We cover a range of financial aspects of licensing including efficient accounting & royalty reporting; trying to raise venture capital; valuing intellectual property and checking media and entertainment share prices.

Accounting & Licensing Management

Mention licensing contracts and people think of lawyers – and rightly so. But Fisher Forensic’s experience as one of the UK’s leading licensing and royalty auditors gives them a unique perspective on the way that agreements can be interpreted in practice. For this reason they always advise their clients to involve them from an early stage when a new contract is being drawn up. Stuart Burns, Head of Fisher Forensic, reports on 6 key clauses every licensing contract should contain.

 

It is sometimes said that every case is different and there is a good deal of truth in the claim. Nevertheless, certain issues occur repeatedly. Based upon our experience, here are six clauses which are often overlooked, but which, we are convinced, every contract should contain.

1. A ROBUST AUDIT ENTITLEMENT

It may sound self evident that a licensor’s right to conduct audits should be spelled out. But by ‘robust’ we do not merely mean access to books and records, important though that is. The contract should stipulate that auditors are entitled to carry out the audit within two weeks of announcing their intention. Without this, endless excuses can be used to delay the audit for months or even years, by which time the trail may have gone cold. Furthermore, access should be to the entirety of the books and records, as the audit has to test for completeness of reporting.

2. INTEREST CHARGES

Remarkably, some agreements say nothing about interest payments on under reported sums. Yet if the audit discloses a pattern of under reporting going back several years, the interest could be substantial. Interest compensates the licensor for the very real costs of borrowing that would be mitigated if the licencee had paid accurately.

3. CLEAR DISCOUNT CLAUSES

Many contracts simply provide for royalties to be calculated on the basis of invoiced prices. Instead, agreements should stipulate that royalties should be based upon carefully and clearly defined gross/net selling prices. If the licensee decides to give buyers an additional discount for prompt payment, that is a matter for them to decide. The licensor should not suffer, by receiving a reduced royalty as a result.

4. ANTI-DUMPING PROVISIONS

There could be a number of reasons why a licensee might decide to sell off products at a vastly reduced price – perhaps to clear old stock or to offload goods when the contract is drawing to an end. Yet products sold this way can have a damaging effect on the integrity of the brand, particularly if goods end up at low end discount retailers. The contract should declare a minimum selling price solely for royalty calculations purposes (expressed as a percentage of the average selling price during the Term) and declare that any sales at a lower rate will be treated as minimum selling price transactions.

5. INCLUDE REMEDIES

It is not enough to include measures that forbid certain actions. The contract should also set out compensation remedies if these measures are ignored.

6. UNLICENSED SALES

Almost every contract will give a licensee rights to a certain geographic area, yet few set out the consequences of trading outside this region. The agreement should state that ex-territory sales will be regarded as unlicensed, meaning the licensor is entitled not merely to royalties, but to the actual gross profit earned. The same should be true of any sales made after the contract has expired. It has to be admitted that EU competition rules can make this difficult to enforce within the EEA, but such clauses should always form part of agreements for other territories. It cannot be said too often that any weakness or ambiguity in a contract will almost certainly be exploited by a licensee, or will at the very least give rise to unnecessary and potentially harmful disagreements. In licensing, clarity is not only desirable, it is essential.

Stuart Burns is the head of Fisher Forensic. He can be reached on +44 (0)20 7388 7000 or sburns@hwfisher.co.uk.

Financial Implications for Licensors

The major challenge for Licensors is to ensure that they maximise the value of their intellectual property by effectively and efficiently managing their licensing agreements and other contractual agreements. A Licensor is at risk of losing substantial revenue without effectively determining whether a Licensee is reporting revenues completely and accurately and that all the entitled contractual payments are being met. Industry wide millions of pounds of revenue is lost each year by the under or mis-reporting of royalties. Reasons for this may be down to differing interpretation of terms in the licensing agreement, such as gross versus net sales, exchange rates or when payments are to be made – or perhaps from lax processes and management by Licensees.

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Potential income may also be lost by undervaluing the intellectual property to be licensed. Often royalty rates are based on previous or similar agreements and not reviewed despite changing economic or commercial factors. Not understanding the worth of a property can mean Licensors don’t demand (and aren’t able to justify) higher royalty rates from Licensees.

Multi-national groups too could potentially save millions of pounds in tax by identifying the best strategy for owning or licensing their intellectual properties within the groups’ world-wide subsidiaries.

Specialist organizations can advise Licensors whether Licensees or other business partners are compliant with the terms of their agreements and royalty reporting procedures and assist with any issues or arbitration. They can produce licensing management strategies and procedures, including the software to automate it. They can also advise on the value of intellectual property to help ensure your royalty rates are not understated.

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Financial Obligations for Licensees

The challenge for Licensees is to ensure that they comply with their contractual agreements and can accurately report and pay the relevant royalties to Licensors and other parties. Royalty and general licensing management can be extremely complex to implement and difficult to track without the right systems or procedures in place. This maybe especially so for those Licensees dealing with multi-currency transactions or sub-licensees or who perhaps those who have many different internal departments involved in their licensing activity.

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Licensors normally always have the right to audit or examine royalty reports and processes used for calculating. Under or mis-reporting, however unintended, frequently happens and can give Licensees financial penalties as well as potentially damaging their reputation.

Specialist organisations can help with royalty administration systems and procedures, assisting Licensees with implementing the controls, procedures and design systems to facilitate the accurate and timely payment of royalties. Software too can help Licensees ensure all the data they need is easily accessible and accounted for and any deductions or adjustments can be easily calculated, allowing Licensees to easily see how they are performing on their contract.

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Investment

Want to raise money? View some of the different considerations and parties involved in venture capital including Venture Capital and Business Angels sources.

What is Venture Capital?

Venture capital is long-term share capital for unquoted companies who maybe start-ups, expanding their business, diversifying or even buying out a parent company. With loans or debts from banks or other lenders, there is a legal obligation to repay the capital with interest, irrespective of the success or failure of your venture. This capital is normally secured on business or other assets, which can ultimately be liquidated. With venture capital you receive capital in exchange for equity in your company. Your investors’ return on that capital is dependent on the business’ success and profitability and ultimately through an ‘exit’ agreement which may include selling their shares or selling the whole company to realise their capital.

What do Venture Capital investors look for?

Primarily this type of investor is looking for companies with relatively quick and high growth prospects and which are run and managed by highly experienced teams. They will seek to maximise their investment by helping to increase the company’s value, providing your business both capital and business experience and advice, without managing the business on a day to day basis. Investment is normally sought to last between 3 and 7 years.

What sort of Venture Capital firm?

The way venture capital firms raise their funds – for example from institutional investors, insurance companies or pension funds – affects their investment preferences and the type of finance they will offer. It is vital to only contact venture capital firms that specialise in your sort of requirements. This criteria may include:

  • The stage/type of investment – Seed (funds required to develop a business concept), Start-up (funds required to setup company and/or develop products), Early Stage (funds required to commence trading), Expansion/Development/Growth (funds required to increase production, diversify or for new product development).
  • The industry sector – e.g. manufacturing; media & entertainment.
  • The amount of investment – e.g. 100k or £5million. Some specialist & regional venture capital firms will invest under £100k, but ‘Business Angels’ are often the best route for smaller amounts.
  • Geographical location – there are nationwide and regional venture capital firms.