Creating vs. Acquiring
Which is easier to achieve, increasing operational revenues or acquiring revenues through the purchase of revenue generating businesses?
For which business strategy is there a more predictable result from investing the necessary funds and other resources?
Assuming that sophisticated investors will seek to participate in a company’s revenue growth through the purchase of revenue royalties, which approach is likely to be assessed as being more predictable, faster, and probably a better bet?
In the current economic environment, the acquisition of another company and its revenues is more easily financed than the more time-consuming endeavor of increasing revenues through the successful marketing of a royalty issuing company’s goods or services.
It used to be that professional investors sought to be longer-term participants in the growth of highly promising privately-owned companies. Now, with the intensified competition among money managers for client assets, their focus has shifted to shorter-term and less volatile investment results.
Therefore, we believe that business owners will have greater success in obtaining royalty-based financing, if the funds received for the sale of a royalty are used to acquire existing businesses and their revenues. The acquisition of revenues can be based on buying a company or a company’s assets as necessary to generate revenues, and of course, this includes the necessary “order book” and other marketing assets of the entity selling the revenues.
The acquiring company and the investors providing the financing will have to research the revenue maintenance and growth of the revenues based on customer satisfaction, competitive threats, intellectual property protections, and product or service competitive pricing. From an equity investor’s perspective, the terms of the acquisition are of significance, whereas the royalty investor is primarily concerned only with the continuation and growth of revenues.
Of course, the well-advised business owner will want to be able to terminate the royalty, by paying a premium or exercising a right of redemption based upon meeting a pre-agreed multiple of investors’ cost terms. These terms will likely include a credit for the amount of royalties already paid in the period to the royalty investor.
The well-advised royalty investor will require being satisfied with the reasonableness of the revenue projections, including the royalty issuing company’s revenues, both before and after financing of the prospective acquisition.
Realistically speaking, the royalty issuer is highly likely to exercise the right of redemption, so longer-term revenue projections will not have the same significance as they would in the absence of the issuer’s right of redemption. While the Internal Rate of Return for the period of the investment will be highly satisfactory, the invested funds will only be productively employed for a shorter period than a typical long-term royalty contract because of the redemption option.
Royalty investors, in transactions using our recommended terms, will have a safer and more predictable investment than would be the case were they to be equity holders seeking price increases that can be influenced by the volatility of enterprise profits. Royalty investors are effectively the landlords of the money used to grow the business.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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