Are They a Better Bet for Entrepreneurs and Investors?
There are many ways to raise capital.
A convertible note is very popular, but has serious problems, angel and venture capital investors get a piece of your business,
BUT revenue royalties bypass both of the above with a better deal.
Over many years of negotiating transactions, for both myself and as an investment banker representing clients,
many of which related to the financing of companies, I reached the conclusion that an investor was much better
advised to buy a piece of a growing company’s revenue flow than becoming an owner of the business.
I also recognized that, in many cases, the owners of the businesses seeking funding were
better advised to avoid the inevitable conflicts of interest between investors and founders.
This revenue royalty approach is the least complicated of the various approaches we have developed.
- Amount of money to be invested
- Period of the investment and royalty entitlement
- Issuer’s Projected Revenues as estimated or based on a projected Compound Annual Growth Rate in various periods
- Average for the period estimated Net After Tax (NAT) profit margin
- Price/Earnings Ratio (P/E) estimated as if the company’s shares were publicly traded
- Market Cap (without consideration of debt) which would occur if the NAT was multiplied
by the P/E and the Royalty Rate to be applied in different periods
Our Calculator Then Produces:
- Projected Revenues
- Annual Amount of Royalties to Be Paid
- Cumulative Royalties Which Will Have Been Paid
- Current Annual Yield
- Percentage of Cost Received in Cumulative Royalty Payments
- Return On Revenues (ROR)
- Internal Rate of Return (IRR)
- Market Cap
In the analysis of the fairness and attraction of a royalty there is a balance between the anticipated
cumulative amount of royalty payments to be received in an agreed period and the risk of loss
accepted by the investors at the time of purchase of a royalty.
The balance is reflected in the percentage of revenues or royalty rate to be paid by the royalty issuer.
The investor’s perceived risk level determines the investor’s required royalty rate.
Royalties, no matter how structured and modified, must be fair to both issuers and investors.
If the deal is not fair and reasonable as perceived by the issuer they will seek funding elsewhere.
Similarly, if the investor does not believe the terms of the royalty deal are a good balance
between risk and reward they will pass on the opportunity.
The great advantage for investors in buying royalties from companies having revenues is that total loss,
so common in high return promising ventures, is highly unlikely as the agreed level of royalties are deducted
from the amount received by the royalty issuer at the time of receipt.
Therefore, for so long as there are revenues there will be royalty payments.
The level or even total of cumulative royalties received can be disappointing,
especially if the expectations were unrealistic, but there will have been a return on the investment.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
We’ll Design & Package Everything For You
Meet Arthur Lipper, Chairman, British Far East Holdings Ltd.
Once your basic company data has been provided, we can give you an accurate estimate
of your required investment to establish a proper Revenue Royalty Investment Offer for your company.
Please contact Arthur Lipper directly at: [email protected]