FAQs

Most license agreements permit royalty audits once every one to three years, and best practice is to conduct audits on a periodic and risk-based basis. Factors influencing audit frequency include the complexity of the royalty structure, changes in the licensee’s business or systems, geographic expansion, mergers or acquisitions, and unexplained fluctuations in reported royalties. Regular audits help licensors identify issues early, reinforce compliance expectations, and protect long-term licensing revenue.

When approached professionally with experienced royalty auditors and within the framework of the license agreement, royalty audits do not harm business relationships. Most agreements explicitly provide audit rights, and reputable licensees understand that periodic verification is a standard governance practice. Clear communication and a focus on factual compliance help maintain trust. In many cases, audits actually strengthen relationships by resolving legacy issues, clarifying expectations, and improving reporting accuracy going forward.

While results vary by portfolio, our experience is that a significant percentage of audits uncover underreported royalties due to rate misapplications, unreported revenue streams, deduction errors, or product misclassification. Recoveries often span multiple reporting periods, making even small discrepancies meaningful. Beyond the immediate financial benefit, audits provide long‑term value by improving reporting processes, reducing future errors, and increasing the reliability of your royalty revenue stream.

The duration of a royalty audit depends on the complexity of the agreement, the quality of the licensee’s accounting and reporting systems, and the licensee’s responsiveness during both the pre‑fieldwork and post‑fieldwork phases. From the date the audit notification is issued, a draft report is typically available within a few months. In practice, most substantive issues are identified and communicated verbally with you within the first few days of onsite work. Fieldwork at the licensee’s head office is generally budgeted for four to five days, with additional time allocated for data analysis, follow‑up inquiries, and preparation of the audit report.

Most licensors benefit from conducting an initial royalty audit within the first three years of commercialization. Early audits help confirm that the licensee has implemented the contract terms correctly, that reporting systems are aligned with the agreement, and that any misunderstandings are addressed before they compound. Waiting too long can allow substantial amounts of underreported royalties to accumulate, increasing both financial exposure and the likelihood of disputes, as licensees may challenge older findings. Establishing an early audit sets clear expectations for compliance and supports a consistent, risk‑based audit cycle going forward.