Check your licensees are paying the right amount and using your intellectual property correctly with a royalty audit from Evelyn Partners.
The licensing industry continues to grow and adapt to changing consumer demands following the Covid-19 pandemic. As well as responding to digital shifts, licensors are becoming more purpose-led, with the aim of creating a better society and more sustainable businesses.
In this era of rapid change, it’s vital to monitor the performance and reporting of those you give licences to. You need connected advisers who are up to date with the latest challenges and opportunities. And that’s where our royalty audit procedures come in.
How will an Evelyn Partners royalty audit help you?
Our dedicated royalty audit team offers a wealth of specialist knowledge and experience. Whether it’s working within a licensed business, understanding how licensors operate or managing relationships, we’ve got it covered.
Evelyn Partners can deliver a health check on how a licensee is performing, to help improve transparency. We can also provide peace of mind as to whether a licensee is using your intellectual property appropriately.
Our royalty audits can review the use of a:
- Any other IP that has been licensed
We’ll carry out a range of assessments – from reviewing financial positions, to checking compliance with contractual obligations, such as advertising expectations or promotional commitments.
Licensee health checks for peace of mind
It’s often hard to get clear visibility over how a licensee is performing, and whether their reporting provides a true picture of overall performance. Our licensee health checks can carry out this assessment for you, ensuring payments are fair and accurate.
Our financial health checks can:
- Verify under-performance: with the help of an impartial external review
- Review current terms: we can offer guidance on whether any existing terms are reasonable when a contract is set to expire
- Assist with additional clauses: our knowledge of other licensors and market trends allows us to recommend extra clauses for revised contracts
Monitoring unauthorised IP use
Unauthorised use of your intellectual property can dilute your brand – whether it’s intentional or not. With the help of our royalty audit procedures, we can cast an external eye over your contracts to see where things stand.
We’ll check for issues like:
- Sales in an unapproved territory
- Designs being released to the market before approval
- Use of your brand that hasn’t been granted
- Sales by a connected company that aren’t covered by the rights of the contract
Checking deductions are fair
Your licensees may be unaware of contract clauses relating to deductions and discounts – and whether there’s a percentage or monetary cap. Without clear visibility of the calculations being applied to statements, they might understate what is owed.
An Evelyn Partners royalty audit will confirm whether any deductions being applied are within reason. We’ll let you know if there are indications of under-reporting – and what the financial impact is.
Learn more about our royalty audit services
Review all the ins and outs of our royalty audit processes by getting in touch today. Simply contact one of our experts for further information.
Frequently asked questions about royalty audits
What is a royalty audit?
A royalty audit, by definition, is a review of a licensee’s performance over a given period, and whether they have complied with the terms set out in their contract. Royalty audit firms also offer a health check of how a licensee is performing, as there can often be a lack of transparency when it comes to reporting. You’ll also be told whether licensees are using your intellectual property appropriately and legitimately.
Who needs a royalty audit?
Any company that has a contractual commitment with another company with regards to using their intellectual property may benefit from a royalty audit. These audits cover a wide variety of sectors and enterprises. It means any company using another company’s IP may be subject to an audit at some point. This could be during the period of the contract, or after the contract has expired.
What benefits does a royalty audit provide?
There are many benefits to conducting a royalty audit, including:
- Ensuring the amounts being reported are correct
- Verifying the amounts due to the licensor are appropriate
- Providing peace of mind that there’s no indication of IP being used incorrectly
- Creating a positive reputation in the market and encouraging licensees to report and pay correctly
- Providing greater insights into how a licensee is performing and the future impact
Royalty audits can help indicate significant under-reporting. We’ve seen instances of 100% of the amount originally reported on.
When should a royalty audit be carried out?
Royalty audit procedures may be required for a wide range of reasons, including:
- When there is no in-house audit team
- When reporting is not in line with expectations or there are unusual movements across reporting periods
- When language barriers arise and a team is needed to help internationally
- When a contract is due to expire and requires renegotiation
- When building a reputation in your market for auditing licensee performance
- When a contract has complex or unusual terms and needs to be interpreted correctly
- When there is an indication a licensee is not disclosing all the information they’re required to share
- When there have been key changes to your licensee, such as takeovers, staff changes or updates in systems
What are the typical issues noted when carrying out a royalty audit?
Each royalty audit is completely different, based on the licensor and the contract they have created with the licensee. Every contract will have varying terms and clauses for the licensee to abide by.
However, our experience has revealed common issues, such as:
- Incorrect royalty rates being used, based on complex contract terms
- Under-reporting due to poor internal systems, with incorrect IP allocated to the licensor
- Incorrect application of exchange rates
- Promotional products not being included in royalty-bearing sales
- Incomplete lists of properties in contracts or amendments
- A lack of clarity on royalty rates for combined products, with an assumed blended rate being used
- Human error due to manual reconciliations and preparation of statements/reporting
- Unintentional missed clauses in the contract that the licensee was unaware would impact their reporting
- Areas in the contract that are up for interpretation and lead to assumptions being made when the licensee reports
- Incorrect application of local VAT rates to gross sales
- Mathematical errors when applying relevant rates and allowable discounts
- Over-application of allowable discounts and returns, resulting in under-reporting of sales
- Interest due on late reporting or late payments
How much does a royalty audit cost?
There are two ways to calculate the cost of a royalty audit. The first is a fixed cost, which is determined in advance based on the size and complexity of the audit. This may then change as the audit advances, based on any unexpected complexities. The second option is for the fee to be a percentage of the findings of the royalty audit.
There may be times when the cost of the audit can be passed to the licensee. This will be due to a clause in the contract stating that if the finding from an audit is greater than a set percentage of the royalties declared in the year, the cost of the audit (time and expenses) will be passed on. This acts as an incentive for licensees to ensure they’re reporting appropriately.