Christmas 2009 is behind us and 2010 here. This is an important time of year for busy executives to reflect on their companies’ progress and how things need to improve in the future. Royalty management is seen as a disaster recovery activity, possibly even an end of relationship activity, but here at Loxley we believe adopting an audit policy, as part of a larger royalty management process, is an essential action for many companies, simply because the numbers declared in (often public) financial reports need be accurate.

If this isn’t enough to persuade you then perhaps consider the other spin off benefits of an audit such as the massive competitive advantage potentially gained from the facts and statistics uncovered during a review. For example:

    •    Market conditions by territory (the facts, not sales talk)
    •    Return on investment questions answered
    •    Cost of manufacture (where applicable)
    •    Profit share v royalty % agreed
    •    Royalty £/$ per unit

All this information can leave you forearmed for future contract negotiations whether it’s a renewal or a new deal. An audit will make it possible to benchmark accurately and allow you to adopt a stronger position when negotiating.

In terms of the audit’s main role, i.e. ‘shoring up’ the numbers reported (and I appreciate auditing is probably the driest subject around, but bear with me). It is, in fact, a great occupation (really it is). We see so many contracts in the industry, and let me tell you, no one contract or sales process is the same. Each licensee is individual in its approach to sales and marketing, manufacturing and distribution and has complex systems to support this. The facts remain that things do go ‘wrong’ with royalty accounting, at best it is a complex beast and success relies on robust contract processes and integrated business systems with, one would hope, some level of project costing ability, this is tricky stuff for many companies to master.

Since 2002 we have personally seen (and been involved in reporting) a figure of $16m previously unreported royalties, much of this turned into cash either immediately after audit sign off or moved, in financial terms, the licensor a step closer to a recoup position. That’s a massive number and it continues to grow year on year as the licensing industry spreads it wings.

So, what’s involved? Well, it’s a good idea to choose a pragmatic forensic audit company (who, by the way, may or may not be a traditional accounting company). You may wish to ensure you review the audit methodology, perhaps requesting certain information to be made available in the audit report. An agreed task list is sometimes useful. Most importantly, check out the ‘approach’ used by your chosen company, good auditors will be personable and fair, if they get you agitated during the pitch process, they will almost certainly upset the licensee. Relationship management is the key to effective auditing as the relationship continues after the audit is finished.

If cash is an issue right now a consideration may be to agree a split between daily fees and a bonus structure, perhaps based on cash received.

In addition to auditing, the adoption of a quarterly review process within your team (or this task outsourced to a reputable RM company) is a great way of staying in touch with the licensee and keeping the heat out of royalty issues as they arise. If this appeals, check out royalty management services and how it can help you keep pace with your royalty stream effectively.

In short, whether you benefit from an audit by uncovering cash and putting it straight to the bottom line and/or by a deeper understanding of the true costs and income associated with your brands, it really does make sense to put it on your action list for 2010.

Loxley Royalty Management offers advice on all matters concerning royalty income from contract opinion (net receipts definitions, audit rights), quarterly royalty statement reviews and feedback and royalty auditing (worldwide). We have a proven track record in managing all aspects of royalties and uncovering previously unreported income and would be delighted to talk through any business issues you may have, at your convenience. For more details, click here.