Industry Sector Expertise Worldwide

Character Merchandising

Character merchandising through a licensing arrangement can be a quick way to generate additional revenue globally through a variety of branded consumer products such as toys, stationery items, home furnishings, publishing, and even food products. Often, brand owners may have several hundred licensee partners globally distributing the branded character merchandise. Licensors often find that managing a large portfolio of licensees can be difficult in terms of monitoring incoming reported revenues.

Furthermore, many licensees may hold various licence agreements with multiple brand and IP owners. Differing reporting requirements from one licence agreement to another could lead to inaccurate reporting by licensees. From our experience of royalty audits worldwide, we have uncovered significant under-reported revenues due to clerical errors, accounting mistakes, or contract misunderstandings. In the majority of cases, the additional revenue identified by us and collected by our clients far exceeds the cost of the audit, thereby rendering the whole audit programme a self-financing exercise.

We recommend that all licensors exercise their right-to-audit clause in their licence agreements at least once every two to three years for all key licensees.

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Entertainment & Media

We have worked with independent production companies, broadcasters, and content providers (TV and music) in reviewing the reporting of profit participation and distribution of licensed content through broadcast, DVD distribution, and new media. Our experience has shown that the royalties and residuals payable by the licensee/broadcasters are typically impacted by the licensees’ interpretation and application of key terms and definitions set out in the licence agreement that only come to light as a result of an audit. Examples of these include:

Definition of “net” revenues and how this has been derived from “gross” sales price;
Incorrect deduction of expenditure and application of accounting provisions rather than actual expenses;
Distribution via third-party sub-licensees;
Incorrect application of royalty rates by distribution channel/territory;
Sales outside of the contractual territory;
Incorrect offsetting against the upfront production investment and advances;
Incorrect application of royalty rates on escalated sales volumes;
Late reporting and payment of royalties and profit share due;
Other reporting discrepancies due to clerical errors and incorrect product setup resulting in inaccurate reporting.

Luxury & Sports Brands

Brand protection is key to upholding the quality and reputation of a luxury fashion or sports brand. Regular monitoring of licensees through compliance audits is essential to achieving this. Often, the licence agreements stipulate strict guidelines on minimum pricing, sales targets, distribution channels, stock control, and the treatment of end-of-season sales.

The absence of regular compliance and royalty audits could lead to brand erosion and significant under-reporting of royalties due to the incorrect application of royalty rates, particularly when long-term licence agreements stipulate differing royalty rates on escalating sales targets and unauthorised distribution channels, particularly in the Far East region. We have experience in conducting royalty audits in countries such as China, Japan, and Korea for European sports and fashion brand clients.

Music

We have experience of performing royalty audits for music copyright collection societies, music publishers, artists and songwriters.

The way music is consumed has changed over time from physical products such as CDs to streaming. Royalty audits are, therefore, key to managing the accuracy of royalties due to the copyright owners and also ensure that the license agreements are regularly updated to reflect the changing nature of music consumption by the public.

We also have experience in the review of music usage by organisations such as radio stations, bars and nightclubs, cinemas, pubs and restaurants to ensure that the correct metrics are applied in reporting the royalties payable.

Pharmaceutical

Pharmaceutical and biotech companies spend vast amounts of time and resources on R&D before a drug finally comes to market. This is also the case for learning and research institutions such as universities. In addition, the global distribution of a drug incurs significant further costs in terms of manufacturing, distribution, advertising, and marketing.

Pharmaceutical and biotech companies, as well as universities, are increasingly entering into strategic alliances with other companies in the industry through licensing, co-promotion, and co-development/distribution agreements. The basis of the royalty calculations in these agreements is often highly complex, depending on various factors such as the territory of distribution, grant of patents, data exclusivity, and the existence of other competitive drugs. As a result, any minor error in reporting could lead to a significant underpayment.

We have experience in assisting companies in the pharmaceutical industry in maximising and recovering their contractual cash flow through detailed forensic audits. These audits result in improved future terms in agreements and build stronger relationships between business partners.

Technology

With the tremendous global growth of technology licensing, a significant amount of revenue leakage occurs as a result of poorly written licence agreements. Although protected by patents, the intended and anticipated royalty income from such arrangements may never be accurate. For example, royalty rate structures may take many forms, such as a fixed dollar amount per unit distributed of a product incorporating the licensed IP, or various percentage royalty rates dependent on factors such as sales targets or product version upgrades.

The complexity of reporting requirements for the licensee is also a major factor in unintentional under-reporting, particularly when a product may contain several different patented IP technologies (software or hardware), each with a different reporting basis for royalty calculations. With high unit volumes of global distribution, especially for electronic mobile devices, any minor error in the royalty calculation methodology could result in millions in misreported revenue.

Franchising

Franchising can be a quick way to expand globally into new markets without the need for a vast initial capital outlay and setup costs. A typical franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea, often in a specific geographical area. Under the agreement, the franchisee trades under the franchisor’s trademark or trade name and benefits from the franchisor’s help and support. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of sales revenue, profits, or other defined criteria.

Given the global growth in franchising, control and financial risks inevitably increase for the franchisor. Franchisors need to be proactive in their compliance programmes to ensure quality is maintained, protecting the brand and minimising revenue leakage.

We work with franchisors in implementing successful compliance programmes globally. This may involve reviewing the portfolio of franchisees, analysing reporting trends, conducting limited scope on-site reviews at franchisee locations, or performing detailed forensic reviews of high-risk franchisees.

The benefits to the franchisor include stronger control over the brand or trademark, increased revenues, reduced ambiguities in agreements, and stronger partnerships moving forward.

Media Advertising

Companies spend millions per annum on advertising and marketing through agreements with independent advertising agencies, which in turn use this money for creative campaigns and the purchase of media space from media owners (broadcast, press, online, and outdoor). However, there is often very little transparency between the actual nature of spend by the advertising agency and what the advertiser is charged.

We perform contract compliance and media expenditure audits to ascertain whether the agency is adhering to the terms and conditions of the agreement and to verify that the amount the agency charges the advertiser is the same amount paid to third-party media owners and vendors. From our experience, significant amounts may be payable back to the advertiser for amounts charged by the agency that are contrary to the terms of the contract or agreement. Some typical reasons include:

Incorrect deduction of agency commissions;
Rebates received by agencies from media owners that are not passed back to advertisers;
Disallowed mark-ups on costs charged to the advertiser.

Media expenditure audits conducted every two to three years also improve and enhance the advertiser/agency relationship. The results usually drive greater transparency, leading to improved mutual understanding and appreciation between the advertiser and the agency.

Protect your brand, ensure compliance, and recover lost royalties with expert contract audits and licensing solutions.