Monthly Minimum Compounding Royalty Return

 

The Royalty Issuer Assured Return (RIAR) approach and calculator available at http://rex-riar.com describes and facilitates the use of unique revenue royalty terms. The RIAR description also follows below. The two innovations are:

Investors will receive a higher Royalty Rate in return for allowing a delay in the payment of royalties.

Investors will benefit from a Reinvested Royalty Rate of Return (RRRR) from reinvesting royalties into additional royalties at a higher than original Rate of Return, because of payments being made over an extended maturity.

The new idea is for a Monthly Minimum Compounding Royalty Return (MMCRR), which anticipates a minimum assured royalty of say 1%, compounded monthly for an agreed period. The cumulative annual payment of royalties would be greater than the annual rate due to the compounding as calculated using <Compound Interest Calculator.xlsx>. It is also possible that a higher Royalty Rate would be paid if the payments were delayed.

There will be appropriate investor protections in all cases of delayed royalty payments.

The attraction of MMCRR is that the investor receives a minimum fixed return on the amount invested which is higher than the current market rate, while possibly benefiting from an upside based on revenues. There is also the possibility that the company issuing the royalty will elect to exercise its royalty terminating right of redemption, paying the investor the agreed multiple of investor cost, including the royalties paid.

 

Following is the description of the REX-RIAR approach:

The REX-RIAR (Royalty Issuer Assured Return) website calculator is a new, dramatically different, and greatly improved analytical tool for both investors and royalty Issuers to use in analyzing the impact of negotiable contract terms. The Reinvested Royalty Rate of Return (RRRR) is a new and necessary analytical tool for understanding the inherent investor advantage of using royalties versus other forms of investment.

Users are able to enter data re: the amount of money to be invested, the period of the investment and royalty entitlement, the Issuer’s Projected Revenues as estimated or based on a projected Compound Annual Growth Rate in various periods, the estimated Pre and Net After Tax (NAT) profit margins, the Price/Earnings Ratio (P/E) which are estimated to be appropriate if the company’s shares were publicly traded, the “Business Value” (without consideration of debt) which would occur if the NAT is multiplied by the P/E, the multiple of investor cost to be assured in a specific period and the different royalty rates to be applied depending on whether the royalties are periodically distributed to investors or credited to the investor’s account but retained until maturity of the contract by the royalty issuing company.

Now, by using our newly developed, Reinvested Royalty Rate of Return (RRRR) calculator, the investor can enter the “Fixed Return”, estimated by the investor for the expected return which will be received as a result of reinvesting the monies received quarterly from royalty payments. The RRRR will always exceed the IRR, as calculated using the same projected revenues, as the inherent benefit of the quarterly royalty distribution approach is now measurable. Fiduciaries who professionally invest other people’s money will be especially interested in this new tool.

In a royalty transaction we recommend that both investor protections and an Issuer redemption right to terminate the royalty are included. The redemption right should be set at an agreed value, including the cumulative amount of royalties paid. The investor protections should include: an investor’s right, but not an obligation, to require, at the end of an agreed period, the return of the amount invested, less the cumulative value of the royalties paid, as a condition for terminating the royalty. Also, that all revenues be deposited in investor approved banks, that royalties be paid at the time of revenue receipt (and either distributed to investors quarterly or credited to investors but retained by the company), that controlling owners personally attest that the royalty issuing company is in royalty payment contractual compliance with investors and finally that critical assets of the company are placed under the control of an agreed party, which exclusively licenses the company to use, without cost, those assets for so long as the company is in compliance with its obligations to the royalty investors.

The basic premise of our approach to using the sale of a percentage of a royalty issuing company’s revenues in order to create additional working capital which would otherwise have to be borrowed or be acquired by the dilutive sale of equity, is that the safer the investor’s capital, the better are the terms of the deal which can be justified and negotiated for the royalty issuer.

The sale of a royalty versus the sale of equity will be found to be compelling by the business owner truly believing in the company’s projected revenues and profits. The benefit to the owner of avoiding significant equity dilution through the sale of a royalty to obtain business-expanding capital, especially a royalty which can be redeemed, is obvious.

The royalty investor benefit from increasing revenues is in receiving increasing cumulative income irrespective of the royalty issuing company’s level of reported profits.

Newly conceived and developed is also an A and B approach in which the A royalties are paid as previously agreed and recommended, and the B royalties are credited and retained by the royalty issuer until the maturity of the royalty agreement. The RRRR benefit of reinvesting the royalty payments received at the Fixed Rate estimated by the investor is noted in the Analytic table as C. Due to the ability of the royalty issuing company to improve its profit margin by having increased working capital for the period of the royalty there will be a willingness to pay a higher royalty rate for the ability to temporarily retain royalty payments. Of course, royalty issuers will be able, on pre-agreed terms, to redeem their royalties, therefore terminating their future payment obligation, by paying an agreed multiple of the investor’s cost, beyond the royalties which have been credited. I believe that many investors and issuers will find the new approach for using credited royalties attractive.

The REX-RIAR approach is likely to become a standard practice as it can be negotiated to be a win/win for both parties, especially taking into consideration both new concepts of Credited Royalties and the Reinvested Royalty Rate of Return.

 

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