Nine Ways to Improve Your Royalty Audits

To get ahead, improving your royalty audits is vital. Here are nine ways to accomplish just that.

  • First: Learn everything you can about your licensee’s business practices. The information you garner will help you determine how well the company will be able to comply with your licensing requirements.
  • Second: Write licensing agreements in unambiguous terms and incorporate into the financial provisions the business practices and conditions for each licensee.
  • Third: Defend your right to collect your royalties. Many times audits turn up money owed to the IP owner due to innocent mistakes, turnover in personnel, or a misunderstanding of contract terms. Just because the errors were not caused by fraud doesn’t mean you should forego collection of the amounts due you. After all, royalties affect your company’s financial health.
  • Fourth: Hire a professional auditor who is a disinterested third-party to conduct your royalty audits. Using your company’s staff for this task may raise personality conflicts that can cause a problem during the settlement phase.
  • Fifth: Do not depend on verbal agreements. Reduce your initial agreement to writing as well as all subsequent changes and modifications. You can not enforce verbal modifications if they conflict with a prior written agreement. Remember: verbal agreements do not help you collect royalty fees.
  • Sixth: Monitor your products in the marketplace. You may find evidence of license violations that enable you to enforce the terms of the contract sooner than a regularly scheduled audit.
  • Seventh: Put processes in place to monitor compliance with your license agreements. Create written administrative procedures for investigating suspected violations of your license agreements.
  • Eighth: Establish a system of random audits. This practice will let your licensees know that you have zero tolerance for under reporting of royalty payments.
  • Ninth: Collect periodic financial information and calculation worksheets to substantiate the royalty payments made by your licensee. Create the reporting forms for your licensees to submit the financial information that you need to substantiate compliance and in the format that you need it. Collect annual financial statements and tax returns, including financial information stored in electronic and digital format.

Royalty audits help maintain a level of trust between licensees and licensors. Random audits help keep all licensees playing on the same level playing field.

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