The challenges of Brand Licensing

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, unless your Royalties are managed carefully:

In a brand licensing business, royalties drive everything.

What am I 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:

Do they allow you to discount your items and declare the discounted amount?
Is this the same for all types of discounts?
What about contractual dilutions? (Surely they are allowable!)
Is there a limit to returns for damages or defects?

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.

What will it cost me if I make a mistake?

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. Sometimes simple mistakes have minimal consequences. If you classify an item incorrectly, but the royalty rate is the same, then nothing is lost. But other mistakes can lead to big problems. Selling out of territory is an obvious 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 be aware that you are non-compliant. Because when you sell to a customer who distributes your products outside of your territory, and you reasonably should have known that is what they are doing, 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.

What can I do to ensure this doesn’t happen?

You CAN try to keep on top of every single clause, in all your agreements, but this takes time and when you are trying to grow your business, your time could be much better spent elsewhere. It also takes expertise your staff may not possess yet.

Typically, royalty declarations are prepared at quarter end and every Licensor wants their declarations at the same time. There are often hundreds of criteria to apply for each license, and with a myriad of licenses over multiple territories and resources stretched, whoever prepares them will be under pressure. Oversights and mistakes are inevitable and when the latest amendment for your biggest license is overlooked, or a calculation is made incorrectly, you end up mis-declaring your royalties.

Somehow there never seems to be enough time to go back and check whether you are getting it right. And so the same problem re-occurs every quarter without fail, and over time the errors stack up.

I’ve seen 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 as the business grows.

It’s not only growing licensees who suffer from these headaches, established businesses can also find the burden of royalty declarations is one they could do without.

What are the consequences when I'm audited?

When the time comes for the Licensor to check your royalty compliance, you are likely to find yourself among that 95% of Licensees who fail their royalty audits. The result of failing is costly: you end up paying for the mistakes the auditor has uncovered, you have to cover the audit fee, and will incur interest charges on top.

This can be both concerning for the staff responsible and financially painful. Every business can find far better ways to invest funds than paying such unnecessary expenses. You could pay the Advance on a brand-new license for example, or lease another warehouse. You could even pay your staff a bonus… just imagine the boost to morale in these times of burgeoning living costs!

What does good Royalty Management look like?

An efficient royalty management process gives you more than just time to focus on growing your business, and confidence that you won't have to cover unexpected costs for mis-declared royalties.

It can help you spot if you've used a higher royalty rate than you needed to, or if you've overlooked any permissible allowances and discounts. Your declarations will be compliant, and made on time. It all helps you to build a strong relationship with your Lincensor.

You won't avoid an audit, but being properly prepared for with a pre-audit check ensures that you can make provision for any errors which might have been made, and you, rather than the auditor, will drive the process.

How do I manage an audit?

A pre-audit check means you will already have all the information you need for the auditor, and it will be complete, accurate, and cross-referenced. You will have way more time to respond to any additional requests from the auditor (like sample invoices: they will ask for those and they can’t be prepared in advance). This means the audit will be quicker and the audit duration will reduce - along with the audit fee, if you do have to pay it.

You will also have the information you need to challenge any provisional findings you believe are incorrect.

Once you have settled, the Auditors will report back to the Licensor. When the Licensor is told about the smooth, quick, and pain-free audit they will know how much you respect the licensed property they are letting you exploit, and they’ll see you are serious about getting your royalties spot on.

This all adds up to a better relationship with your Licensor, and whilst it may not result in money in the bank right now, there can be big strategic benefits.

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.

When you are sitting down with your Licensor negotiating to extend your License into new categories or territories, how much more confidence will the Licensor have in your chances of success when you have a strong track records of timely, accurate declarations and you've just dazzled them with your audit compliance?

I’ll let you decide how much easier that negotiation would be. Just remember the Licensor wants you to succeed, they need you to succeed, but you must prove that you can.

What are my next steps?

Let Clarity ROYALTIES MANAGEMENT

help you be in the 5% of Licensees who pass a royalty audit.

I can manage your royalty declaration process on your behalf, help you to prepare for a forthcoming audit with a pre-audit-check or support you through the audit process so you achieve the best outcome possible for your business.

It’s reliable, proven, and the investment is less than you might think!

CONTACT CLARITY