Jul 2, 2019

What Makes Royalty Validation So Important?

Customer Success Manager Gjergji Make Weighs In

This week we end our exploration of the financial side of the licensing business with a dive into royalty validation, a concept that some consider the hardest to master. We sat down with Flowhaven Customer Success Manager Gjergji Make to understand why royalty validation is key and to answer some frequently asked questions.

Is royalty validation an important pillar of brand licensing?

Yes. Successful brand owners understand that royalties are more than payments made by one party to another to license an asset. They are figures that require long-term validation, including, but not limited to, record keeping and open, honest communication between partners.

Is there a standard for royalty reporting? If so, is it effective?

In some cases, licensees are asked to submit comprehensive reports to licensors, that can detail the total earnings of a given agreement, SKU or category, including how much money the licensee owes to the brand owner. Because brand owners may have multiple licensees with any combination of geographic or distribution rights, auditing royalty reports can become tedious. Most licensees work to generate accurate, easily digestible reports, but some round numbers or miscalculate figures, preventing brand owners from recouping the full amount owed to them.

Does a brand owner have the right to ask for more data?

While the brand owner is free to conduct a more detailed inquiry, the act may result in tension between partners. If conducted after an agreement has terminated, it may be too late to recoup the miscalculated sum. In one case, a brand owner reviewed five years of reports and found that they had missed out on a great amount of money in royalty payments during that time.

Do licensees benefit from improved royalty validation?

Efficient royalty validation programs also benefit licensees. By communicating with brand owners frequently and submitting data quickly, licensees make it easy for brand owners to determine exactly how they calculated a royalty payment.

What should licensing partners do to improve their royalty validation systems?

Knowing how to manage royalties in real time helps brand owners maximize their profits, determine if their programs are successful and more. For licensees, it offers proof that they’re products are performing well and that they are reporting accurately. To achieve optimum success, brand owners should invest in software or learn how to use spreadsheet applications, to create comprehensive charts.

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