LICENSEE AUDITS - A PROFIT CENTER

At some point, most Licensors come to the realization that a rotational program for visiting all Licensees is necessary – Licensors simply do not have the full “picture” without the reviews by and input from Auditors! Licensees prepare the “invoice” (the royalty report) which they submit and pay. Without an audit, this leaves too many unanswered questions.

The key point about an audit plan is that, done right, audits are a profit center generating significant incremental revenues. Yet even more beneficial are the increased on-going royalties resulting from reporting corrections made in the audits. Audits should not be contentious UNLESS a Licensor waits to audit (or only audits) when suspicions arise or major concerns or problems occur. ALL Licensees need to be periodically audited. And since a good audit program will generate net revenue there is NO reason not to audit!

There are real challenges, however, to developing an effective, on-going and efficient Licensee Audit Program, one that complements (rather than detracts from) the marketing effort:

• Audits can be very expensive.
• Except for the very largest Licensors, “in-house” Auditors are not feasible; and even when they are, Auditor turnover can be so frequent there is little continuity.
• Unless Auditors are completely professional, they can cause unnecessary rifts with Licensees.

OUR PHILOSOPHY

Making Better Licensees

A primary objective of our audits is to make sure Licensees come out of an audit with a greater understanding of what they need to do in the future and usually (based on our experience and input) an easier way to do their work – we are not satisfied with simply identifying and calculating past errors, we strive to improve future reporting.

Keeping Audits Reasonably Priced

It does no good to consider auditing Licensees if the costs exceed the expected returns – this is where experience is invaluable! Theoretically, Licensors could complete “full-blown” audits of their Licensees (usually costing a minimum of $25,000 – ouch!), but this is seldom practical financially.Yet an equally poor approach is to not audit because “full” audits cannot be justified.

“Good” audits are exposure directional, meaning keeping an eye on costs so audits do, in fact, result in a net profit to the Licensor. There is no reason to forgo the good two to four day audit simply because it cannot accomplish what a two to three week audit can! If large errors are noted in the primary testing the audit can be expanded, but if no significant errors are initially noted the benefits seldom justify this additional cost.

Technology has greatly increased the quality and scope of Licensee audits. At the same time it is now possible to audit much smaller Licensees, where under-reporting is (percentage-wise) more common.

ALL our audits have a significant Off-Site component with an On-Site visit scheduled when deemed necessary and justified (either because the Licensee is very large or the errors noted in the Off-Site testing are significant – at which point, most License Agreements require the Licensee to pay the audit costs). Licensees can now electronically send ahead much more information than they, in past years, were able to provide even when audited on-site.

The Off-Site audits are about 40% of the cost of traditional On-Site audits, thus allowing for cost-effective audits of small Licensees and for larger Licensees making the subsequent On-Site visits much more efficient, if a visit is even required. Completing most, if not, all the work Off-Site also allows the audit to proceed, and be completed, at it own pace – rather than being “squeezed” into a 3 or 4 day period (often not enough time for the Licensee to provide the necessary testing data or to complete the testing); sometimes, due to errors made, a Licensee may even have to correct and re-supply the data more than once to ensure the final numbers are correct. And since an audit provides an excellent opportunity to correct their reporting system, future reporting is also considered and should be improved as well.

Besides completing all possible work Off-Site, we also keep costs low by auditing regionally. To audit a single Licensee can result in travel time (and costs) exceeding the cost of the actual on-site testing – we audit a number of Licensees when we are in an area to “spread” the travel time and costs among them. We even, whenever possible, complete reviews on a "co-op" basis; meaning, we represent several Licensors for a single review which substantially reduces the cost for each participating Licensor.

Outsourcing the Licensee Auditing Function

As mentioned above, only the very largest Licensors can reasonably afford “in-house” Auditors. And even large Licensors find outsourcing beneficial to better maintain continuity, keep costs lower and have a higher level of expertise than they can normally develop and retain in-house.

Licensee Relationships

Licensors beginning to audit their Licensees are often surprised that Licensees are not upset by audits, Licensees expect to be audited. Licensees feel they are properly reporting (even though we, more often than not, note reporting errors) and want to make sure other Licensees are as well. For this reason, audits are very seldom contentious if the Auditors understand and appreciate the Licensor/Licensee relationship and the importance of treating Licensees professionally.

Licensees generally are very appreciative of our audits because we often give them “tips” to make their royalty report preparation much easier and better. Most Licensees do not mind paying royalties – they just don’t want to owe at the time of an audit. So if we can show them how to prepare reports more accurately and more efficiently they welcome and appreciate the help (with both the Licensee and Licensor benefiting!).