by Arthur Lipper
Q: What is a royalty as you are using the word?
A: A royalty, or revenue royalty, is an agreed percentage of defined revenues to be paid to the royalty investor by the royalty issuing company for an agreed period.
Q: What are the reasons to buy a royalty?
A: The reason to invest in a royalty is to benefit from owning a percentage of the royalty issuer’s revenues. Royalties should only be purchased from companies where the growth of revenues will result in an increasing series of royalty payments during the royalty payment period, which can be as long as 20 years.
Q: What are the risks in buying a royalty?
A: The chief risk for the investor in the buying of a royalty is that the company will no longer generate revenues. However, if our approach is used, royalties are paid whenever the royalty issuer receives revenues and therefore the investor’s capital risk is reduced whenever a royalty payment is received. If the royalty issuing company already has revenues then there is a greatly reduced chance of an investor’s loss being total, and if the company continues to generate revenues for a five-year period most revenue royalty investments will return in payments at least the original capital invested.
Q: What are the likely returns for the investor?
The returns for the royalty investor are dependent on the revenue growth of the royalty issuer. With the terms negotiated in the royalties we recommend, the investors’ anticipated Internal Rate of Return should be a minimum of 15% annually, over the course of the royalty payment period. Higher anticipated returns may be negotiated, depending on assessment of risk and market forces. Lower returns may also be realized, depending on the quality of a company’s revenue growth track record, and on minimum assured returns, which our system assists in determining.
A: What are the characteristics of companies selling royalties?
The primary reason business owners find royalties an attractive means of obtaining growth capital is that royalties are not equity dilutive, as royalty investors do not own any part of the company and do not vote or have an ability to influence management. Royalties are also attractive to business owners as they are often not able to arrange for term debt financing without personally guaranteeing the company’s obligation. Therefore, the primary advantage is for business owners who do not wish to share ownership of the company, but are willing to share ownership of an agreed percentage of the company’s future revenues. Also, the companies accepting revenue royalties investments should intend to use the additional capital mainly to increase the revenues of the company.
Q: How does an investor choose the right companies from which to buy a royalty?
Investors have a primary consideration: the sustainability of the royalty issuing company. The company must continue in business, to continue to have revenues from which to pay royalties. Next, the investors should study and research the projected revenues of the company as to rationale and reasonableness. By using the six website calculators and articles to be found at Royalties.Website investors, will be able to anticipate the results of the terms of the royalty if the revenues projected by the royalty issuing company are achieved.
A: What can go wrong for the investor?
If the company actually has revenues which are less than those projected, the amount of royalty payments will be disappointing and less than expected, unless the terms of the royalty require some level and form of minimum payments.
Q: What is the procedure for the investor to receive royalties?
A: In the royalty investments we recommend, the royalty issuer’s investor-approved bank, directly or through an approved mechanism, remits the agreed percentage of revenues immediately on receipt of revenues o an account of the investor. The accumulated royalties are usually distributed to the royalty owners every quarter.
Q: What is necessary for the investor to sell a royalty once purchased?
A: Royalties sold by a US private company are fully negotiable and therefore transferable in that they are an owned asset of the investor. However, the SEC will also consider the royalty a security and therefore the buyer must be “accredited” as the SEC defines the term. Therefore, in the U.S. market the liquidity of a royalty is limited to the finding of an appropriately qualified buyer. The royalty issuing company itself is likely to be the best prospect to repurchase the royalty, as every dollar of royalty payments made is in effect a pre-tax profit dollar. Such repurchases would not be subject to the accredited-investor limitation. Non-tax consequence investors seeking income are also good prospects, and the website calculator REX-PV.com has a number of sample cases which indicate how to use the calculator and the returned to be expected on the sale of royalties.
Q: What are the types of companies to avoid as royalty issuers?
A: Royalties should not be purchased from companies with a low or marginal profit margin, or from companies in industries which typically have low profit margins or an unfavorable revenue outlook. Royalties should not be bought from companies operating in industries where there is a possibility of regulatory problems, possibly leading to a closing or restructuring of the company.
Q: Why are royalties not broadly used in financing companies?
A: Royalties have been traditionally used in the financing of extractive industries such as oil and gas exploration and production, hard rock mining, forestry; fishing and farming has been a standard device. Also, franchising is a form or royalty and widely used. The use of royalties to finance companies with growth capital is a relatively new alternative form of investment and the education process of institutions, investors and issuers is an ongoing activity. Investment bankers are slow to adopt new concepts, especially when dealing with privately owned companies and generally for transactions of less than the amounts usually sought by the bankers.
Q: What are the tax considerations in owning royalties?
A: We believe that royalty payments made by U.S. companies are tax-deductible for the royalty issuer. We further believe that investors may treat royalty payments received as a return of capital until the full amount invested has been recaptured. Thereafter, the royalty payments received are ordinary income for the U.S. investor. However, both royalty issuers and investors should explore the matter with their own tax and business advisor. In other countries, tax treatment of royalty payments may be different.
Q: What are the primary elements of the royalties patent owned by British Far East Holdings Ltd.?
A: The collection of royalties at the same time as the royalty issuing company receives revenue and the securing of the royalty issuer’s contractual compliance for obligations to the investor.
Q: Is it true that royalties have been found to be Sharia law compliant?
A: Yes, it is true that a fatwah or decree has been issued by recognized Islamic scholars certifying that royalties, as we recommend their use (except for the inclusion of debt), are Sharia compliant as they are not debt and do have a risk element.
Q: Why should investors use royalties for income investing?
A: Because royalties both finance the expansion of businesses, and that is beneficial to the companies, employees, communities and society generally, while being a means for investors to participate directly in the revenue growth of royalty issuing companies. We believe the risk-adjusted receipt of income from royalty payments will be superior to other forms of alternative investment.
Q: What should be requirements of royalty issuing companies, in their relationships with investors?
A: Royalty issuers have an obligation to honor the requirement of immediately paying the agreed level of royalty. Further, they should agree to provide financial and other information related to revenues received from all sources to royalty investors in a timely manner.
Q: Where should investors go to get more information about royalties?
A: Those interested in royalties should go to Royalties.Website and study the information provided. The website calculators are:
Arthur Lipper, Chairman © Copyright 2017 British Far East Holdings Ltd.
British Far East Holdings Ltd. All rights reserved.