Revenue royalty investors purchase a negotiated percentage of a company’s defined future revenues for an agreed price and period. We have patented several approaches to structuring and have developed a range of investor protection strategies.
Since the issuer’s Right of Redemption which we recommend effectively caps the investor’s cumulative return, over the pre-agreed period at a multiple of the investor’s cost, the investor’s primary concern is the risk relating to the issuer, which must be understood and quantified to achieve a superior to market cumulative Internal Rate of Return.
The primary risk-related concern is the economic sustainability of the royalty issuing company. There must be a determination by investors that the company will be able to meet its contractual requirements to the investor, even in the event of unexpected circumstances.
This is done by:
Requiring that the royalty issuing company’s financials are and will continue to be independently audited.
Requiring that investors will be notified by identified and confirmed members of the royalty issuing company’s Board of Directors of any defined adverse change in the company’s prospects or financial situation.
Requiring quarterly reports of defined revenues, and an explanation of any agreed level of lesser than expected results.
Identifying liened and unencumbered assets of the royalty issuing company.
Agreeing with the royalty issuing company about a level of debt/equity ratio above which the company may not proceed without the royalty investor’s approval.
Understanding and being informed of significant changes in defined major customer relationships.
Receiving agreed royalty payments promptly upon the royalty issuing company’s receipt of revenues or other agreed payment terms. We can provide suggested procedures.
It is recommended that contracting with prospective revenue royalty issuers be avoided in the event there is a reluctance to discuss these above possibilities as they impact profit margins, only if minimum company projected results are not achieved. It should also be recognized that all contracts can be modified by consenting parties.
The royalty issuing company will provide investors considering the purchase of a company’s revenue royalty with the following information.
Amount of capital being sought for revenue expansion or other purposes.
Annual projected minimum revenues for each of the years of the royalty payment period.
Estimated minimum Pre- and Net-After-Tax profit margins for the periods of royalty payment.
The company and investor considering the sale and purchase of a revenue royalty will then negotiate the royalty rate percentage of revenues, royalty payment period, and related terms, including those which will be applicable in the event the projected minimum revenues and resulting royalty payments are not achieved. As noted at the beginning of this memo, we suggest that royalty issuing companies be granted by revenue royalty investors an Issuer’s Right of Redemption, allowing the royalty issuing company an ability to terminate the royalty payment period prior to maturity, after the cumulative payment of an agreed amount of royalty payments within an agreed period. The cumulative amount agreed will be a multiple of the investor’s cost, resulting in a highly attractive Internal Rate of Return. This is only fair and reasonable, as the royalty issuer is likely to be required to terminate the royalty by those providing additional financing or acquiring all or a portion of royalty issuing company ownership.
In the event of a revenue royalty purchase by the investor, the company will advise the investor of changes in the initially provided data.
It is noted, that for U.S. companies revenue royalty payments are federal income tax deductible and tax-free for investors until the payments equal the investor’s cost of the revenue royalty, and thereafter taxed as ordinary income, like dividends.
The foregoing thoughts and recommendations assume a further and continuing dialogue with us since each revenue royalty transaction is different because the needs and circumstance of the revenue royalty issuers vary.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.
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