2nd May 2019The need to knows when it comes to royalty auditing in the fashion industry

If you’re a big global brand like, for example, David Beckham, you will be able to sell millions of pounds worth of fashion items like sunglasses and aftershave all around the world. The only problem is that Beckham is a footballer and he can’t make cool looking shades or exquisite fragrances. This is where the magic of licensing kicks in. Experienced distributors will get together with established manufacturers of both items to come up with a range of attractive products bearing the Beckham brand name and sell them in a variety of markets from Brazil to Japan. To do this, they enter into licence agreements with a Beckham company which entitle them to use the brand name on particular fashion accessories in certain territories in return for pre-agreed royalties.

The benefit to team Beckham of using the licensing route is that it can enjoy sales revenues from all around the world without doing any of the work involved or financing a hugely expensive manufacturing and marketing operation. The advantage to licensees is clear. They can expect to increase sales substantially using a big, global brand name in return for paying a modest royalty on all sales. It’s far better to earn say 90% of something than 100% of nothing.

Provided everyone does what they are supposed to, licensing agreements can work just as well in the fashion industry as they do with everything else like technological know-how and music rights. Properly constructed, these deals suit both sides and can lead to highly rewarding long term business relationships. Problems only arise when agreements are poorly drawn up and royalty payments do not total what they are supposed to.

To avoid this happening, experienced licensors will ensure that detailed licensing agreements are drawn up stipulating exactly what is expected of licensees in terms of such things as minimum marketing budgets and the exact expenses that can be properly deducted when calculating royalty payments. Just as importantly, these agreements will have clear and concise clauses relating to regular royalty auditing.

Provided it is made abundantly clear at the outset that the licensor will have the right to send in specialist royalty auditors to check the licensee’s books and ensure that all the correct royalty amounts have been paid, the licensee will have no cause for future complaint. It is only when the goal posts are moved after the agreements have been signed that the trouble starts.

The best royalty auditing teams will try to include licensees in everything they are doing when conducting pre-agreed regular audits as they are acutely aware of how a healthy relationship between licensors and licensees needs to be maintained. Licensees may well interpret some clauses in their favour and it is up to the auditor to ensure the correct outcome for both sides.

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