Licensing royalty audits – preparing for success

Brand licensing exudes glamour, appeal and excitement, as well as fun. But it’s also a serious business, which is why the financial side is never taken lightly.

Royalty arrangements can be complex, including the calculation methods used and the licensee’s regular reporting of sales to the licensor.

It’s estimated that the royalty reporting of more than 70% of licensees contains errors and around 90% of license agreements are underpaid. Which is why a thorough audit of the accounts is essential for ensuring that the finances are above board and bring a sigh of relief from all parties.

Auditors, like inspectors, are not the most popular of people. They are seen as the enemy, coming to check your every monetary move and possibly trip you up. But essentially, they are there to achieve the opposite – to identify potential pitfalls and prevent you from falling off a financial, and legal, cliff.

Treat the auditor as your friend

The auditor has an important – some might say boring – task to perform which is to carry out a thorough risk assessment and evaluation of the accounts. So, it makes sense to be supportive.

Proactively gathering all the essential documents, such as sales reports, ahead of the audit streamlines the process. This includes assembling any email agreements.

Let’s face it: if you have nothing to hide, there’s no need to worry. On the other hand, if you have, the auditor will most likely find it anyway.

Have dedicated royalties staff

One of the first questions that the auditor will ask is how royalty statements are prepared. Do you use dedicated software, or do you have your own in-house system?

The next question is who is responsible for the royalty statements? If you have different staff members doing it, or the dedicated person leaves, that’s often when mistakes are made.

One step you could take is to have a pipeline of people who can take on the role, in the event of someone leaving, and also work with the members of the licensing team. In other words, consistency helps to avoid errors.

Stay on top of royalty sales

The auditor will examine your royalty sales and check that they agree with your revenue reports. If they don’t then your royalty reports will be incorrect. The reasons for this happening are usually that some sales have somehow been missed or even that you’ve over-confidently overreported sales.

It pays to stay on top and not leave royalties reporting until the last minute. One suggestion is to put together a monthly royalty accrual which will make it easier to identify any discrepancies between royalty sales and revenue reports.

The devil is in the discounts

Because calculating discounts can be a bit of a minefield, this is the area that is most likely to be flagged up by the auditor. Discount clauses are not all worded in the same way which means that, when applied along with other clauses, the sums might not add up.

If that’s the case it could mean your profits are lower than your royalty payments. A way to prevent this is to take gross sales and then apply the discounts before applying the discount clause to every agreement. It sounds a lot of work but can help the discount process to be less devilish.

To sum up, the three most important words for passing a royalty audit successfully are preparation, preparation, preparation.

How Dependable Solutions can help:

Dependable Solutions Inc. offers software to help you keep track of your royalty commitments. The Dependable Rights Manager (DRM) is designed to help you manage complicated contracts with different royalty rates for different product categories, territories, sales channels, and retailers.  Our royalty management software allows you to accurately manage your financial commitments across tens, or hundreds of contracts.

Streamline your royalty management effortlessly. Contact our experts today!


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