My job is to invest client money, obtaining the highest returns with the least risk. I reserve the right to believe every fact you tell me and you will be penalized for any untruth discovered. You may give me your opinions and expectations, if labeled as such, without personal penalty.
If I decide to invest client money by purchasing a revenue royalty, an agreed percentage of your company’s defined revenues, for an agreed period on agreed terms, it will be because I believe that it will be good for both of us.. You can expect a closing of the transaction in 60 to 90 days, depending on the time required for negotiation and subsequent due diligence. Your company will reimburse us, at the closing, for all previously approved expenses associated with our negotiation and conducting the due diligence.
The terms of the royalties which are of interest to us include the following terms and conditions:
A repurchase option, terminating the royalty, exercisable only at the end of 60-months, at our cost, less the amount of royalty payments received to date.
Critical assets of the business temporarily transferred or assigned to an agreed independent entity to assure the company’s contractual compliance regarding the payment of the agreed royalty amount on company’s receipt of revenues.
Your company will have an issuer’s right of redemption, terminating the royalty, on the payment of an agreed multiple of our cost of royalty purchase, less royalties previously paid to us, depending on the timing of exercise.
There are other minor details to be agreed such as whether a full annual audit or only an audit of revenues will be required. The amount and timing of information regarding the company and possible access to certain agreed Board of Director actions will also be required.
My job is growing my company and to do so in ways which will neither reduce my present ownership of the company nor require that I personally guarantee company obligations.
I may wish to arrange a refinancing of the business, sell the company or go public. So the redemption right is therefore most attractive and is likely to be exercised.
Amount – the amount sought for the royalty should be sufficient for the company to achieve an important objective, at which point other refinancing options may become more available to the company
Royalty payment period – the longer the royalty period the lower can be the percentage of revenues for the investor to achieve their target Internal Rate of Return. The minimum period should be 10 years and the maximum 20 years.
Royalty Rate – the percentage of revenue can be fixed for the payment period or be reduced on the investor’s receipt of agreed cumulative levels of payment. The REX website calculators we have developed allow users to ascertain the impact on working capital of committed royalty rates. REX-Basic.com is the simplest and REX-RIAR.com the latest and most complex.
Right of Redemption – will be something like 5 times the cost of the royalty, if exercised in 5 years and 10 times the cost of the royalty if exercised in 10 years, in both cases, minus the amount of royalties already paid, on a time of receipt scale. The 5-year return would be for more than a 38% Internal Rate of Return (IRR) and the 10-year model would result in more than a 26% IRR. The “more than” is due to the effect of an investors probable Reinvested Royalty Rate of Return (RRRR) based on the reinvestment of the royalty payments as received at an investor estimated fixed interest rate. The more successful the company the more likely is the exercise of the right of redemption.
The essence of the negotiation will be the investor’s assessment of the revenue projections provided by the prospective royalty issuing company and their achievability. It is also possible that a Royalty Payment Assurance Company (RPAC) could assure the investor of the cumulative receipt of the investor’s cost at the end of an agreed period. However, the royalty issuing company would have to pay the RPAC a fee for such a royalty rate reducing assurance and the investment reality of “less risk, less return” would have to be considered by the parties.
Royalties can be as flexible as is necessary to achieve agreement between the parties and are truly the better way for an investor to benefit from the revenue growth of the royalty issuing company.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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