By Kevin F. Howley, CPA
Gray, Gray & Gray, LLP
The economic disruption caused by the COVID-19 pandemic has generated a need for many businesses to take a hard look at expenditures in order to carefully guard their cash flow. Unfortunately, some companies that license intellectual property or operate as a franchise may be tempted to delay or default on licensing and franchise fees. It is up to the licensor or franchisor to monitor payments to ensure that they are receiving the royalty payments they are due, in full and on time.
When it comes to royalty payments it’s not always easy to identify problems. Or, if a problem occurs, it can be difficult to address the issue with a licensor or franchisee with whom you want to continue to have a mutually beneficial relationship. That’s where a royalty examination can be of assistance.
A regular royalty examination – essentially, an audit of payments – can shine a light on signs of potential revenue shortfalls and other issues that may negatively impact the income stream that a license or franchise should be generating. Indications such as late payments, missed payments, or underreported income can reveal a problem, whether intentional or inadvertent. Shortfalls identified should be addressed immediately.
Every licensing or franchise agreement should include an audit provision that gives the license holder the right to examine financial statements and other documentation to determine whether or not the licensee or franchisee is meeting their commitments. To be most effective, a third-party royalty examination should be conducted on a regular schedule, but an examination can also be done on an “as needed” basis. The report and recommendations that emerge from a royalty examination can provide the licensor or franchisor with the basis they need to pursue collection of royalties.
With money tight and cash flow slowing to a trickle for many businesses, it is in your own best interest to make sure your license and franchise fees continue to arrive as required. A royalty audit is the best way to ensure your revenue stream does not dry up.
Kevin F. Howley is a Partner in the firm of Gray, Gray & Gray, LLP in Canton, MA, and a certified public accountant specializing in royalty audits. He can be contacted at khowley@gggcpas.com or (781) 407-0300.