Why I Might Want to Start and Own a Business and How to do it Without Having the Necessary Funds?

Starting and owning a business, if it becomes successful, is both a path to personal profit and wealth, as well as freedom from a range of restraints which otherwise have to be accommodated.

Successful business owners have the power to make decisions which may be wrong in terms of achieving desired results, without employee penalties. They also can decide the balance between lifestyle wants and the obligation to achieve and report maximum levels of company profitability.

Decision-making abilities include: office location and decoration, work facility equipping, employee policies regarding comfort and training, executive health, retirement and other benefits, travel and marketing expenditure policies, staff selection and management, customer-related expense reimbursement policies, etc., etc. Business owners also can do good for others and be so recognized.

The benefits of founding a business which becomes successful are restricted if other people’s money is used in traditional approaches of debt or a sharing of ownership. In the case of debt, there are likely to be required repayments and restrictions on how the money borrowed is used, as the motivation of the lender is focused earning interest and being assured of the repayment of the loan.

If the ownership is shared through the sale of stock in the company or the use of some other form of partnership, there will be a fiduciary obligation to manage the company for maximum reported profitability.

The reason for this is that the partner or share-owning participant will be primarily interested in having the ability to sell the interest they purchased, at a time in the future when the business will be work much more, due to the history of increasing profitability and prospects for continuation.

If the realistic intent of the founding business owner is to go public then the interests of the investors and the controlling owner are in sync and all is fine. However, if the founding business owner is primarily interested in enjoying the benefits of private company ownership there is a conflict of interest between the parties.

The solution and that which is in the best interest of both investors and business founder is for the company to sell to investors a percentage of the company’s revenues.

To accomplish such a sale the investor must be satisfied with the projected revenues as being achievable with the funding being sought, the projected royalty payments, which will be a function of the period of royalty payment and the royalty rate. The early stage company royalties we structure are intended to provide the investors with an Internal Rate of Return of more than 15%

Of course, there will be both investor protections, including an ability to terminate the royalty at the end of 60 months for the amount paid, less the royalty payments made.

There will also probably be an issuer right of redemption permitting the issuer, on terms as to the multiple of investor cost as agreed at the time of the royalty purchase. In the case of early-stage companies, we frequently suggest the redemption right be 5 time the investor’s cost if within 5 years and 10 times if the redemption occurs between the ends of the 5th and 10th year. This would produce more than either a 38% or 26% Internal Rate of Return if there were royalty payments prior to the issuer exercising their right. It is also possible the issuer will seek to negotiate the termination of the royalty directly with the royalty investor.

The point of all of this is to describe how funds can be raised for a new business without ownership sharing and still allow the investor to participate in the success of the business.

There is much more to royalty issuance and investing than described herein and a full understanding can be achieved by reading my new book, Revenue Royalties, which is available through Amazon.com or directly from REXRevenueRoyalties.

Arthur Lipper, Chairman, British Far East Holdings Ltd.

Copyright 2018 British Far East Holdings Ltd. All rights reserved. 

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