royalties risk and financial know how 2009
DESCRIPTION
TRANSCRIPT
Royalties, Risk and Financial Know how
Rafi Saville, Fisher Forensic
Content
1. Net Sales Clause2. Hide and Seek3. Common Misunderstandings4. Calculating and Reporting Royalties5. Licensee Royalty Auditing
Introduction – what do we do?
• Forensic accountants• Specialise in Licensee Royalty Audits • Hundreds of audits each year • Audit worldwide• Across a range of industries
– Consumer products, fashion, film & TV, publishing, sport, music, inventions and technology
• Act for vast array of IP owners both small and large • We see how agreements are interpreted and royalties are
calculated by licensees
1. Net Sales Clause
Key operating definition
Discounts• What discounts do you want to allow?
Volume Discounts
Bonus Rebates
Early Settlement Discounts
Promotion Discounts (e.g. Store Placement)
• Specify and Define!
Trade Discounts
Marketing Discounts (e.g Catalogues)
Pre-Invoice Discounts
• Licensor Problem– No control over deductions made by Licensee in arriving at
Gross Invoice Price
• Possible Licensor Solution– List Price– Highest or Established Price
Other Deductions
• Which of these will be allowable?– Returns (damaged goods only, restrictions?)– Taxes– Bad Debts– Manufacturing Costs– Transportation Costs– Sales Costs– Marketing Costs
Sales to Affiliates• Risk
– Potentially reduced royalties through reduced sales
• Solutions– Royalty on sales price charged by affiliate
• Problem: Need access to affiliate’s records– Royalty based on “usual” or average price charged
• Problem: What is usual?
• Define an Affiliate
2. Hide and Seek
Licensee – Look for themLicensor – Consider including them
Hidden Clauses with significant financial implications
HC1: Sell off Period Provisions
• No set-off against un-recouped MG
Royalties During Term £50,000
Royalties During Sell-Off £10,000
£100,000 or £110,000?
• Maximum % of units to be sold in sell-off period
HC2: Anti-Dumping Clause
• Definition– “High volume sales with large discounts at end of
product life-cycle”• Undesired Effects
– Devalue brand, undesirable stores, flood the market, affects sales of new range
• Solutions– Specify that the practice is not permitted– Minimum royalty per article– Maximum level of discounts– Sell-off period provisions
HC3: Marketing Spend
• Consider Specifying Financial Remedy if not met
Aim
• Increase sales by increasing awareness amongst public (not customers)
Define Content
• TV, newspapers, trade shows?
• Specific expenditure• 3rd Party invoices (not
marketing staff salary)
HC4: Cross Collateralise MGs
• Minimum Guarantees for specific categories
Territories
Years
Products or Product Categories
HC5: Restrictions on Sales• Check whether these restrictions are included
and consider whether they are appropriate
Sale or Return, Consignment
Channels of Distribution
Sales to specific customers
Internet Sales
3. Common Misunderstandings
• Agreement Language not Clear• Standard Practice employed
CM1: Point of Recoupment
• Different industries have different standards• Always defer to the Agreement
Date Type Amount MG Balance
Option 1 Option 2
01 January Advance 1 10,000 (10,000) 10,000 10,00031 March Q1 Royalties 15,000 - 5,000 5,00001 May Advance 2 10,000 (10,000) 5,000 10,000Total 20,000 25,000
CM2: Who Pays the Royalty?
Licensee 1• Licensed to sell MM pens in France• Arranges for manufacture in China• Sells to Licensee 2 in UK and other
wholesalers/retailers in France
• Licensed to sell MM pens in UK• Purchases from Licensee 2 and
other manufacturers• Sells to wholesalers and retailers in
UK
Licensee 2
CM2: Who Pays the Royalty?
• Don’t assume that other licensee is reporting• Check that other licensee has a valid
agreement for products and period• Defer to the agreement
Licensor Risk • No one will pay royalty
Licensee Risk • Both licensees will pay royalty
CM3: Royalty Escalations
• Example: Licensee sells clothing range – jackets and socks across the world“Royalty rate will increase to 10 % when sales of products reach 10,000 units”
• Issue 1: Clarify – All product categories? • Issue 2: Clarify – 10,000 units to be calculated
in date order
CM4: Sales to Licensor
• Particularly common with Football clubs and Fashion Brands
Problem 1 • What is Usual?
Problem 2 • Do you exclude one off sales?
• No more than 90% of “Usual” Sales Price
Solution Make Reference to a Price List or Highest Price achieved
4. Calculating Royalties
Calculation: Responsible Person
• Don’t under-estimate potential complexities• Choose the Royalty Reporting team/person carefully• Don’t rely on temporary or very junior staff• Needs to be checked and signed off
Calculation: Multiple Statements
• Issue– Licensees often report to multiple licensors– Often reporting at same quarter ends
• Possible Consequences– Sheer volume of intense reporting can lead to errors– Fail to take account of individual agreements’
calculation complexities• Solutions
– Establish templated and formulated processes– Undertake cross-checks
Calculation: Transferring Information
• What can go wrong when information is transferred from the accounting system to the royalty system?
Think HMV / Beatles example• Dropped or missed some• Damaged stock• Bargain Basement (Anything by
Wings)• Collaborations (Ebony & Ivory)• In the Sound Booths• Incorrectly filed• Incorrectly labelled
Calculation: Royalty Reporting Systems
• Advantage:– Automates the process and removes some
potential for human error– Potentially much quicker
• Beware:– Still relies on parameters being set correctly– Inbuilt errors will continue to persist– Unable to deal with unusual transactions– Staff become reliant on the results
Calculation: Communication
Risk: Royalty accountant may not be fully aware of contractual implications
Dealmaker Lawyer Finance Director
Royalty Accounts
Reporting
• Transparency– The more information the better
Units, Values, Royalty Rate etc
Territory
Customers
Invoice Level Support
Stock Movements
5. Licensee Royalty Auditing
What is a Licensee Audit
• Check compliance with the Licence Agreement• Check Licensee has reported and paid correctly• Determine not what is there, but what is missing
Why do an audit?
Unreported Royalties
Identify Breaches of agreement Protect the brand
Find out how your Licensee operates
Clarify misunderstandings
early
Deterrent to all Licensees
Duty to shareholders
Opportunity for Licensee
Do we usually find things?
In fact, 80-90% of audits uncover under-reporting or non-compliance
Yes!
