An alternative financing strategy, particularly for privately owned companies which have the potential for significant revenue growth, is the sale of revenue royalties (royalties) for the financing of their companies.

In the royalties we structure for corporate clients, investors receive from the royalty issuing companies a full return of the amount invested in 5 to 7 years, provided that the company achieves the minimum level of projected revenues and has an additional number of years of revenue sharing benefit.

Royalties are flexible contractual obligations. Revenues are defined and negotiated as a percentage of the company’s actual revenues generated, over a specified payment period, and royalty rates are either flat rate or are modified based on cumulative payments made during agreed periods, subject to issuer redemption rights and remedy penalties for possible shortfalls in the payments anticipated.

The contractual terms can allow for the termination of the royalty payment obligation, if desired by the issuer, on a pre-agreed basis with the investor.

Royalty investors own a percentage of revenues, and unless otherwise agreed, they do not own any interests in the company generating the revenues. Therefore, the royalty investor is not concerned with the level of profit declaration or the policies or practices of the royalty issuing company relating to executive compensation, retirement plans, employee benefits, acquisitions, or other activities of the company. The royalty investor is solely interested in the future revenues of the company.

Royalty investors are not impacted by market valuation changes of the royalty issuing company, because they have no ownership in the company. Royalty payments are federal income tax deductible for the company making the payments. Royalty payments received are federal income tax-free for the royalty investor until there has been a full recapture of the amount invested, and they are considered ordinary income thereafter.

Attorneys and tax advisors of both royalty issuers and investors should be consulted, and we are available to advise clients seeking to structure and issue royalties.

 

Arthur Lipper, Chairman                 arturlipper@grmial.com
British Far East Holdings Ltd.