Royalty payments reward those having invested in a percentage of defined revenues of a royalty issuing company, which is similar to the distribution of: a percentage of a company’s profits in dividends to an investor, or an increase in the value others are willing to pay for the shares of a company owned by the investor.
The difference is that royalties can be paid by the royalty issuing company immediately upon the company’s receipt of revenue without any calculation or influence of profitability.
The percentage of defined revenues, known as a royalty rate, can be negotiated to decline with the investor’s receipt of agreed amounts of royalty payments in specified periods.
The royalty payment period, also known as the maturity of the contract, can be whatever time period meets the needs of the investor and royalty issuing company.
The royalty issuing company may have, as we recommend, a right of redemption permitting a termination of the royalty on terms negotiated at the time of the sale of royalty by the company. The terms we recommend are a multiple of the cost of the royalty less a time of receipt adjusting credit for the royalties paid to the investor.
The rights of investors should be protected and companies selling royalties should be willing, at the option of the investor, to repurchase the royalty at the investor’s cost, less the value of royalty payments received by the investor, at the end of an agreed period of time. We suggest the option be exercisable at the end of 60 months.
As a means to assure the investor of the issuer’s contractual compliance to pay the investor the agreed percentage of all revenues on receipt of revenues, critical assets of the company will be temporarily transferred or liened to a mutually acceptable third-party.
It is possible that investors will accept a lower royalty rate if the amount of royalty payments to be paid to them is assured by either the company or an independent party. If an independent party assumes the liability of assuring the investor of payments, the company will have to pay the assuror a fee, reducing that which the company will be willing to pay the investor or increasing the company’s cost of funding.
Royalties are negotiable financial instruments and may be sold by the royalty investors to qualified buyers. The most logical buyer of a royalty is the issuer of the royalty, as the obligation of making future royalty payments will be terminated by the repurchase.
Therefore, royalty investors have first call on their agreed payment and benefit from increasing revenues, irrespective of reported profits or company valuation. It is also likely that issuers will exercise their right of redemption due to additional financings, sale of the company, merger or public offering of shares. The terms of redemption will be at an attractive multiple of the investor’s initial cost, less royalties already paid.
For further information review my royalty related Journal arthurlipper.com, study the first of our six website calculators REX-Basic.com and read “Revenue Royalties” and “Off The Top”, both available at amazon.com. You are also invited to contact me.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
© Copyright 2019 British Far East Holdings Ltd. All rights reserved.
Blog Management: Viktor Filiba