Once a definition of gross turnover is clearly defined, it should serve as a reference for the limitation of allowances, rebates and yields (either by fixed amount or by percentage) deductible for the purpose of calculating royalties. Do not limit reductions and value adjustments as a percentage of net turnover, as this leads to a circular calculation. Licensing agreements cover a wide range of known situations. For example, a retailer could enter into an agreement with a professional sports team to develop, produce and sell merchandise bearing the sports team`s logo. Or a small manufacturer may allow a production technology owned by a larger company to gain a competitive advantage instead of having to spend time and money developing its own technology. Or a greeting card company could agree with a movie distribution to produce a series of greeting cards with the image of a popular animated character. In addition to the details of all parties, license agreements define in detail how authorized parties can use features, including the following parameters: Normally, the theme of a license is that the licensor is passive, receives only license payments, while the licensee participates in the operation or development and is free to exploit it as long as royalties are paid and other criteria are paid. are filled. Failure by licensee to comply with the license agreement usually results in termination of the license and payment of damages to the licensor. A common mistake in many license agreements is simply to define gross revenue as an “invoiced selling price.” This definition leaves the taker with many flaws, such as for example. B the possibility of deducting from the sale price of the invoice unauthorized discounts and certificates, which leads to a decrease in gross and net turnover. Where a licence agreement limits the nature or amount of rebates and allowances, the licensee may circumvent those restrictions by inserting undue deductions into the invoiced price. It is therefore desirable to ensure that the definition of gross turnover is linked to the “list price” or any other measure that is difficult to manipulate, such as the highest actual selling price.
Alternatively, you can set gross revenue as an invoice price before deduction, which is better than “invoice price.” However, this approach remains unclear and open to interpretation. Deductions. Reducing gross turnover for deductions is common, as many retailers require discounts and allowances from suppliers. However, for the calculation of royalties, make sure that only deductions that are measurable, that relate to the sale of licensed products and support the licensee`s ability to sell those products in the retail environment. For example, discount premiums and price protection increase turnover and should be deductible from the licensee (up to a limit). On the other hand, discount and freight deductions benefit the customer exclusively and should therefore not be regarded as part of the calculation of royalties. Licensees should not be allowed to deduct their selling, shipping, storage, general or management costs, as licence deductions should only cover certain amounts `refunded` to customers. Unlike the recording of transactions, cash deductions should be recognised when sums are actually credited to the customer.
In order to preserve the integrity of the licensed marks, total deductions should be limited to a percentage of gross turnover. Such ceilings are generally between 5 and 15%. In poorly structured agreements, we often do not find a specific definition of gross turnover. Often, there is a vague starting point that often begins: “Net sales are less sales… “, which allows the licensee to interpret what is explicitly communicated and what is not. However, the definition of gross turnover is not as simple as it seems, depending on the licensor`s objectives and the contractual limitations of deductions. . . .