Jen: This is The PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski and I’m back once again with Carlos Gomez, an audit manager, and one of the faces of PKF Texas’s Contract Compliance Services team. Carlos, welcome back to The Playbook.

Carlos: Thanks for having me Jen.

Jen: So, we’ve been talking about different kind of audits throughout the series, and how about you share a little bit about what a royalty audit is.

Carlos: A lot of royalty audits that we performed is on behalf of a client who is not necessarily in a certain industry, whether it be consumer goods, toys, apparel, those types of things. And for this specific instance, we have a client who is in the automotive industry, and a way to build their brand recognition and loyalty is to have toys and have apparel. And so, a kid gets a truck, and his dad has a Ford F-150, and they get a Ford F-150 toy car for Christmas. It kind of builds that loyalty and brand loyalty.

Jen: So, when they’re building that brand loyalty, where does the royalty audit come in?

Carlos: So, typically with us it comes in three-to-five-year spurts where we’ll come in and we’ll do an audit of that third party, just to make sure they’re paying the right amount of revenue back to our client in royalties, and that they are obeying by the terms. Our clients don’t want their trademarks used on products that aren’t becoming of them in the marketplace.

Jen: So why would somebody bring us in then to do that audit?

Carlos: They could do it, but it just holds a little bit more weight when it’s a CPA firm with the type of experience that we have, and they are able to ask the difficult questions.

Jen: So, Carlos what kind of results have we found for clients with these royalty audits?

Carlos: Typically, you’ll hear in the industry they talk about 10% is a standard, but that all varies. You know, how big is that third party licensing, do they have a lot of other licensors, were they licensed trademarks, and have a big portfolio of products that they offer.

Jen: So, at what points should somebody call us to help them with this type of audit?

Carlos: Usually anyone who has, for three to five years, gotten at least a half million dollars’ worth of revenue or royalties, that’s usually a good time to audit a third party.

Jen: Well, Carlos, that sounds perfect. We will get you back to talk a little bit more about some other services that we offer, sound good?

Carlos: Yes ma’am, thank you.

Jen: For more information about this topic visit pkftexas.com/contractcompliance. This has been another thought leadership production brought to you by PKF Texas – The Entrepreneurs Playbook. Tune in next week for another chapter.