What do you need to know about royalty audits in the fashion industry?

What do you need to know about royalty audits in the fashion industry?

When it comes to the world of designer brands, and both High and High Street Fashion, few countries parallel the success of the UK fashion industry. Around the world British brands earn billions, but to keep the business profitable for everyone concerned there needs to be strict and enforced royalty audit agreements between all relevant parties.

Think of a major brand that is recognisable to people in every country, one of our home grown success stories in the UK: David Beckham. The charismatic footballer is capable of using his fame, charm and chiselled good looks to sell millions and millions of fashion items, from underwear to cologne. However while he can bend a ball into goal like few others, Beckham can’t make aftershave, bottle it and distribute it around the world to the people who want it. That’s where the middle men come in.

Distributors and manufacturers come together and create and sell a variety of products with the Beckham seal of approval. To make this happen all parties enter into a license agreement with a Beckham company which allows them to use the brand name on items in particular territories in return for payment of pre-agreed royalties on all sales.

This kind of agreement works well for both parties. For David Beckham and his team it means they can reap the sales revenue from global selling without the huge expenditure of setting up manufacturing and distribution channels. For licensees the dramatic increase in sales due to working with a global brand name, in return for paying a royalty is enormous. Whatever the royalty rate agreed is, it’s better to earn 70% or 80% of something than earn nothing.

These kinds of agreement have been de rigueur in the worlds of music, literature and particularly in technology and computer software for years, and are just as successful in the fashion industry. The problems only arise when royalty agreements are either poorly drawn up, or royalty audit clauses are not regularly and efficiently enforced.

As long as a stipulation is made at the outset for regular royalty auditing, and the condition is enforced, then it is highly unlikely that licensees will have an issue with being audited. Because international distribution and sales is a complex business with millions, if not billions, of pounds being exchanged across businesses and territories, inaccuracies in reporting and other errors are to be expected. Few licensees attempt genuine fraud and royalty audits should be seen as more of a health check which ensures everyone is getting exactly what was agreed upon.

A good royalty auditing team will always work fairly with the licensee as they understand that audits can take up time and resources and that the relationship between the licensor and licensee is of paramount importance. That’s why it’s important to hire a specialist royalty auditing team who can perform the job expertly, leaving everyone else to get on with the important aspects of running their business.

This helpful sponsored post was provided by HW Fisher.

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