12 Part Blog Description

Are you looking to learn as much as you can about the business of sports licensing? Then please read the 12 Part "An Insider's Guide to the World of Licensed Sports Products in 12 Parts: Practical Lessons from the Trenches" - all 12 parts of the blog can be found within this site. Click here to start with the Introduction.

Thursday, March 1, 2012

Part 5 - An Insider’s Guide to the World of Licensed Sports Products: Royalty Reporting and Audits

Please note: This 12 part series initially appeared on my "Heritage Uniforms and Jerseys" blog, but I moved it in March 2012 to this blog which has a more single-focus on the world of licensed sports products. Thanks! Scott Sillcox

Greetings!

This is Part 5 of a 12 Part Series of blogs Scott Sillcox wrote called “An Insider’s Guide to the World of Licensed Sports Products in 12 Parts: Practical Lessons from the Trenches”. For a backgrounder on Scott Sillcox and his company, Maple Leaf Productions, please see the introductory blog and/or watch his 11 minute introductory video. Scott is available to consult with anyone interested in pursuing a sports license.

The 12 Parts of this Licensed Sports Products blog are:
Part 1: How Licensing Works - Follow The Money or How $5,000,000,000 can be less than you think
Part 2: What’s Involved in Getting a License – You need them far more than they need you
Part 3: The Landscape and some of the players
Part 4: Quality Control – Where The Real Power in Licensed Sports Lies
Part 5: Royalty Reporting and Audits
Part 6: Selling Licensed Goods - Why it’s not as easy as it looks
Part 7: Players Associations and Current vs. Retired Players
Part 8: Royalty Rates – Is 12% the norm and when 12% isn’t enough
Part 9: Local Licenses – myth or reality?
Part 10: Packaging
Part 11: Ten Things (Actually 12 Things) I Learned Along The Way
Part 12: Ten More Things (Actually 14 Things) I Learned Along The Way

Ah royalty reporting and audits, two of my least favorite parts of the licensed sports business. Let’s have some fun and get through this…

Let’s assume we’ve got an NFL license, beginning April 1 and ending March 31 the following year. Each month we need to report, online and in great detail, our exact sales for the purposes of reporting the royalties we owe the NFL. More specifically, by the 10th of each month we need to report our sales for the previous month. And the sales need to be reported by team. And not just by team, but by product category. Let’s say our license allows us to sell posters, clocks, playing cards and fridge magnets – 4 categories of products – and of course there are 32 NFL teams, so that’s 128 sales figures we have to report to the NFL each month. That doesn’t sound too bad – 128 figures once a month.

But wait, we have six different types of posters, two types of clocks, only one set of playing cards but three sets of fridge magnets. And we sold products to approximately 150 customers in that month. So what we really need to do is take all these sales figures from our invoices on a line by line basis – literally, and roll all of them up into a monthly report that calculates those 120 figures. That’s maybe 2000 or 3000 line items for that month. Oh yeah, and we’ve got an NBA license and 18 collegiate licenses as well, so we’ve got 6000, no maybe 8000 line items worth of sales to report to the NFL, and to the NBA, and to each of the 18 colleges. I expect you’re getting the picture.

My point in taking through all this is simple – if you are about to enter the world of licensed sports products, you have better have the accounting side of things all figured out AHEAD OF TIME. If you’re a one man shop, then your Invoicing Software needs to have a 100% compatible Royalty Reporting package working in sync with it. Sit with your hired accountant and figure this out AHEAD OF TIME – and get it right. If you’re a 100 person shop, your accounting and invoicing software needs to have a 100% compatible Royalty reporting package working in sync with it. Sit with your in-house accountant and figure this out AHEAD OF TIME – and get it right.

I don’t have all the answers, but I believe the software answer for almost everyone lies somewhere in this list of royalty accounting software packages put together by the folks at Easy Royalties USA. They sell one software solution, and they believe in it so strongly that they have kindly compiled a list of 20+ other software solutions for small and large companies (to that list let me add Dependable Rights). As the Easy Royalties USA people very fairly write:

“We provide this listing because we want you to select the right software for your company. Easy Royalties is really good. It’s powerful and affordable. We like it a lot. We can help you implement it really fast. But, it’s not for everyone. You need to select the royalty management software that can best meet your needs. If you know of a rights and royalties application not listed that has 30+ clients using the software, can import sales and is actively marketed as standalone royalty software, let us know [and we will add it to this list].”

Let me make one more point and I will move on. If you are a small shop, chances are pretty good that you use QuickBooks software for your invoicing and accounting. If you don’t, maybe you should ask your accountant about it and make the switch – millions of businesses can’t be wrong?!? I say this because you need a brand name software package on your side, and QuickBooks is the leader in the field, so much so that add-on Royalty Reporting packages are available for QuickBooks.

It seems to me that the two best software packages for licensees or aspiring licensees who use Quickbooks are:

Lou Ellman
Royalty Zone
1001 Beaver Trail, Suite A
Austin, TX 78746
Ph: 866-265-7256
lou@royaltyzone.com
www.royaltyzone.com

Edwin Fager
Easy Royalties
Kensai International, Ltd.
75 Nottingham Road
Malverne, NY 11565 USA
Phone: 516-593-0480
Email: edwin@kensai.net
www.easyroyaltiesusa.com

As a small shop you are going to need everything possible going for you, and getting your invoicing and accounting synced with your royalty reporting right from the beginning is critical. Get this right folks, or you will pay the price for years to come. You want to be able to “push a button” and get your monthly royalty reports calculated.

Thus far in this Blog we have really talked about the fact that each league is going to require you to submit a monthly sales report online 7-10 days after the previous month end. You need to do this every month, and you need to file your report on time. Simple, but non-negotiable.

In Part #2 of this series, we spoke of the Annual Minimum Guarantee Royalty payment to the league – let’s now sync the monthly royalty report with the annual minimum guarantee.

Let’s say your license to the NFL is a $100,000 annual royalty guarantee, and that they require 80% of the annual guarantee up front, meaning you have pre-paid $80,000 of royalties to the NFL. If in your first month of sales/royalty reports you report sales of $100,000, this means you owe the NFL a royalty payment of 12% = $12,000. But you have pre-paid $80,000 of royalties, so when you file your monthly report online, you do not have to send the NFL a check. And nor will you have to send the NFL any payment until you hit the $80,000 royalty mark. And it’s possible, although I don’t wish this upon you, that when the 12 month period is up you may have only sold enough product to warrant $60,000 worth of royalty payments – in this case even though you have prepaid $80,000, you still owe the NFL an additional $20,000 to meet your $100,000 guarantee. As stated in Part 2 of this Blog, do this two years in a row (miss your guarantee) and your license is in great jeopardy because the league does not want to make money this way – the league wants you to meet and exceed your minimum annual guarantee, not make money off missed guarantees.

I think you get the concept of monthly royalty reporting.

Now for Audits.

When you sign your license agreement with the league, any league, you agree that you can be audited at any time and that your accounting records can be reviewed upon demand by a representative of the league.

Here’s what happened in the real world: I was a licensee of the NHL for a dozen years and was never audited. I was a licensee of MLB for 10 years and was never audited. I was a licensee of the NFL for 10 years and was audited three times, so I will draw on that experience as I relate these lessons from the trenches.

The auditor really wants one thing from you – a mammoth spreadsheet of all your sales, line item by line item, for the period of time being audited. The auditor makes it very clear exactly what columns are required in the spreadsheet (a lot of columns!), and his/her job is simply to audit that spreadsheet against the monthly sales you reported online to the league. The auditor will ask for copies of random invoices and match them to your spreadsheet. And if you have a software system in place like the one I suggested earlier – one that takes your invoices, line item by line item, sku by sku, and produces a royalty report and allows you to export all that data to a spreadsheet – you should sail through the majority of the audit.

It seems to me from my experience with the NFL auditor, and from speaking with fellow licensees, that the auditor prided himself on extracting additional royalty payments from every audit he performed. I don’t say this with malice, I say it because I believe it to be true – I think it may have been a point of pride for the auditor to catch everyone on something. So here are a couple little tidbits to watch for.

1. In the case of the NFL, and this may or may not be the case with the other leagues, licensees are contractually bound to offer the NFL teams (ie the “team stores”, aka the in-stadium stores, aka concessionaires and/or any stores owned by the team whether or not they are in-stadium) the lowest possible price for every product. If you sell 1,000,000 units of something to Wal-Mart for an incredible price, that same price has to be offered to the NFL team store which only buys 100 units. If the auditor discovers that that low price was not offered to the team store, you are going to be writing a check for the difference. In some ways it’s crazy to expect a modest account like the team store to get the same low price as your largest volume customer, but in other ways it’s really quite brilliant on the NFL’s part – of course the teams should get the lowest possible price!?!

2. We will be covering this in greater detail in Part 8, but the NFL actually has a number of different royalty rates that apply to each licensee. I have been using the figure of 12% for the NFL throughout these Blogs, and that is the rate that applies to sales to retailers, but when a licensee sells to a “Distributor”, the royalty rate is actually 15%. Let’s leave for the moment what the difference is between Retailers and Distributors (Blog Part 8), and just accept the fact that they are two distinct groups of customers and each has their own Royalty Rate. Two things of interest about this:

A. When it comes to the monthly Royalty Reporting, there is actually one more report that needs to be submitted, and that is Sales to Distributors (of all products, not broken down by category). This Royalty Rate is 15%.

B. Secondly, while the Auditor performs the audit, he/she checks who you claim to be / and not to be distributors against his list of Distributors, and since he deals with all 100-ish NFL licensees, the Auditor’s list of Distributors is going to be quite comprehensive. So comprehensive that it’s entirely possible that customer X, who you did not know was a distributor, actually is a Distributor according to the Auditor and thus after the audit you will owe the league the 3% royalty difference on all sales to that customer.

3. This next audit tidbit really only applies to non-American licensees, so unless you are based in Canada or Mexico or elsewhere outside of the US, feel free to skip this point. Actually, it could also apply to you if you are an American firm seeking a Canadian NHL license – we haven’t yet covered this scenario – what’s a “Canadian” NHL license, but we will in Part 11 or 12 of this blog. So let me re-phrase slightly – this point applies if you are involved in “cross-border licensing” – if you’re not, then skip this point.

If you are from outside the US seeking a license from a US base league, it is almost certain that you should be paying your federal government a withholding tax equal to 10% of your royalty payments because you are making royalty payments to an entity outside of your country. I am the furthest things from an expert in tax law, but I believe this 10% withholding tax on royalties is a fairly well established part of the corporate tax code – how frightening is the fact that someone actually wrote tax code for this type of scenario!?! The only thing is that it is so obscure, my guess is most accountants (mine included), have never heard of such a withholding tax. So my point is – if you are a licensee involved in cross-border licensing, get some good withholding tax advice on this one or the federal tax authorities will be on to you at some point.

4. One other auditor issue that I experienced is one that only applies in “cross border” licenses, including if someone has a NFL US license and an NFL International license. We haven’t yet covered this scenario – what’s an NFL “US” license and what’s an NFL “International” license, and we will in Part 11 (Sections 3 & 4) of this blog, but the simple story is that in order for you to sell NFL product to a retailer outside the US, you need to have an NFL International license, and if you sell NFL product to US retailers, you need an NFL US license. When it comes to sales reporting, do not mix the two – your US sales are your US sales and your international sales are your international sales. It is awful if you are below your annual guaranteed royalty for one and over for the other, because you are still going to have to top off the one where you are below your guarantee regardless of the status of the other. The simple lesson is this: your US sales are your US sales and your international sales are your international sales, and never the twain shall mix.


That’s all for Part #5 of “An Insider’s Guide to the World of Licensed Sports Products: Royalty Reporting and Audits”.

Thanks for reading and all comments are welcome!

Scott


PS: This is just a quick FYI that in the spring of 2017 Scott Sillcox will be continuing the multi-city tour of North America that he started in the spring of 2013. While in each city, I will be meeting face-to-face with people who want to learn more about sports product licensing.

If you are considering going through the process of acquiring a sports license(s), or if you are considering working with an existing licensee, you should strongly consider meeting with me live and in person. If you have been dreaming about your product and the opportunity it represents for months, maybe years – now’s the time to move your idea forward! Take advantage of me coming to a city near you.

1. You can meet with me for a full day session – from 8:30am – 5:00pm - just you and me (or you and your team if you wish). The full day one-on-one session fee is $1500.

2. You can meet with me for a half day session (4.5 hours) – either in the morning or the afternoon. This half-day session is also one-on-one - just you (or your team) and me. The half day session fee is $900.

3. New for 2017: You can meet with me for two hours - the timing depends on my other meetings. The two-hour session fee is $600.

The cities and dates for the Spring 2017 tour are:
1. Feb 21 - 23 (Tues - Thurs): Boston
2. Feb 28 – Mar 2 (Tues - Thurs): Atlanta
3. Mar 7 - 9 (Tues - Thurs): Washington DC
4. Mar 21 - 23 (Tues - Thurs): Chicago
5. Mar 28 - 30 (Tues - Thurs): Princeton NJ & NYC area
6. Apr 4 - 6 (Tues - Thurs): Cleveland & Columbus, OH
7. Apr 11 - 13 (Tues - Thurs): Dallas
8. Apr 18 - 20 (Tues - Thurs): Ft. Lauderdale FL
9. Apr 25 - 27 (Tues - Thurs): Las Vegas
10. May 1 - 3 (Mon - Wed): Los Angeles
11. May 4 – 5 (Thurs – Fri): Seattle

I can send you a suggested meeting agenda - just ask - but because our one-on-one time together will be totally focused on your needs and your story, no two sessions are ever the same so the agenda is highly flexible.

If your city is not listed above and you would like me to come to you, I’m happy to go almost anywhere in the continental US or Canada as long as you book a full day session and pay a one-time all-inclusive travel fee of $500. Thus for a flat fee of $2000 I will come right to your door and spend a full day with you.

To register, simply call me, Scott Sillcox, at 416-315-4736 or email me at ssillcox@rogers.com and book your face-to-face time - you can lock-in a confirmed session right over the phone.

6 comments:

  1. So what we really need to do is take all these sales figures from our invoices on a line by line basis – literally, and roll all of them up into a monthly report that calculates those 120 figures. That’s maybe 2000 or 3000 line items for that month.

    ReplyDelete
    Replies
    1. Hi Royalty software -

      You got it - that's exactly what's involved and that's why I'm so strong of the opinion that licensees need to arm themselves with a great royalty reporting package that works in conjunction with their invoicing software.

      Thanks -
      Scott

      Delete
  2. What if you are just interested in a single NFL team because you are small company with just a regional interest? Does the NFL grant any type of license for that.

    ReplyDelete
  3. Hi -

    Many thanks for the note and could I encourage you to contact me via regular email (ssillcox@rogers.com) and I will answer the question in a bit more depth via regular email.

    Thanks -
    Scott

    ReplyDelete
  4. In your experience, was the auditor an employee of the licensing organization, a small 3rd party niche firm, or a 3rd party large accounting firm (most likely one of the big-4)?

    ReplyDelete
    Replies
    1. Great question that hardly anyone asks - it's your middle option - a small 3rd party niche firm.
      All the best - Scott

      Delete

Thank you for taking the time to add a comment - all input is welcome, especially the constructive kind! All the best - Scott