Royalties are a fixed cost of doing business, similar to payments for rent, electricity, communications and wages. The difference is, that using one of our approaches, the royalty is due and collectable upon the royalty issuer’s receipt of revenue.
This collection procedure attracts the investor and permits the negotiation of other terms of the royalty to be more favorable to the issuer.
Also, using another of our patented approaches, the critical assets of the issuer become controlled by a trustee-like party representing the interests of the investor, in case revenues are received by the company, without an immediate payment of the royalty due to the investor.
The worst of the bad things which can happen to the issuer, from the perspective of the investor, is a shortage of revenues. This possibility is greatest in pre-revenue companies selling royalties. However, revenues can be materially reduced due to lots of reasons, including: natural disasters, fire, competition and mismanagement. Some of these can be insured against and others are just business risks. In any case, unless there is a minimum amount of royalties guaranteed, royalties are only due when revenues are received.
The more usual situation is one of the royalty issuing company being cash flow deficient and facing pressures from: landlords, vendors, employees, etc., which pinch would be eased were the royalties not being collected as required and therefore available to the issuer.
The following agreements are possible:
All or an agreed percentage of the royalty payment due can be deferred, at an agreed interest rate, if revenues decline by an agreed amount, in an agreed period, if an agreed percentage of the investor’s royalty cost has already been paid.
It is also possible that under agreed circumstances, the investors will allow the issuer to pay all or a percentage of the royalties due in the form of notes having agreed terms.
If all or an agreed percentage of the investor’s royalty cost has been paid, the investor may agree to subordinate all or an agreed percentage of their potential interest in the company’s critical assets. It is also possible that upon the issuer’s payment to the investor of an agreed cumulative amount of royalties that the terms of the asset holding agreement be changed.
The investor could grant the issuer some relief from their royalty payment obligation for a modification of the defined revenues on which the royalty was based and/or an extension of the royalty payment period.
If the critical assets of the issuer are intellectual property or some other desirable asset, it is possible that an ownership interest in the asset(s) might be agreed in exchange for a modification of the royalty agreement.
In the event of a failure of the issuer to comply with contractual obligations to pay royalties on the receipt of revenue, it is possible the issuer would grant the investor a right of first refusal to acquire control of the company.
If the company seeks a modification of the royalty agreement it is possible the company could develop and offer the royalty investors a guarantee of entities acceptable to the royalty investors that the royalties due the investors would be paid on agreed terms. The royalty issuer can use equity, not paid to the royalty investors, as the guarantor’s compensation paid to the royalty investors for the desired royalty modifications.
As will have been noticed, the words “agree” and “agreement” are frequently used in the above explanation. The royalty investor is typically not interested in anything other than the collection of the contracted royalties. The royalty investors want the company to survive and prosper. The royalty investor does not want to own or manage the issuer’s business.
Agreement requires communication and where there are problems to be addressed, the earlier the parties start a dialogue the greater the probability of reaching a mutually constructive agreement.
We can help in developing possible alternative royalty terms. We also have a vested interest that royalty issuers using our approaches succeed.
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Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7100
Blog Management: Viktor Filiba