The ability to own a percentage of a company’s revenues, in exchange for guaranteeing a loan taken out by the company, in which the controlling shareholders personally guarantee the loan, which will also be collateralized, providing significant risk reduction for investors.

The loan to the company should be at a lower interest rate due to the loan being secured by multiple guarantors, and in some cases benefitting from SBA regulations. The terms of the loan should require either repayment within 36 to 60 months, or the release of the investor’s guarantee in the same period.

The revenue royalty should commence on the repayment of the loan and have a maturity of ten or more years, including an issuer’s right of redemption, at a negotiated multiple of the risk assumed by the investor in providing the released guarantee. The company’s royalty payment obligation can be satisfied, and the royalty terminated, by the payment within a specified period, of an agreed multiple of the amount guaranteed by the investor. This is important to the issuer as the obligations of a royalty may interfere with the purchase or refinancing of the company.

It is also possible that the investor providing the loan guarantee might instruct the company to direct royalty payments to a tax-deductible entity, enabling the investor and royalty paying company to receive a tax deduction benefit. As in all cases of contractual obligations, the advice of tax and legal professional advisors is necessary for both the investors and the companies.

Finally, it is believed possible for an investor, in assuming protected risk, to do good for a selected beneficiary entity, without the investor’s direct cash payment. Of course, the investor could alternatively elect to receive for themselves the income of the royalty payments, for an attractive and hopefully growing cumulative amount.

 

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