11 Avoidable Expenses Most Licensees Are Paying
Licensees pay substantial royalties for the rights to use licensed IP, with the intention that these properties generate revenue and turn a profit. Yet many licensees are paying avoidable expenses due to lack of visibility into their operations and error-prone processes for reporting and managing royalty payments. These 11 expenses could be eating away at your profits.
- Overpayment of Royalties Licensees often overpay royalties in order to mitigate the legal and commercial risk of underpayment. For example, a FADEL client in the high-tech space consistently—and intentionally—overpaid by 10-15%. They subsequently reduced overpayments to zero after implementing the FADEL system, saving $200k+/annum.
2. Contingency Fees Based on experience with audits by major licensors, some licensees’ best practices include managing a reserve of 15-20% of royalty expense as a contingency for underpayment. FADEL clients have been able to hone their accuracy, eliminating the need for contingency funds and freeing up cash for other corporate objectives.
3. Forfeiture of Discounts, Allowances and Chargebacks Some manufacturers pre-pay royalties as soon as the product ships to a retailer. As returns come in, the pre-paid royalties should to be credited to the manufacturer, but many manufacturers are unable to accurately track the credits due back to them and forfeit this revenue. Additionally, many licensees do not have a way to manage caps on discounts and allowances for returns and therefore forfeit them, losing between 5-10%.
4. Audit Prep Time Licensees are subject to audits and many large licensors have demanding expectations, steep requirements and varying frequencies. The workload generated can be enormous; one licensee reported 200 hours over a year’s time. An automated system like FADEL’s with full reporting capabilities gives licensees immediate access to the data required to respond to audits with accuracy and speed. With a full audit trail and set of financial reports, audit prep time can be cut in half.
5. Violation Fees Violations are almost always unintentional…and costly. Assuming a 100K sales violation in an unauthorized territory at a 10% royalty rate, many licensors will charge 3x the royalty as a penalty, and in situations where audits are only performed every 3-5 years, interest is typically compounded over the term of the violation. Other potential negative impacts include loss of rights and increased rates imposed for sales in unapproved channels, territories or accounts. A system that generates violation warnings when they occur and allows teams to view sales data against contract terms can eliminate these unnecessary fees.
6. Inflated Audit Bills Audits often result in penalty fees that may or may not relate to accurate violations, and the onus is on the licensee to disprove any claims, which can require significant manual analysis across multiple departments and resources. One licensee was charged a penalty fee for a violation assumed from a keyword search that turned out to be unrelated to the licensor. This licensee projected that a system like FADEL’s would not only reduce violations, but help them respond to an audit more effectively, cutting the amount owed by 50% or more.
7. Shortfall on Minimum Guarantees and Other Key Performance Indicators Many licensors are requiring minimums by territory, channel, store and more that could range from 1/3 to 1/2 of the royalty payment. Licensees are required to pay out unearned royalties if the minimum is not met, and run the risk of the licensor recapturing the territory, channel, etc. for underperformance. The ability to stage performance against contract terms and confirm financial obligations such as minimum guarantees are being met helps sales teams meet their commitments.
8. Missed Revenue Opportunities Many licensees forfeit revenue opportunities from co-branded assortments because they have no way to manage multiple payouts on a product sale. A scalable rights and royalty management system like FADEL’s automatically captures and calculates products requiring more than one payout, empowering sales teams to create bundled products for further revenue opportunities.
9. Painstaking Statement Generation Many licensors are very specific about how they want their data presented, and without a templatized system, licensees must manually generate each individual report according to the licensor’s guidelines. One licensee generates 40-50 different reports for various licensors and it can take them up to 3 days per report to roll royalty information up into the correct format. This translates to months of time spent on reporting alone.
10. Time-Consuming Forecasting While most quarterly forecasts may only take a couple of hours, some licensors ask for very detailed forecasts entailing reporting by retailer, channel and licensor property, which can take as long as a week to create. Automated rollups reduce forecasting time from weeks to days.
11. Contract Interpretation and Negotiation After a contract is completed, licensing managers often spend days summarizing the terms of the agreement in order to create a consumable reference document for teams and management. FADEL clients can say goodbye to interpretation of lengthy contracts and tracking actuals and royalty payouts in spreadsheets with a single platform that captures rights and payment terms and manages them against the contract. Analytics capabilities give licensees the data they need to negotiate more favorable terms for the renewal period.