Royalties, which are an agreed percentage of a company’s defined revenues, paid for an agreed period by the issuing company to the owner of the royalty, are not well understood. Prospective issuers and some investors keep looking for the hidden faults or potential problems. Deciphering the above optical illusion is accomplished by observing as much of the leg as possible, and not just the feet. The same recognition of the whole picture is necessary in order to understand royalties.
When the utility of a tool is being considered by a prospective user the questions that need to be asked include: What will the tool do for me that is more or better than what I can do without the tool? How difficult will it be to use the tool? How much will the tool cost and how often will I use it?
Royalties are a tool that businesses can use for raising capital without taking out loans or selling stock in their company. The greater the company’s future revenues, the more the investor owning the royalty will receive. However, the owners of the business will continue to own as much of their company as they did before the company raised capital through selling a royalty.
Also, in the approaches we recommend the company selling the royalty has a redemption right, which permits the termination of the royalty, on terms agreed at the time of the purchase/sale of the royalty.
From the investor’s perspective, once there is sufficient comfort that the issuing company is sustainable, the entire focus will be on the ability of the company to grow its revenues, in part as a result of the funds obtained from the sale of the royalty.
The investor is only interested in receiving the agreed-upon percentage of revenues. It’s that simple. The royalty investor has no ownership interest in the company issuing the royalty, and therefore is not concerned about levels of reported profit or the resulting change in the valuation of the company.
Therefore, the company’s likely ability to, at least, generate the revenues which have been initially projected, according to the terms of the royalty, is the primary area of investor concern and focus. The company’s ability to generate revenues of a sufficient amount to pay the investor’s anticipated minimum amount of royalties requires an analysis of both the royalty issuing company and the economic prospects for its customers. The terms of the royalty must protect the investor in both the event of success and failure.
These protections are negotiated as the terms whereby the company may redeem all or a portion of the outstanding royalties. The amount to be paid by the company to the investors will include a credit for the royalties paid plus an amount necessary to satisfactorily reward the investor.
Our six website calculators can be used by both parties and their financial advisors in structuring a royalty agreement meeting the needs of all concerned. My associates and I are available as advisors, and those interested can review: the Journal at arthurlipper.com, our royalty calculation website at REX-Basic.com and “Off The Top” and “Revenue Royalties”, both in eBook and soft cover versions at Amazon.com.
© Copyright 2019 British Far East Holdings Ltd. All rights reserved.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7100
Blog Management: Viktor Filiba