“Revenue Royalties,” as used in the financing of businesses, are an agreed percentage of defined revenues, paid to investors purchasing the royalties for an agreed period on agreed terms and conditions.
In other words, there may be negotiations regarding all elements of a royalty. The revenues can be all-inclusive, or revenues from specific geographic areas, or based on specific products or services.
The percentage of revenues, or royalty rate, can be fixed throughout the agreed royalty payment period or may change on the receipt of agreed amounts within agreed periods.
The royalty payment period is as agreed between the parties, with the royalty issuer seeking shorter periods than the royalty investor. The period of royalty payment impacts the royalty rate, with longer periods justifying lower royalty rates. We suggest 20-year terms with issuer redemption rights.
When using our website calculators there is a suggestion to the royalty issuer to enter a 20-year projection of revenues. The projected revenues are not, unless agreed, assured by the royalty issuer.
The issuer projections are estimates and are usually optimistic. To make it easier and more realistic for the issuer, most calculators have a Compound Annual Growth Rate (CAGR) entry capability for three different annual periods so the issuer need only enter a specific projection for the first few years and then estimate the CAGR for the revenues for the ensuing years.
In the case of the REX Scaled Royalties approach the calculator facilitates the use of benefits and penalties for the royalty issuer achieving better or worse results than projected, by agreed percentages for agreed periods.
It is our belief that estimating revenue levels and trends is far easier than predicting specific per-share earnings results.
Revenues are subject to both the royalty issuer’s customer satisfaction and the issuer’s marketing expertise and budget. Revenues of companies are impacted by the economic outlook for their customers and the country’s economy.
There are usually sources for impartial and expert opinions as to longer-term relevant industry expectations. There is also a range of factors which make accurate projecting difficult. These include competitive factors, changes in the economics affecting the industries or country, and changes in company management decisions.
Therefore, we believe that eventually the Royalty Issuer Assured Return (RIAR) as suggested in REX-RIAR.com, will become a standard as the minimum royalty will be assured by the issuer.
It is also possible to make the royalty even more attractive to investors, therefore justifying a lower royalty rate; the assurance were to be buttressed by an independent third-party.
It must also be ever remembered that royalties can be structured for capital recapture to occur within 5 years and that our approach provides for other projections of investors interests.
Royalties are the better way of both investing in and financing of privately-owned companies.
Arthur Lipper, Chairman, British Far East Holdings Ltd.
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