There are many reasons why the owners of successful, privately-owned companies might wish to obtain additional growth capital to increase revenue and make their businesses worth more without involving partners or additional owners.
Business expansion reasons include:
- increasing marketing
- acquiring a competitor
- recruiting key associates and senior executives
- re-equipping manufacturing facilities
- opening branch offices
- acquiring rights to additional products
- researching new processes or products
- expanding international sales
Business ownership considerations:
- debt
reduction ownership consolidation (buying out a partner)- going “private” if there are other shareholders
- increasing overall profitability
- preparing for
sale of business - acquisition or termination of liabilities
Financing any of the above objectives may be accomplished without incurring debt or diluting ownership if royalties are used.
The royalty investor will likely seek to negotiate a royalty rate providing a reasonable current return and an internal rate of return (IRR) in excess of 15% over the course of the royalty payment period.
As the investor is basing the investment decision on the royalty issuing company’s increasing projected revenues, the investor will wish for a longer-term royalty payment period.
Conversely, the royalty issuer will naturally want as short a period as possible due to the fact that all royalty payments would be pre-tax profits if not paid to the royalty holders.
Therefore, we suggest 20-year royalty payment periods to justify lower royalty rates, with an agreed royalty issuer redemption right permitting the issuer to reacquire the royalties for an agreed multiple of the investor’s cost, less the amount of royalties distributed.
Of course, the royalty issuing company can, at any time, offer to purchase the royalties from the investors, either directly through individual negotiation or by making tenders to all of the royalty investors.
Tools for the negotiation and use of royalties are found at: REXRoylties.com, REXdebt-shareRoyalties.com, REXScaledRoyaltiues.com, and REX-RIAR.com. REXComparator.com and REX-PV.com are also helpful.
Those interested in learning more about royalties are encouraged to visit REXRevenueRoyalties.com where they will be able to purchase for $9.99 a copy of Revenue Royalties, a full compendium of my writings regarding the use of our patented approaches to using royalties in the financing of businesses.
Royalties are the better way of both investing in and financing privately-owned companies.
Arthur Lipper, Chairman, British Far East Holdings Ltd.
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