We all know that brand licensing is an essential strategy for expanding sales and product reach and generating untapped revenue. However, ensuring that your license agreements are being adhered to correctly and licensees are in compliance with the terms of the contract can be challenging. A well-executed audit of your brand licensing agreements can not only mitigate risk but also uncover new opportunities for growth through licensee expansion or redirection of those licenses. I’m going to provide you with some insider tips on how to effectively audit your brand licensing agreements for compliance:

📃 Review the Terms of the Licensing Agreement

Start with a thorough review of the agreement itself and build a summary for easy reference. Focus on key terms, such as:

• Products and Properties: What product types or categories are being licensed? Which brands or trademarked properties are permitted for use by the licensee?
• Territory: Which agreed-upon geographic areas are products being sold?
• Marketing Spend: What are the amounts and allowable spending activities that must be fulfilled?
• Payment Terms: Are there royalty payments, minimum guarantees, and other financial obligations?

💵 Check for Missed Contractual Milestones and Deliverables

Most brand licensing agreements include specific milestones or performance benchmarks that the licensee must meet. This could be in the form of revenue targets, minimum guaranteed royalties, or marketing spend activities. Ensure that these milestones have been achieved and documented properly. If these are missing or incomplete, this could indicate the need for a simple communication that results in a direct cash payment.

🔓 Verify Royalty Reporting

One of the most critical components of any licensing agreement is the license fee and royalty reporting structure. Review the licensee's royalty reports to verify that royalties, advances, and minimum guarantees are being calculated and paid correctly and on time. Look for discrepancies or underreported amounts that may suggest an easy catch-up reporting or payment.

📌 Assess Trademark and Brand Use

Brand licensing agreements grant the licensee the right to use a brand's trademarks or intellectual property. Ensure that the licensee is using your intellectual property within the boundaries of the agreement and not diluting or misusing your brand. Look out for unlicensed uses, such as selling products outside of the agreed scope of the license or using trademarks in unauthorized ways. Many of these issues can easily be pinpointed by taking a deeper dive into licensee reports. Also, without leaving your desk, significant research can be done on the licensee website or any open market place where product are sold products. If you want to get your hands and feet involved, head to the online storefront or local retailer to buy products for physical inspection.

📺 Audit Marketing and Advertising Activities

Brand licensing agreements often come with marketing and advertising requirements. Review the marketing campaigns, promotional materials, and other print, media and online advertising efforts to ensure they are in line with your approved channels of ad spend. Alos, the message being delivered by licensees should align with your brand values and public perception. If the marketing strategies are inconsistent or incorrect, it is worth a conversation to get your licensee back on the wagon.

📩 Maintain Clear Communication Throughout

Effective communication is key to a successful licensing partnership, as well as compliance program. Regularly check in with your licensee to address any concerns or challenges that you are seeing, or that they may be facing. If issues arise, approach them collaboratively to ensure both parties stay on track and any necessary adjustments are made in real time.

📟 Hire a Third-Party Auditor if Necessary

In most cases, working with a third-party auditor can provide an objective perspective and ensure a thorough review. Independent audits help uncover potential non-compliance and ensure that everything is being handled according to the letter of the agreement. What’s best is these audits usually pay for themselves through recoveries and resulting contractual charges. So yeah, call me 😊

Let's Wrap Up

Auditing your brand licensing agreements is essential for protecting your brand's integrity and ensuring long-term profitability. Regular reviews help identify risks, uncover areas for improvement, and strengthen your relationships with licensees. By staying proactive in managing the licensee compliance of your agreements, you safeguard your brand’s reputation, bottom line and support the ongoing success of your overall licensing strategy.

Want even more helpful ideas on how to take your brand licensing compliance program to the next level? Let’s connect Christopher Lincoln, CPA, CIA

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