When one thinks of royalties, the money paid to top recording artists usually comes to mind. Their spacious mansions, exotic getaways, and fast cars are supplemented by the monies received from music sales. Authors are paid royalties by a publisher for the right to publish his or her work. A percentage of the box office receipts during a play’s run go to playwrights. Even you as an entrepreneur or businessperson, you may be entitled to royalties surrounding the use of your intellectual property. You are granting permission to an entity for use of your creative concept – the fruits of your labor, while allowing them to benefit as well.
How royalties operate is hinged on the contractual agreement between the owner of the intellectual property (“licensor” for the sake of this post) and the one who will be using, manufacturing, or marketing the patented or trademarked product (“licensee”). Within the contract, the terms and conditions of royalty payments are outlined. Five percent (5%) of net sales is the customary amount; however, certain industries have a standard that exceeds this percentage. If royalties are set too high within the contract, it won’t be profitable for the licensee to do business. The work-to-profit determinations have to be figured in such a way that the licensee doesn’t price itself out of the market.
Included in the contract may be a provision for a lump sum payment to the licensor. These are really advances on the future royalty payments. If the intellectual property fails to produce the anticipated future royalties, the loss to the licensee could be taken as a write off or recovered through litigation.
The next installment will explain what royalties mean to your bottom line as an entrepreneur or businessperson.