Royalty audit - four reasons to look at your licensing

The licensee-licensor partnership is financially significant to many brand owners, and in the current environment, it's an essential source of revenue generation. External advisors can help licensors tread the thin line between trust and control in order to protect brand value.

We've been supporting brand owners in safeguarding their licensing revenue for over 10 years and here are the four key insights that you need to know:

1 Royalty income is understated by around 10%

Our findings reveal that, on average, licensee reports are incorrect by 10%, highlighting that many brand owners could be due additional income from their existing licensees.

We have found that there are five main causes of under-reporting royalties:

1 Licensees overlooking the restrictions around deductibles as a result of woolly contract language and inadequate monitoring systems

2 The incomplete reporting of sales by a licensee due to system-configuration errors

3 Inadequate attention given to the minimum license fees or marketing-spend commitments

4 Late reporting and payment of royalties to a licensor

5 Inadequate hand-over during staff changes

Under-reporting of royalties

Source: Grant Thornton UK LLP

2 The return on investment from a royalty audit programme is significant

During the last 10 years, we have uncovered over USD $68 million of under-reported royalties and late-reporting interest charges across television, consumer products, home video, video-on-demand, and theatrical licensing. This is revenue that would have remained undiscovered without a royalty audit programme and could provide a much-needed boost to your bottom line.

Relative to the cost of undertaking the audit, this recovery represents a massive 751% return on investment for brands. Depending on the license agreement, undertaking a royalty audit could cost you nothing.

ROI Overview

Source: Grant Thornton UK LLP

Comparing the findings of royalty audits globally does not reveal significant disparities between international regions.

Our findings reveal that audits in Central America saw a greater level of return due to the size of under-reporting. However, this can be attributed to the density of licensees and robust auditing programmes, rather than the region itself.

Similarly, we see a significant return on television production in the UK, due to a well-established approach to selecting producers and licensees for audit, which was developed in conjunction with television networks.

ROI by Reporting Location

Source: Grant Thornton UK LLP

In general, royalty audit findings are less aligned to regional locations and more likely to be influenced by the individual set-up and circumstances of a licensee. This highlights the importance of regular and consistent selection and monitoring practices for licensors.

4 A systematic licensing programme yields results

Our findings indicate that the greatest risk of under-reporting is seen with TV distribution and licensing. It is no surprise that this has coincided with increased production budgets which has driven greater scrutiny and the need for a more systematic approach to licensee-monitoring.

ROI for Royalty Revenue Streams

Source: Grant Thornton UK LLP

As the TV industry’s focus on international distribution and licensing has grown, we've supported our clients to apply a more-methodical approach to identifying distributors and licensees to be audited, which has yielded enhanced results and an increased return on investment. This trend can also be seen in the growth of online-format film revenues. As brand owners recognise the benefits of a focused monitoring programme, the greater the financial results they achieve.

Ten-year focus on Home Entertainment and Digital content Royalty Revenue Streams

Source: Grant Thornton UK LLP

To learn more about how we can support you with your royalty audits and assist you in developing a robust license-monitoring programme, contact Akin Ogboye.