Author Michael Thomsett posted a comment in a previous entry about cross accounting, he says–

I would recommend every author cross out the infamous “cross collateralization clause” – a mouthful, but important stuff. This is usually some reference like, “Author agrees to that any amounts due on this or any other agreements may be withheld from earnings…” This means that if you write two books and one doesn’t earn out its advance, the publisher can apply earnings from the second book to the first.

This is good advice and it’s probably one of the best tools in an agent’s arsenal, something that authors might not learn on their own until they see lots of royalty statements. I thought I’d offer a little more perspective on co-accounting (a.k.a. cross accounting or cross collateralization) because it comes up in a variety of scenarios.

What is co-accounting?

Just what Michael said. You might have two books with $10,000 advances, but if one does great and the other poorly, you still won’t see any money until the entire $20,000 advance earns out. The “tell” is when you see the words, “under this or any other agreement” in your contract.

Co-accounting is a tool publishers use to reduce their risk, and we all want to reduce risk so it’s not really a surprise that it’s in your contract. You should be able to remove or modify this clause, but some publishers will balk at this with a new or unproven author. If you decide you can live with it on your first book, you should certainly address the issue before you sign a second book with that publisher. You might also ask that co-accounting be limited to future editions of that book only.

Co-accounting of advances

Co-accounting of advances is usually a bad deal. There are rare circumstances where it might work okay: for instance, an author and agent may agree to cross accounting on a series contract because they are sharing the risk on a full list of titles, but this is usually balanced by a strong royalty and large advance.

Co-accounting and returns

Even if you strike the co-accounting of advances, your publisher will want to keep the right to take “overpayments” from future earnings. You can make sure that “advances are not considered overpayments,” but it’s unlikely that your publisher will say the same of returns. In general I think this is fair. Returns hover at 20% for computer books, and most authors don’t expect to be paid for books that were subsequently returned.

Co-accounting and subsequent editions

If you’re dealing with books that are revised and re-released every few years — something that invariably triggers returns — you’ll find that your publisher may want to reserve the right to co-account your first edition against your second edition advance, and so on. Again, this protects a publisher from the cost of returns on the first edition.

What about reserves, don’t they cover returns?

Sure, over time they should. But something funny can happen when you have both co-accounting of editions and a certain reserve clause. Ideally, a publisher would deduct the returns from your reserve, but some will try to deduct the returns from books with positive sales, and keep the reserve pool flush for a period of time. This invariably delays your money. 20% of your sales are held in escrow, as it were, and your returns are debited against your other books. It doesn’t mean that you won’t get paid, but it forestalls that payday.

Publishers without reserves

A few publishers don’t hold a specified reserve unless they see a wave of imminent returns, but they do typically co-account advances and royalties against future editions to protect themselves from the returns on the first edition.

Success is your best weapon

In the best scenario, your books are doing so well that your returns are more than offset by multiple streams of income across multiple books that are not co-accounted. If you’re successful as an author, you can convince your publishers to limit co-accounting and also to release reserves when they climb too high. Cross accounting clauses hurt the mid-list authors of oft revised books most of all, since some of these books are only eaking out their advances before they need to be revised and updated. It’s worth asking whether they’re really worth the effort.

At the very least, make sure you understand what your contract says, and ask your editor as many questions as you can about the royalty accounting and payment system up front, especially before signing that contract for book two if you didn’t already manage it with book one. Otherwise you may not learn what your contract really says until you see the royalty statement in your hands.

Standard “I don’t know everything disclaimer”

Your mileage may vary. This post is most germane to computer books, textbooks, and reference titles. Every publisher’s system has its own wrinkle, and I’m sure I’ve missed a few points here. Please feel free to post your comments, questions, or pointers to other resources that may cover this topic as well.

  One Response to “The Varieties of Co-Accounting”

  1. Great post, Matt!

Sorry, the comment form is closed at this time.