and corrected at the administration stage.
We offer a number of services to improve your contract administration from a cost effect evaluation of current methods to an on site visit every declaration period to support and assist in the processing of royalty declarations.
Have you just received notification that you are about to be audited by a Licensor?
Our Pre Audit Review will perform those tests specific to a royalty examination to check that you have complied with your license agreement, highlight any potential findings and calculate the monetary impact.
Why have a Pre Audit Review?
The answer is simply to save money. The majority of audit clauses entitle the Licensor recharge Audit Costs where a difference 5% is found. With average audit costs in excess of US$10,000 and unreported revenues incurring interest of up to 15% total audit findings can be a significant amount
Been Audited?
You should receive a letter from your Licensor requesting payment and or requesting a response within a very short period of time.
You may not have the facilities or the staff to adequately review these findings in the time allowed, often leaving little option but to comply.
In performing a Post Audit Review, we will read the Licensor's report, check all calculations presented, and draft your response, including advise on any findings to be agreed and any to be disputed
Most audit findings are a result of poor contract administration on the part of the Licensee.
Sales not correctly reported, incorrect royalty rates , sales outside of the licensed territory and sales of pre approved product are the most common and costly errors.
We offer a cost effective service where we will prepare your monthly or quarterly declarations for you whilst ensuring that you have complied with the terms of the license.
Seems obvious but this has to be the biggest and most common mistake we encounter. Once faced with large Audit Findings the Licensee confides that that they never read the Agreement beyond the contractual term, advances and royalty rate.
Along with not reading the Agreement is the presumption that all the discussions had with the Licensor will be reflected and included in the License Agreement. The majority of deals are boiler plate templates and little is changed from one Licensee to the next, so another reason to read it and check it reflects the conversations had.
Category Managers change, people move, Licensors don’t recall… whenever discussing contractual terms, additional Territories, payment plans, or obtaining permission to do something with License Product, always, always follow up with an email outlining what was discussed and approved. Always request a Contractual Amendment signed by the Licensor.
Just because the property is hot in one territory, doesn’t mean it will be a success everywhere and many a Licensee has ended up with Contractual Guarantees for territories that they will never recoup. Always make sure Guarantees can be Cross Collateralized.
The Key terms of the deal need to disseminated among the team, Sales People need to know any limitations placed on selling the Licensed Product, the Contract Administration team need to understand royalty rates, territories and any reporting commitments.
Ensure that the Net Sales Definition works for you, if your customers impose discounts, rebates and or obtain Licensed Product on a Sale and Return basis make sure that the contract allows such deductions and selling practices.
Many License Agreements limit returns to a percentage of reported sales per reporting quarter. If your business involves frequent returns make sure that the Returns cap is removed or the percentage cap is set at a rate that works for you.
The most common way to incorrectly declare royalties is by submitting Royalty Declarations that contain mathematically errors. Licensees to often copy the template as provided by the Licensor from one quarter to the next, adding and subtracting lines never checking the totals are correct. Those errors can be costly when interest and Audit costs are applied two years after they had been submitted.
Agreements come to an end, make sure you understand how the Sell-Off procedure works as it is rare that a License Agreement automatically grants sell off rights. Understand what you are allowed to do with the product at the end of the Agreement, ensure that the selling price is contractually permitted, and get proof that any remaining product was physically destroyed.
Need we say any more than that…
Friendliness begets friendliness, rudeness begets a world of pain where only the Licensor can save you.