Privately owned companies which are capable of expanding can benefit society and specifically their communities by creating a need for additional employment, enlarged facilities and services, customer benefits and payment of taxes. Socio-economically successful communities and societies require growing business activity.
Business owners, if financially capable of creating and expanding the size and scope of their business, can create personal wealth and facilitate the income, career growth and health and retirement benefits of their employees. Businesses generating expanded profitability are a benefit to the individuals directly involved and to their communities.
The funding of successful businesses is more satisfying to many investors than the buying and selling shares of companies, based on predictions of changes in market valuations.
There are three ways of financing companies:
One is to profit from the interest charged on loans to the company. Loans can be made directly to companies or guaranteed, for a fee, enabling the company to borrow more advantageously from a lower interest rate lender. Interest rates vary based on the lender’s assessment of risk and reward. The greater the perceived risk, the higher the required return. Companies paying high interest rates find it difficult to generate continuing profitability and are frequently restricted in their activities.
Next, is the traditional means of funding the growth of companies, buying shares in the company, representing a percentage of ownership. The shares can be of common stock or preferred stock. The preferred stock can be of a fixed return or can also be convertible into common stock. The preferred stockholders have a preference in the liquidation of the company’s assets if the company is dissolved.
Companies are also able to receive funding based on revenue sharing through the sale of a revenue royalty. A royalty is a negotiated percentage of defined revenues, for an agreed period. There may also be additional terms regarding the redeemability of the royalty and assuredness of the company achieving the projected revenues when in soliciting the investor’s purchase of the royalty. Royalties are not securities but may be issued by companies in combination with securities. Royalty payments are tax deductible to the company.
Debt must be repaid, and lenders can restrict the activities of company owners and managers. Debt repayment is not tax deductible.
Equity is precious if the company is successful. Investors want to gain the highest percentage of ownership for the stock purchased. Control of the company shifts with majority ownership of the shares of the company. Investor financed companies have investor elected members of Board of Directors. The Board of the company selects and establishes the terms of employment of the senior officers, as approved by the shareholders. The Board is responsible for protecting and enhancing the assets of the investors, and thus may have conflicts of interest with the business founders and senior managers of the company.
In comparison, royalty investors, having purchased a percentage of a defined revenue of the company and therefore, are only interested in the company’s sustainability and it’s growth of revenues. Royalty payments can be payable to royalty investors upon the company’s receipt of revenues. Royalties do not vote and own no part of the company issuing the royalty. Royalty payments received are tax free for the investor until there has been a full recapture through accumulated royalty payments and are taxed as ordinary income thereafter.
Therefore, we believe that for both the company founder and controlling shareholders, as well as for investors, royalties are means of funding growth oriented privately owned companies.
We are here to professionally assist both investors and royalty issuers in structuring royalties meeting their needs.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd. 858 793 7100 PST
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