Licensing agreements often allow an artist to retain ownership of a work even though another person or company manufactures or markets it. The artist also typically receives royalty payments, which are a portion of the income generated from the licensed artwork sales.
The agreement may include an advance payment of royalties. If so, that payment is recouped by the licensee before any other future royalties go to the artist. Occasionally, an artist may negotiate a one-time license fee instead of an advance on royalties. Such fees aren't deducted from future royalty payments.
Gross sales and net sales are often considered when calculating royalty payments. Gross sales are the total amount customers pay who use the licensed art. Net sales are gross sales minus deductions that could include tax payments and any returns of the product. Royalty payments are then calculated by multiplying the agreed upon royalty percentage by net sales.
If an artist agrees to a buyout, a licensee will pay a flat fee for the one-time use of the artist's work. Be aware such agreements also could include unlimited reproduction rights, where the artist loses all future rights to reproduce his own work and profit from it.
The artist or artist's representative should require the licensee to provide access to records to monitor the agreement. This audit provision will help the artist keep track of royalty payments and spot any shortfalls.