Agreed royalties are paid to Investors at the time the royalty Issuer receives or deposits revenues in the Issuer’s account, at a specified bank the Investor has approved.
Issuers grant Investors a right to require the Issuer to repurchase the royalty at the Investor’s cost, less royalty payments received by the investor, at the end of an agreed period, which thereby terminates the royalty. This is similar to a Continental “put” and is unlikely to be exercised if there are any expectations of significant revenues, because of the desire of investors to maximize revenue participation. There is an issuer benefit from possibly delaying the recognition of the amount received for the royalty to be understood.
Temporary transfer or assignment of the Issuer’s “critical assets” to an agreed third party. The critical assets are exclusively licensed, internationally, without charge, to the Issuer, subject to the royalty payment terms of the Royalty Agreement. Therefore, this is the third party’s only real power to cancel the license in the event the Issuer receives revenues without making an immediate payment of the agreed royalty amount to the Investors.
Issuers may agree to pay a minimum amount periodically or cumulatively as a basis for negotiating a reduced royalty rate. In these cases, there may be additional investor protections reflected in the specific royalty agreement or overall process.
Issuers will be required to provide agreed financial information about the Issuer. This will include defined auditable related data and access as agreed. The form of communication and informational data regarding the Issuer will be agreed as well as specifying the responsible Issuer executive with whom the Investors have a right of access.
Issuer protections and benefits:
The Issuer’s “Right of Redemption” in the Royalty Agreement permits the Issuer, should they wish, to acquire all of the outstanding royalties for an agreed multiple of the amount received from investors at the time of the transaction, less the cumulative amount of royalty payments already paid to those Investors. Therefore, on agreed terms and conditions, the Issuer may terminate all future royalty payment obligations.
Issuers may, at their determination, contact any or all of the Investors in an attempt to negotiate the purchase of any or all of the royalties owned by the Investors.
Issuers may make a tender, offering to purchase from Investors all of the royalties owned by those Investors.
Issuers may make a tender offering to all of the Investors to sell-back a stipulated number of royalty units. In this “Dutch Auction” offering Issuers can buy as many royalty units as possible for a stated amount. Therefore, Investors wishing to sell some or all of their royalty units indicate the price at which they are prepared to sell their royalties. The issuer then will buy, for the same unit price, the royalties most attractively offered.
In all royalty transactions involving Investors and Issuers the parties negotiate the terms, either at the time of the pending transaction or, in the case of exercising the right of redemption, at the time of royalty repurchase.
Overview – Fairness in balancing of royalty agreement terms:
The REX website calculators we have conceived and developed allow users to understand the impact of the variable terms of the contract.
The reality of all financial transactions is that the more secure the investor capital, the lower will be the Investor’s acceptable use fee for the capital employed.
Investors must balance risk of capital or income loss, versus the level of expectation for the income or gain to be received. Being too conservative and risk adverse results in Investors earning less than may be reasonably desired. Being too greedy and allowing the “wish to become the parent of the thought” by not adequately discounting predictions made by those seeking capital result in Investors losing money.
The for investors advantage of royalties is that buying a part of an established company’s revenue stream, especially using our recommended approaches, is quite secure and even more profitable if the revenues of the royalty Issuing company increase, in part due to the use of the Investor’s capital.
The benefit to the Issuer is the advantageous ability to raise capital without giving up a share of the ownership of the business. Business owners become fiduciaries, responsible for the use of Investor’s capital, if stock is sold to outside Investors. Also, the prerogatives of private company ownership may be in conflict with that which is in the best interest of the minority shareholders.
The royalty Issuer’s Right of Redemption, allowing the termination of the royally, significantly enhances the attraction of royalty-based financing for the business owner, in addition to not having to share business ownership until it possibly becomes more advantageous for the owner to do so sometime in the future.
Arthur Lipper, Chairman
British Far East Holdings Ltd
858 793 7100
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