Royalties Are…

Royalties are the better way of both investing in and financing privately-owned companies.

Royalties are fees which owners of property, including; land, natural resources, equipment, intellectual property, personal service (professional athletes, performers, musicians, authors) and money receive, as a percentage of the revenues produced using the provided assets.

The owners of a business requiring capital, to be used for the expansion of a business, should prefer non-equity dilutive financing, if available, rather than the sale of any ownership of the business if they believe the value of the business will increase based on the planned expansion.

The revenue generating company sells an investor a percentage of the revenues of the business for an agreed period of time and does not sell the investor any ownership in the business.

The longer the royalty payment period, the lesser can be the royalty rate percentage of revenues paid for the use of the investor’s capital.

It is fair and reasonable that royalty agreements contain clauses permitting royalty issuers the ability to terminate outstanding royalties on pre-agreed terms, usually expressed as multiples of the investor cost, less royalties paid.

It is even possible that pre-revenue companies could sell royalties to investors if the prospect for revenues is of sufficient magnitude and within a predictable time period.

We have developed a number of approaches for using royalties in the financing of businesses which meet the needs of both royalty issuers and investors.

Royalty investors should have significant capital protections, as the more secure the investor’s capital, the lower can be the cost of the capital.

Royalty income funds can be geographically and industry focused.

Royalty income funds can either retain or pay royalties to investors,

It is highly unlikely there would be significant capital risk in a diversified royalty income fund buying royalties from established companies having satisfactory profitability and increasing revenues at the time of investment.

The Reinvested Royalty Rate of Return (RRRR) will always be higher than the Internal Rate of Return (IRR), due to the Fixed Return the investor receives on the reinvestment of the quarterly royalty payments.

It is possible investors can be assured of sufficient royalty payments to be paid to equal the cost of the royalty by the issuer, as well as by other entities.

It is possible for royalty issuers to address investor needs for liquidity.

The prediction of a company’s likely revenue trend is easier than projecting earnings per share due to operational issues and the likely to be dilutive financings required by growing companies.

Earnings per share are a measure of company management’s ability to create and maintain profit margins, whereas the growth of revenues is indicative of customer satisfaction.

Even without the possible extra benefit of a redemption premium, royalties should be able to be structured to provide a minimum of a 15% IRR over the course of the royalty payment period.

Royalty investors are not concerned with issues such as: executive compensation, health and retirement plans, travel and customer entertainment policies, types of vehicles acquired for executive use, etc., as royalty investors are not interested in reported profitability or possible business or market valuation.

Only companies either having or projected to be having relatively good pre-tax profit margins should consider using royalty financing and investors are cautioned to be aware of industry norms in terms of profit levels.

It is likely that royalties issued by companies requiring future financings, interested in going public or being acquired will exercise the royalty redemption rights requiring the minimum agreed payment for the royalty, less the royalties already paid.

Royalties are the better way of both investing in and financing privately-owned companies.

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