Are you overwhelmed with royalties?
I'll begin by saying that making the decision to enter the world of Brand Licensing is one not one you want to make lightly.
Yes, there are fabulous profits to be made if you can persuade a Licensor to let you exploit their IP and successfully align your licensed product to the market. But all your hard work and success could come to nothing, and here's why: The license agreement you sign can be devilishly difficult to apply correctly, and when you get it wrong, you will have to pay a hefty price. Sure, sometimes you can get away with making simple mistakes. Like classifying an item incorrectly, but the royalty rate is the same, then nothing is lost. No harm; no foul. But other mistakes can lead to big problems. Like selling out of territory for example. If your license agreement limits the territories you are allowed to sell in (and most do) then if you sell your products elsewhere, you are in breach of this clause. And you might not even know you did. Because when you sell to a customer that distributes your products outside of your territory, and you reasonably should have known, you may be liable to pay additional royalties. That means you could be charged three or four times the royalty you have already paid, so you could be selling your items at a loss, without even realising. So how do you make sure this doesn’t happen? You CAN try to keep on top of every single clause, in all your agreements, but this takes time and expertise and when you are trying to grow your business your time could be much better spent elsewhere. Not to mention the endless nightmare of trying to get all your royalty declarations prepared at quarter end when time is already tight. Most growing licensees suffer from these headaches, and if this is you, please read on. Because I’m going to tell you how licensees I know have avoided this downward spiral and gone on to become extraordinarily successful. I’ll show you that you CAN comply with your license agreements, get your royalty declarations submitted punctually, AND free up your time at the end of the month when you most need it. It’s reliable, proven, and… … the investment is less than you might think! |
With 95% of audits exceeding the threshold, can you afford to fail?
Why royalties are NOT just an expense
My name is Russell Farmer and I first entered the licensing industry working for a small company making Sat Nav celebrity voices. It was loads of fun; recording the voice of Homer Simpson in the Fox lot in LA, flying all over the US to meet the artists who voiced Darth Vader, Yoda, and other Star Wars favourites, and witnessing talent bring the voices of Bugs Bunny and Sylvester the Cat to life.
But it was also a serious business with debt and cash-flows to manage… and plenty of complex royalties agreements to navigate my way through. The royalties spreadsheet I inherited totaled 16 cells so I knew the royalties weren’t being done properly. They were submitted on time, but nowhere near enough attention was being paid to the calculations. And that meant the business was at risk. Why? Because the owners thought that royalties were just an expense that needed to be paid. Whilst royalties ARE an expense, when you consider a 16-cell spreadsheet was used to calculate the biggest single cost to the business, you realise how inadequate their approach was. The royalty calculations needed an urgent review, but much more importantly the owners needed to realign their perspective. Why was that? Because in a brand licensing business, the royalties drive everything. Royalties are NOT just an expense, or a cost, they are the guiding metric that reveals the financial health of the business. They show the individual profitability and success of each license and the business as a whole and these metrics should be used to make key decisions. Like which licenses to invest in developing and which ones to let expire. There are always winners and losers, and you can’t back them all if you want to grow a viable business. |
What are you going to pay?
When you sell any licensed article a royalty liability is incurred. Every time, and with very few exceptions.
Even if you give freebies to your staff, or a sample to a potential customer, you may need to pay a royalty. What's more, each license agreement is different and contains uniquely worded clauses that define these liabilities. And therein lies the problem. To make sure that you capture every royalty, (yes sometimes even charitable donations!) you need to extract EVERY relevant clause in your license agreement and apply them ALL to each sales transaction. And that’s just the beginning. To make sure your sales amounts are correct, you need to read what your license agreement says about what constitutes Net Sales:
And once you have arrived at the correct Net Sales figure for one license, you need to do the same for ALL your licenses, and that’s before you even start the royalty calculation. Getting this right soon becomes a burden, and the burden can quickly become overwhelming even for the most disciplined people. I know, I’ve seen it and I’ve talked to licensees who spend so much time trying to get accurate records from their accounts system and applying the right royalty clauses, they have no time left to grow their business. And then they find that the property description that they’ve extracted doesn’t quite match the royalty declaration template and every single row needs to be manually amended… … on every declaration. It can be a nightmare that just gets worse at the business grows. So, what do you do? The answer is simpler, cheaper, quicker, and more effective than you might think. You see I have been building systems to calculate royalties since before I had children and my eldest is now applying for apprenticeships. Much has changed since I started, not least the complexity of the licensing terms. But that is why I have developed flexible software templates that can be amended to cater to these changes. |
No more royalty declarations for you.
I will make your royalties nightmares disappear. Forever.
That’s a big promise so let me break it down step by step. Firstly, I’ll work with you to find the best way to extract your sales reports from your ERP, accounting system, or spreadsheets, whatever you use. Licensees use a myriad of systems which generate different reports, so this is where we start. Once we are comfortable that your sales reports match your General Ledger balances (so no sales are missed or over-reported), then I will create your license library. What’s a license library? It’s a digital record of all your licenses detailing the relevant rates and restrictions for your licensed articles and properties. You can view all this information in one place, and it can be added to and amended when you sign new agreements. You can think of it as the engine room of your royalty operation. Once that’s done, it’s time to apply the terms held in your License library to your sales reports using the software calculation template. This reflects all the rates, conditions, and restrictions you have agreed to and it will highlight any non-compliance when it generates the data for your royalty declarations. Finally the royalty calculation output is transferred to each royalty declaration template supplied by your Licensor. Now all your declarations are prepared correctly and filed in an audit-compliant format, so you won’t have sleepless nights worrying about a royalty audit when the time comes. And it will. That’s another guarantee I can give you. But that’s not all. Not every close. With every quarterly calculation (or monthly if you want to run your business with the headlights on full beam) comes some wonderfully rich management data. It’s generated as a bi-product of the royalty calculations and you can use it to great effect. You can now see the recoupment for each license, the most profitable products (after royalty deductions of course), your top licenses, and your best performing properties. Whichever way you want to slice and dice your license information, we can provide you own unique dashboard for you. All for one, simple monthly fee. So how much will it be? Well, that depends on about as many variables as your royalties require so we need to look under the bonnet to work that out. But I can give you a hint. It will cost you less per year than the average auditor charges you when you fail an audit. So, when you outsource your royalties to Clarity and pass a royalty audit, you have more money than when you started. And all that beautiful license information on top. What’s more, you never have to prepare a royalty declaration again. Sound good? It should. This may be the best ROI you can make right now. |
What's next?
If you’ve stayed with me this far, you likely want to outsource your royalties, and need to know how to do it.
The next step is an initial call which will take 30 – 60 mins depending on the size and complexity of your business and your licenses. I will ask you lots of questions about your license operation, because If I don’t, I won’t know how best I can help. There could be a lot at stake. And before you ask, the call is free. |
P.S.
Why trust Clarity? I’ll let Matt tell you. Matt was the CEO of a US-based Toys and Homewares licensee who were facing their first audit: Clarity Royalties Management Ltd. has been an invaluable partner for Underground Toys/Seven 20. We have worked with Russell and his team for 7 years. They have managed complex royalty schedules across all geographies through multiple contract revisions flawlessly. With the Clarity team we do not have to worry about the accuracy, quality, or timeliness of our reporting. He seamlessly and thoroughly handled all our audits as well. They have our highest recommendation for any company working with licensors. |