Despite the great benefit they receive from using your intellectual property, it's common for licensees to underreport and underpay royalties. Lost revenue for licensors can run well into five or six figures (or more) each year. And underpayment typically goes undetected until the licensor takes action by conducting a royalty audit.
Sidney P. Blum is one of America's leading royalty audit experts. Sid has led teams conducting over 1500 royalty audits representing individuals to large companies in almost every industry. He has authored two definitive books on royalty agreements that are frequent references for attorneys. Because of his global reputation as a leading authority on royalty audits, Mr. Blum is even called by courts to review the work of other royalty auditors. Based on his vast experience, Mr. Blum offers the following important advice to any licensor considering a royalty audit:
We've discovered underpayment in about 90% of the royalty audits we've conducted. If you have concerns about whether your licensees are paying their full obligations, you may have good cause to investigate.
In cases where we have discovered underpayment, our clients have on average experienced returns in excess of 10x the amount of the royalty audit fee.
Some licensors hesitate to conduct royalty audits due to cost concerns. However, many royalty contracts stipulate that if the audit discovers a certain level of underpayment, the licensee must pay 100% of the
audit fee. Based on our findings of underpayments where there is a cost recovery provision, the licensee must pay for the audit more than 90% of the time.
Unfortunately, there is no license required to become a royalty auditor. Many "generalists" – who may be fine accountants, consultants or financial advisors – do not specialize in this area. Most simply do not fully grasp the complexities involved in royalty contracts. We have seen many situations where audits were performed incorrectly, resulting in significant lost profits for the licensors and leading to expensive litigation. It is highly recommended to work with a specialist that has the right experience and credentials.
Another consideration is whether your royalty auditor is capable of working with your attorney if a dispute arises. Relatively few royalty auditors have the credibility and insight to help an attorney make a strong case. Even fewer have actually testified in court as expert witnesses. Before you select an auditor, determine whether that auditor can help if you need to enforce your contracts in court.
Mr. Blum will be able to answer any questions you might have in order to help decide whether your specific circumstances warrant a royalty audit.
Sidney P. Blum is widely recognized as America's leading royalty audit expert. He wrote the royalty audit methodology for two of the Big 4 accounting firms and is the author of the industry reference book, Financial Elements of Contracts: Drafting, Monitoring and Compliance Audits (Oxford University Press 2010). He has audited over $8 billion of royalties and $100 billion of sales, has testified in court, and has lectured nationally on royalty contracts and audits.
Authored by Mr. Blum, this book navigates the nuances of drafting financial terms for license and other self-reporting agreements and shows how proper monitoring and auditing should occur once a deal is in place. This book modernizes and remolds how agreements are written and greatly enhances the bottom line of licensors and other contractors.
"This book gave me some great wording that I've placed into my client's royalty agreements. I appreciated that it provided the problems and benefits with certain language in agreements so I could better understand the ramifications of the different language I might place into a contract. It was easy to grasp the message from the author." — Reader review