|
|
Royalty
Based Financing is an exciting alternative to traditional
equity and debt venture capital investing. It provides tremendous
repayment flexibility and features a built-in exit strategy.
What
is a royalty?
Rockwater Capital defines a royalty as a calculated percentage
share of a company’s gross revenue pledged to the Fund.
Essentially, a stream of royalty payments is the means to repay
a capital investment over a predetermined period of time, or until
a predetermined repayment amount has been achieved.
How
does it work?
Royalty Based Financing presumes a fundamental trade-off
between the investor and the business owner. In lieu of an equity
ownership stake given to the investor, business owners agree to
return to the investor the original principal plus either a predetermined
multiple of the original investment (fixed dollar payback) or
payment of the royalty until a fixed period of time has elapsed
(fixed time payback). In some cases the royalty is based on a
percentage of sales of a specific product or set of products.
Investors deploying Royalty
Based Financing do not push businesses to be acquired or
to launch an IPO. Rather, business owners are encouraged to maintain
ownership, to grow, and to develop successful, long-lasting enterprises
with solid, profitable revenue streams. For the investor, this
prosperity translates into regular and increasing royalty payments.
Companies pay as they go, paying more as they grow.
What
are the benefits and how is value created?
For the investor, Rockwater
Capital's Royalty Based Financing approach…
|
| • |
Ends the conflict over valuation
and the need for a single event “exit strategy”
(IPO, sale or refinancing); |
| • |
Provides regular payment distributions
to investors from royalty receipts; |
| • |
Earns superior risk adjusted rates
of return; |
| • |
Depends on the gross revenue of
the company, and therefore is not directly reliant on net
profits; |
| • |
Through the Fund offers access to diversified
and profitable deals with industry leaders; |
| • |
Through warrants taken, provides
investors with a modest equity participation interest in the
future success of the company in a sale or IPO; and
|
| • |
Provides support & guidance
throughout the life of each investment through Rockwater Capital’s
Advisory Board and management assistance plan. |
For the business owner, Rockwater Capital's Royalty
Based Financing approach… |
| • |
Minimizes or eliminates
ownership dilution, maintaining management control and promoting
management and employee ownership; |
| • |
Provides access to growth capital
with flexible repayment terms (no fixed payment schedules); |
| • |
Makes financing available to companies that
may not otherwise qualify for other financing; |
| • |
Ends conflict over valuation and
eliminates the need for a disruptive exit strategy; |
| • |
Enhances effectiveness of management
team through Rockwater Capital’s management assistance
plan, Advisory Board and industry contacts; |
| • |
Reduces capital cost through interest deductibility
by up to 40%; |
| • |
Requires limited or no personal guarantees;
|
| • |
Contributes to building more durable
businesses and communities. |
Why has Royalty Based Financing
been popular?
Royalty Based Financing has been a successful investment
model for decades in mining, intellectual property, film, theater,
music and other industries. Its flexibility makes it an ideal
vehicle for deploying small and mid-sized loans through an investment
fund. The need for such flexibility and access to growth capital
is apparent everywhere.
| • |
Individual
business owners, family and friends contribute the capital
to start nearly every new venture. Once those resources
are exhausted, companies typically look to individual investors,
so-called angel investors, for their next round of funding.
Angel investors typically don’t invest more than $100,000
in a single investment. Entrepreneurs seldom receive more
than $1 million through organized small investor groups.
|
| • |
Fewer
than one percent of businesses looking for venture
capital ever get it – and many venture capital firms
seek minimum investments of $5,000,000 or more. In fact,
recent data from Thompson Financial’s Venture
Economics indicate that the average new venture
capital investment for the first three quarters of 2001
was $11,700,000. |
| • |
Both
individual and institutional equity investors require the
same single event exit strategy to recover their original
investment and harvest their financial reward. This generally
requires the sale of the business to another company or
an IPO. Many business owners do not want capital
on these terms. |
This “opportunity gap”
– the difference between what individual investors will finance
and what venture capital firms will consider – is the perfect
niche for Royalty Based Financing.
What
sorts of companies fit the Royalty Based Financing profile?
Royalty Based Financing can serve a wide range of businesses
previously ignored by more traditional funding sources. The typical
Royalty Based Financing investor seeks businesses with
an existing annual revenue stream, or a revenue stream that will
be activated with a new capital infusion. These companies should
have substantial gross profit margins, sufficient to pay royalties;
a sound business plan; and the ability to provide a reliable and
reasonably predictable revenue stream.
Royalty Based Financing
capital is most appropriate for companies seeking to launch a
broader marketing strategy, introduce new products to the market,
or complete commer-cialization of a newly created product or service.
Established market acceptance or clearly identified demand for
the product or service is important in qualifying for Royalty
Based Financing.
What
are the mechanics?
Based on formulas unique to each situation, the investment principal
repayment and the agreed upon multiple and/or time period will
commence via a stream of royalty payments derived from
gross sales.
Royalty Based Financing
can be structured either on a secured or an unsecured basis, but
is typically positioned as senior or subordinated debt. Payments
exceeding original principal are deductible expenses for the company,
with the principal amount normally recorded as a long-term liability
on the company’s balance sheet.
Investments are typically disbursed
through one or more staged draw-downs. These staged disbursements
may correspond with specific business activities, revenue growth
milestones, working capital requirements, or other special events
or achievements.
Royalty payments are typically
made monthly, and begin shortly following the infusion of capital.
|
