It seems and also can be so simple to agree to buy or sell a percentage of defined revenues for an agreed period as determined by the terms negotiated.
First, there has to be a mutual desire to exchange an asset, money in this case, for a percentage of something, such as the defined revenues of the company issuing/selling the royalty. The investor must believe the company will prosper and generate increasing revenues. The issuer must believe that the funds received for the royalty will enable the company to expand sufficiently to justify the agreed cumulative royalty payments.
Questions? What will be the use of proceeds which will result in greater revenues? Is the amount of money expected by the issuer to be received for the royalty sufficient for the company to achieve a significant value increasing result? Are the projected revenues sufficient to generate royalty payments sufficient to justify the capital employment? How are the royalty rate and other details of a royalty determined? Who is best to negotiate the terms of royalties? Will the profit earned on the increased sales be sufficient to justify the lost profit caused by the royalty payments? What are the economic factors likely to impact the customers of the royalty issuing company? Why do longer term royalties usually have a lower royalty rate than shorter term royalties? What happens if the projected revenue increases fail to materialize? What if the company needs more money? What if the company wants to merge or sell? What are the terms negotiated for the company to be able to terminate the royalty? What are the investor protections and liquidity? What are the tax effects of both paying and receiving royalty payments for U.S, issuers and investors? Why are royalties not the standard way of financing privately owned companies? What are the services and fees required by the issuer? What are the services and fees to be paid by the investor? What are the investor risks? What are the issuer risks? Where can more information and advice be found?
Answers. There are more questions than appear above and I will only answer the following underscored questions in this writing. I will be pleased to answer all of the questions and more in an email exchange with interested parties.
use of proceeds must only be for creating or increasing revenues
value increasing result must be the issuer’s rationale for accepting the royalty payment obligations.
royalty determined the royalty rate and other details are negotiated between those representing the issuer and the investor. The investor’s minimum target return must result if the projected revenues are achieved.
longer term the longer the period of time in which revenue sharing continues the greater will be the royalty payments to the investor.
fail to materialize business and investment decisions is based on predictions. If minimum royalty payments are assured then the royalty rate will be significantly reduced as there has been a shifting of risk from the investor to the issuer. The parties must strike a balance between risk and reward for both parties.
needs more money in some cases the provider of additional financing will require either a subordination of the royalty investor’s priorities or an elimination of the royalty. In the royalties we recommend there is a royalty issuer’s redemption right permitting the termination of outstanding royalties on terms agreed at the time of royalty issuance.
merge or sell the royalty issuer will usually have the ability to redeem outstanding royalties or to convert them into equity in the case of a change in control of the issuer.
investor protections the greater the investor is comfortable with the security, the less demanding will be the investor’s royalty rate and other terms. The issuer may transfer or pledge critical assets of the company to assure contractual compliance and agree to repurchase the royalty at the investors’ net cost at the end of 60 months.
tax effects we believe that issuer royalty payments are federal tax deductible and tax-free to investors until the amount originally paid to the company has been recaptured. After the investor has recovered the amount returned, the royalty payments are ordinary income for tax purposes. Any and all statements made by us within this and other documents should be reviewed with appropriate tax and legal advisors.
fees required by the issuer are legal fees for drafting the offering document necessary in any financing, a patent license fee to us for the use of our patented approaches and possibly an advisory fee, auditor fees and possibly other consulting fees paid to capital introductory intermediaries.
services and fees required to be paid by they investor are limited to legal fees and compensation for services relating to royalty payment collection and distribution.
investor risks are only in the case that revenues and therefore royalty payments, unless minimally assured, are not achieved.
issuer risks of the issuer are if the projected level of revenues is either not achieved or does not produce the level of projected profit, while the royalty payment obligation and other terms of the royalty agreement will have to be honored.
more information is available from reviewing arthurlipper.com, REX-Basic.com, and by reading the eBook or print version of “Revenue Royalties” or “Off The Top” available from amazon.com or by emailing me at chairman@REXRoyalties.com.
I hope that this Journal posting has been found interesting and will prompt an interest in learning how you can be enriched by the use of royalties.
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Arthur Lipper, Chairman
British Far East Holdings Ltd.
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