Are You Getting Short-Changed on Your Royalty Reports?

March 1, 20170 Comments

How do you know your licensees are paying the correct amount of royalties? Generally, royalties are paid quarterly with statements from your licensing partner showing the previous quarter sales and amount of royalties owed. But a royalty report doesn’t always mean you’re getting paid the right amount.

There are still a some ways your royalty payments can be under reported. Here’s a list of the 3 big royalty reporting errors and how to avoid them:

Vague Royalty Calculation Formula: Whether the royalty is a percentage, fixed fee or annual amount, the calculation formula must be clear. If it’s vague or general, then it’s open to interpretation. The result is a significant difference in what the licensee pays you and what you’re owed. For example, if the definition only says “sales”, your licensing partner can interpret this as net sales after deducting certain costs, such as production or advertising. Or the “sales price” is different from the “selling price”, one is the listed price and one is the price it’s actually sold for. That’s why I like to use deal memos to followup negotiations. It specifies the formula for calculating royalties on sales so everyone is in agreement before it’s included in the licensing agreement.

Under-Reporting Sales: The biggest reason for this error is a product definition wasn’t specific. The licensee adds a new product (or territory) that wasn’t originally in the agreement, and it’s “overlooked” when reporting royalties. When Power Ranges was red hot, the studio audited licensees each year, and inevitably recovered “under reported” sales. Typically these were on products added after the contract was signed. You can avoid this mistake be making sure you are very specific about the products (or services) included in the licensing agreement. If more products (or extensions) are later added, be sure to update the agreement , and make sure they are included in the royalty reports.

Non-Allowed Deductions: This error happens often. These are deductions from the royalties that are not allowed. Some of these include advertising, overhead, damaged goods, returns, warehousing, production or other selling costs. Sometimes the royalty report will only give a general summary of deductions, making it hard to figure out if it’s allowed. Most of the agreements I negotiate have very limited deductions, and these are clearly spelled out in the agreement. You can also avoid this mistake by providing a royalty statement template that requires a clear explanation of deductions.

The best way to avoid these 3 big mistakes is to make sure the royalty calculation formula is clearly defined in your licensing agreement. Be sure to describe the products (or services) in detail and make sure your licensing agreement is updated with the changes. Most important, be sure to list allowed deductions, as well as those not allowed, and give a royalty report template so you can easily verify the payment your licensing partner is making is what they owe. Otherwise you could wind up getting short-changed on your royalty payments.


You Don’t Get the Deal You Deserve, You Get the Deal You Negotiate

Negotiating is where the rubber meets the road. Get it right, and you'll create a fortune. Get it wrong, and you'll wind up in a nightmare. That's why successful negotiation is all about preparation. If you're not prepared, you'll wind up flopping all over the place, whipsawed by different discussions, getting a lower royalty rate, and a host of other terms that you later regret agreeing to simply because you weren't prepared to discuss them. That's why the Negotiating Checklist is a core tool in The Licensing Toolkit. It includes the 10 most important business terms you must be prepared to negotiate so you don't wind up giving away the store. Click here to get The Licensing Toolkit.

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About the Author ()

Rand is President / CEO of Licensing Consulting Group, an intellectual property management and licensing company specializing in assisting clients in IP Management, Strategic Consulting, Acquisition of Licensing Rights, and Property Representation. Rand has licensed some of the biggest Hollywood blockbusters, including “Batman” and the “Mighty Morphin Power Rangers”, both of which generated billions of dollars in worldwide merchandise sales. He has lead various international licensing programs as both licensee and licensor, and through consulting projects focused on licensing strategy, brand development, sponsorship sales and property representation.

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