Projecting anything is difficult, and in part it is guesswork.

Revenue royalties are structured to be simpler than equities because their value is not dependent on the issuing company’s profit generation.

However, in the negotiation of a royalty rate, which is the percentage of revenues to be paid to the royalty holder by the royalty issuer, the level of investor return will be totally dependent on the accuracy of the minimum revenue projections.

There are risk-shifting terms in the royalty agreement which can address the investor’s risk of basing the royalty rate on the projected minimum revenues. In the negotiation of terms, the lessening of investor risk should similarly permit a reduction in the royalty rate.

We recommend to the managers of royalty issuing companies seeking investors that they project what they conservatively believe to be minimum revenues. However, companies are formed by founders who have a vision of success, so it is difficult for them to predict anything other than positive results.

Royally terms can include:

Minimum revenue projections, which are assured by the royalty issuing company. Deficiencies in revenue and therefore royalty payment projections can be reflected and adjusted in amounts to be paid during the royalty payment period.

Third party-assured minimum royalty payments during the royalty payment period.

Increasing the royalty payment period or geographic limitation based on an agreed level of royalty payment deficiency from that projected.

Pledging of the royalty issuer’s intellectual and/or other property to assure minimum levels of royalty payment during the royalty payment period.

We can be of assistance to both royalty issuers and investors in the structuring of royalties.

 

Arthur Lipper, Chairman                                    arthurlipper@gmail.com
British Far East Holdings Ltd.

 

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