Direct-to-retail license agreements can prove to be an advantageous strategy for property owners and retailers. This type of arrangement can establish long-term relationships. It may also enable retailers to quickly move licensed products from suppliers to retail store shelves.
From the licensor’s perspective, it is extremely important to remain informed regarding the performance of the retailer, and their success (or lack thereof) with the property in question. Licensors and agents can accomplish this objective by keeping communication lines open, obtaining sales projections and promptly receiving sales results. Conducting regular royalty compliance audits of the retailer is also critical in order to identify and resolve issues that could have a major impact on royalty revenue and the success of the partnership. Comprehensive Royalty Compliance (CRC) provides an experienced partner to accomplish this objective.
In addition to our typical investigation of the licensee’s compliance with the provisions of the agreement, we have applied a three-pronged approach that is the major emphasis for the direct-to-retail audit engagement. The audit routine includes the following vital procedures:
1. Review of Transactional Sales Detail – This is perhaps the most difficult request for the retailer to satisfy. Compiling sales data by item for each product sold, by relevant departments in every store can be a challenging task. Regardless of the level of sales volume that your property is generating, understanding the nature of this procedure illustrates the importance of a regular audit cycle. It is extremely helpful to minimize the number of months being audited, therefore limiting as much as possible, the amount of data that the retailer is asked to provide.
A thorough analysis of this information will provide answers for the important questions that the licensor should be asking: Is the correct retail sales value being captured and reported (consistent with the net sales definition)? Have all of the products for my brand been properly flagged for royalty reporting purposes? Are there any store departments/product categories that have been overlooked during the reporting process? Has the retailer included all of its locations (including online sales) when reporting my sales and royalties?
2. Retail Store Visits – It is the responsibility of the retailer to accurately code/flag each licensed item in the sales system for royalty identification purposes. When reviewing the detailed sales records, each item typically includes a brief description that helps the auditor to catch products that may have been miscoded. However, that description may fail to adequately describe the licensed property being audited. It also is possible that no description has been established in the appropriate product description field. Due to these variables, the licensor is exposed to a high level of risk that licensed items will fail to be identified and never be reported.
This is where retail store testing comes in. By applying bar code scanning technology, the auditor can obtain a sample of the licensed products that are on the shelves at a retail location. Easy to use software applications enable the auditor to download the UPC’s to a spreadsheet and then compare to the items reported on the royalty statement. Adequate planning for the store visits must be considered as licensed items scanned today need to be verified on royalty statements submitted in the future.
3. Scrape of Website Data – Some licensed items may only be sold online by the retailer. The sales volume for these products can be significant (especially over the past year), and the licensor needs to verify that they have been reported on the royalty statement. CRC has successfully utilized software programs that will scrape the retailer’s website and identify all of the licensed products in question that are available for purchase online. This data can then be manipulated, downloaded to a spreadsheet, and compared to a royalty report for confirmation that the items have been accurately identified by the retailer.
Applying these procedures when conducting an audit of a DTR license agreement can lead to the recovery of significant amounts of royalty revenue. The audit will also identify inadequate reporting procedures that can be corrected in order to prevent the same mistakes from being made on future royalty statements. The data retention policies of retailers may require that information be purged or archived after a certain period of time. Once again, it is therefore important to audit DTR license agreements early and often.
Comprehensive Royalty Compliance has continued to conduct audit engagements remotely throughout the pandemic. For more than 20 years, CRC has provided royalty compliance audit services for top licensors and agencies.
For more information, contact Douglas R. Edwards, CPA at (513) 860-9500
Visit the CRC website at www.comprehensiveroyaltycompliance.com