Yes, it is possible to purchase royalties from companies which offer an assurance of paying royalty investors a minimum royalty payment. The payment may be a cumulative amount at the end of an agreed period or cumulative royalty payments.
Yes, it is possible for some investors to borrow money. Currently, loan interest rates are relatively low and lending institutions are prepared to make loans on attractive terms to qualified borrowers. The maturity of the loan should be the 5 years royalties frequently require to fully return in royalty payments the amount paid for the royalty. It may also be possible for the royalty rate paid and assured by the issuer to be modified in the event of significant changes in interest rates.
If the royalty rate paid results in a higher payment, beyond as a percentage of the amount necessary to buy the royalty, there would be an assured minimum profit.
There is only a single problem and that is when the commitment to assure the payment of the minimum royalty amounts is not honored. The risk which is really being addressed is that the company’s revenues will not be sufficient to result in the agreed payment of the minimum royalty. Of course, the company’s contractual commitment is to pay the minimum royalty payments, irrespective of the level of revenues, and this is what the assurer is assuring.
Therefore, the investor must be comfortable that the assurer of the payment is financially responsible. The assurer can be a financial institution or another party having an ability to give the investor the necessary comfort.
If the royalty payments are used to repay the loan used to purchase the royalty, the investors liability is reduced with each repayment. Once the loan has been fully repaid the investor owns the royalty debt-free.
For an American taxpayer the interest paid by the borrower is income tax deductible and the royalty payments received are a return of the investor’s capital and therefore nontaxable, until the amount paid for the royalty has been recaptured. Thereafter, the royalties received are considered to be ordinary income, the same as dividends, by the investor. It is possible for the investor to sell the royalty for a capital gain taxable premium, reflecting the remaining years of royalty receipt entitlement. Non-tax consequence institutions and the royalty issuing company are logical buyers of the royalty at that point.
In the royalties we structure, the royalty issuing company uses its critical assets, such as: intellectual property, brand names, trade secrets, customer contracts and whatever other assets are negotiated, to be UCC liened or otherwise protected by and for the royalty investor in the event revenues were received by the royalty issuer, without the agreed royalty payments being made. Also, the royalty issuing company is required to pay the investor, directly or through an agent, the agreed royalty immediately on receipt and is required to deposit all revenues in banks approved by the investor. The terms of the royalty may be modified at such time as the investor’s capital risk has been eliminated.
In the event the investor requires the assurance of a financial institution or other party, the royalty issuing company will pay a fee to the assuring entity. The royalty issuer offers the assurance in order to justify paying the investor a significantly lower royalty rate for reducing, if not eliminating, the investor’s risk of the transaction.
Currently, the situation is very favorable for royalty investors as many successful, privately owned companies are seeking non-equity dilutive expansion capital at the same time as interest rates are low.
Of course, the reality of the marketplace is that established companies are able to acquire capital on terms more favorable than high potential early stage companies, even though the revenue growth prospects of the newer enterprises may be far greater than the businesses just seeking to expand further and faster than presently possessed capital permits.
We can help.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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