27th May 2016Could royalty audits be the golden ticket for business revenue?

But increasing numbers of companies now seek to license their most valuable asset – their intellectual property.

Tech companies, inventors and fashion houses license their innovative designs; restaurant chains and spas sell franchises of their business, and pharmaceutical companies license their miracle medicines.

Rather than releasing new products themselves, it’s often faster and more cost effective for businesses to sell the rights to their intellectual property.

There are, admittedly, downsides to this approach: such as businesses losing control over the sales process. So it’s vital that a business receives maximum revenue from their licensing agreement, and that it’s paid on time and in accordance with the agreed terms.

What is a royalty audit?

To ensure that the licensing agreement is followed, most contracts include an explicit right of audit, allowing qualified accountants to carry out an official financial inspection of the licensee’s company at regular intervals.

Put simply an audit will:

• Ensure that all sales have been reported by the licensee
• Check that the terms of agreement have been followed.

Why do an audit?

One of the key ingredients is to find those unreported royalties. Imagine, for example, that you’re standing outside a HMV (and it may require a little imagination to see a good old fashioned HMV shop front in your mind’s eye, too). If you were asked to go in and collect all the Beatles-related records, it would seem like a relatively straightforward task.

But on emerging from the store bearing basketfuls of records, the chances are you’ll have missed a spot or two. You might have dropped a couple of CDs on your way out, you will most likely have missed the Wings albums in the bargain bucket, you may have forgotten to look for collaborations (Ebony & Ivory would be a glaring omission from your pile), the damaged and incorrectly labeled Beatles stock will have gone unchecked, and there will be a number of Ringo Starr solo albums languishing in the sound booths.

It’s these sorts of omissions that audits will catch, finding opportunities to capitalise on material that might otherwise slip through the cracks.

You will also need an audit to identify any breaches of the initial arrangement: what exactly were the terms of the agreement when you were asked to collect all those Beatles-related records?

It’s these sorts of omissions that audits will catch, finding opportunities to capitalise on material that might otherwise slip through the cracks.

Conducting an audit will clarify any misunderstandings in the early stages of the relationship.

And there are numerous other benefits:

• Audits are a way of protecting your brand, which is an appealing option when you’re effectively handing over your ‘baby’ to the licensee;
• They act as a deterrent to other licensees, who are less likely to try their luck with a licensor or brand owner who obviously monitors activity carefully;
• With an audit underway, the licensee has the chance to establish a good track record and prove how well they are actually looking after the brand.

If you would like more information about royalty audits, or would simply like to consider an alternative approach to your existing arrangements, our specialist team at Fisher Forensic would be happy to hear from you.

Rafi Saville, Royalties Partner
T 020 7874 7967
E rsaville@hwfisher.co.uk