As a result of reading the draft manuscript of a soon to be published workbook regarding sales training, by Chris Lipper, our eldest son, I am prompted to pose the following questions:
Q: Why would you prefer to sell a share of the ownership of your highly promising business if there was also an investor prepared to pay the amount of financing you seek in return for a share of the future revenue of the business?
A: The prospect of having to pay a percentage of our sales, irrespective of the profitability of the business, is not attractive.
Q: Would you prefer to own less of the business in the future, as a result of selling equity now at the current valuation?
A: Our technological and other competitive advantages may decrease and we are not sure of how much more money we will need. Also, the equity investors may have relationships which will be useful for us.
Q: Do you mind limiting your perks and your independent decision-making as a proprietorship re executive compensation, policies and practices of the company and the terms of possible acquisitions, mergers or the sale of the company?
A: No, because we understand that with outside investors we will be accepting both the responsibilities of being fiduciaries for those investors, as well as accepting representatives of the investors on our Board of Directors. We can afford to buy our own cars, and flying economy and not having the personal benefits of business founders and controlling shareholders is ok as long as we obtain the money that the investors pay for the stock.
Q: Recognizing that investors only buy shares of a company with a view to selling the shares in the future at a higher price than paid, due mainly to ever increasing profit levels, are you ok with a policy of maximizing profit declarations?
A: Yes, we understand that all decisions will have to be made with the intent of increasing reported profits and this may restrict investments in research and projects which do not result in high immediate profits. We also understand that the objective of reporting maximized profitability levels will affect many decisions regarding ourselves and the staff compared with before we sold the equity.
Q: Is it ok with you that the investors will probably be inclined to pressure the Board of the company to sell the company or become a publicly traded company, as soon as possible?
A: Yes, we understand that the attitude and perspective of the investors will likely be different than ours.
The reasons listed below highlight why I believe that privately-owned companies are better advised to sell royalties than shares, especially if the terms of the royalty, as I recommend, include the issuer’s right of redemption. The exercise of the right of redemption terminates and effectively caps the royalty payment obligations, on previously negotiated, worst-case, terms for the issuer.
The royalty investor is only interested in revenues and not in reported profitability or market valuations.
The royalty investor will naturally use whatever influence is possessed to assist in revenue growth.
Royalties paid by the company are tax deductible by the company.
The more success the royalty issuing company has the greater is the likelihood that it will redeem the royalty.
Royalty financing allows a company to delay a sale of equity until its performance justifies a higher valuation
The owners of businesses who elect to sell equity when there is a non-equity dilutive alternative available are making a statement as to their belief about future market valuations and their willingness to relinquish full control of their business.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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