If your idea can be successfully financed and developed it may result in a profitable business. Financing your business by selling a royalty, in order to retain the perks of being the main proprietor, may be easier and more possible than you think.
The sale of an agreed percentage of defined revenues, for an agreed period, while retaining a right of redemption of the royalty, is the best way of financing most early stage businesses.
If the activity is a business, and not a personality-dependent practice, and is profitable you wish to expand the business by franchising. In a franchising arrangement the franchisee pay the cost of the new unit expansion, while the franchisor receives an initial fee and continuing percentage of the franchisee’s revenues.
There are a great many benefits associated with owning a successful business. Also, it is easier to finance, on more favorable terms, the growth of a successful business than an unproven idea. The funds received from the sale of a royalty can be used to create the success needed for an even larger financing. Also, royalties can be terminated according to predetermined terms agreed at the time of the creation of the royalty.
In comparison, if the business is originally financed through the sale of stock and becomes successful, the entrepreneur not only forsakes the perks of fully owning the business but also will have to pay an “ex-post” negotiated premium to repurchase the shares sold if he wishes to regain the benefits of full ownership.
Those businesses which should be financed through the sale of ownership interests, are those requiring initial amounts that exceed reasonable valuations based on realistic and projectable returns. The requirement for this is that investors must be prepared to accept original valuations which are highly favorable to the entrepreneurial stock promoter.
It is all a matter of investor risk acceptance and sharing. Entrepreneurs benefit when investors assume some of the risk of project success and are also relatively unconcerned about capital risk. In comparison, the buyers of stock in new companies, on terms highly favorable to the entrepreneur, must be comfortable with the level and timing of future exit valuations, which are necessary to justify the valuation level at the time of the purchase.
Smarter and more investor-responsible entrepreneurs as well as more experienced investors, will likely opt for the royalty route, once they understand the flexibility and benefits of royalties.
For information regarding royalties see REX-Basic.com and review the articles in arthurlipper.com. There are also a number of books available on amazon.com written by me and I welcome questions and contact with interested parties.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7100
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