royaltybasis

Royalty basis is the metric used to determine royalties payable under licensing agreements for intellectual property, technology, brand use, or content. It defines what amount the royalty rate is applied to and can significantly affect the total cost for the licensee and the revenue for the licensor. The term is common in licensing, franchising, and publishing contexts and is established by the contract between parties.

Common bases include net sales, gross sales, revenue, or per-unit quantities. Net sales or net revenue typically excludes items such as returns, allowances, and freight charges, as specified by the contract. Gross sales is the total invoiced amount before deductions. Per-unit royalties are fixed amounts paid for each unit sold, regardless of price. Some agreements combine bases or use tiered structures that apply different bases at different volumes or product categories.

Calculation examples illustrate the concept. If a license provides a 5% royalty on net sales and net sales total 2,000,000, the royalties would amount to 100,000. The same principle applies to other bases, with the rate applied to the defined base and any contract-defined adjustments.

Practical aspects include reporting and payment schedules, typically quarterly, and the need for accurate accounting to determine the base. Licensors often reserve audit rights to verify calculations and allow adjustments for errors or post-period changes. Currency, tax treatment, and treatment of returns or discounts are also defined in the agreement. Selecting the royalty basis can shift risk between licensors and licensees and influence pricing strategies, product mix, and overall profitability.