Frequently asked questions regarding royalties
Q : Why does a royalty purchaser care about the profit margin of a royalty payer or issuer?
A : The investor needs to understand the royalty issuer’s sustainability and if too much is paid out the company may not be able to meet its royalty payment obligations.
Q : Why in the Samples do you show different royalties in different periods?
A : During the process of negotiation it is reasonable that a royalty issuer will propose a reduction in the royalty rate when certain levels of cumulative royalty payments have been reached. Every dollar of royalty paid would be an added dollar of pre-tax profit to the royalty issuer if the payments could be lessened or ended.
Q : I note that A and B can be assumed to invest a different amount. Why are there not different revenue assumptions sown?
A : The REX Royalty Comparator is an analytical device or service, which attempts to provide comparability of royalty issuer results using the same revenue assumptions. The user can adjust profit margins, price/earning ratio, amount of investment, and royalty payment rates in various periods but not revenues. Of course, changes in royalty payments will impact profit margins and the user should adjust them accordingly.
Q : Won’t a higher royalty rates in earlier years be an operational burden of on the royalty issuer?
A : Yes and royalty investors should recognize that demanding too high a royalty in the early years could be counterproductive as the funds paid in royalties could be used by the company to increase revenues and profits in later years.
Q : Why would a company agree to pay royalties, which significantly reduced their profit in early years?
A : Business owners will agree to sacrifice profits in order to attract capital on terms, which do not cause a reduction of their ownership. Royalty purchasers should balance their natural desire to recapture their investment as quickly as possible with the knowledge that in a long term royalty and a growing business the greatest payments can be in the latest years.
Q: Why should anyone buy a royalty?
A: Royalties should only be purchased if the buyer has a belief the royalty issuer will have increasing revenues and the terms of the royalty offered are satisfactory. Royalties are a purchase of a percentage of a company’s revenues and therefore a participation in the company’s growth for an agreed period of time.
Q: Why is this feature helpful and why is a royalty buyer concerned with negotiation?
A : The REX Royalty Comparator service is designed for both individual investors discussing the terms of a royalty with a royalty issuing company executive and also for underwriters attorneys, accountants and others negotiating on behalf of investors. One of the great advantages of royalties is their inherent flexibility as to the timing and magnitude of payments.
Q : Who decides what the terms of a royalty will be?
A : Typically, the company proposes selling a royalty on the terms they believe to be reasonable for them and attractive to an investor. Investors may indeed accept the offered terms or they may make a counter-offer in a negotiation with the company. The REX Royalty Comparator is specifically designed to show the impact of the different terms being considered.
Q: Who should use this site and why?
A : Potential royalty issuers and investors, and the financial advisors who assist them, should use this tool. Attorneys, accountants and those involved in negotiating the terms of a royalty contract will also benefit. This tool provides a controlled experimental lab which allows you to analyze the potential benefits and liabilities of two royalty investments side by side, for review by both investors and issuing companies. It allows fast, flexible calculation of many different assumptions, and shows their short and long-term consequences year-by-year for 20 years. It also allows people to evaluate royalty income streams against a benchmark, define specific investment return targets and how to achieve them, and adjust the royalty income rate year by year during the life of a contract. Important considerations, such as the impact on pre-tax income of paying royalties, and the long-term impact on the valuation of the companies, are also included. Finally, we believe that use of this tool will allow willing buyers and offerors of royalties to negotiate terms that are fair to all, with major expectations and assumptions documented in the open.
Q : What are the limitations of the model presented in this site?
A : For simplicity of presentation, the current model allows two royalty stream scenarios to be compared against each other -- but the gross revenue assumptions for the two scenarios need to be the same. Introducing multiple income streams into this model, along with all the other variables, would make presentation of clear results quite complex. If you wish to evaluate multiple income streams against each other, along with all the other variables employed here, you are encouraged to build two or more models on our allied website, http://www.rexroyalties.com. You can then print those models, with tables and charts, and evaluate them side-by-side.
Q : Why are you making all this information and this interesting modelling tool available so freely? What is your business objective?
A : After decades of working with business owners, entrepreneurs and investors, we are convinced that royalty financing offers attractive alternatives for developing growth capital that will benefit many companies, help spur innovation, create employment and stimulate healthy economic growth. Tol further these larger goals, we seek to be available to advise selected companies and investors on how to structure royalty agreements, to encourage the adoption of an active public securities market for royalty trading, to speak at universities and financial conferences on the subject, and to author books, such as the free ebook on the possibility of a royalty exchange in China, which may be downloaded here: http://www.chinaroyalties.com/en/documents/free-electronic-book/ (English) or http://www.chinaroyalties.com/documents/free-electronic-book/ (Chinese). Our return on investment will come in the form of licensing fees for our U.S. patent on royalty financing, speaker fees, book royalties, and consulting fees and participation for assisting in a small number of highly-selective royalty financing projects.
Q : Can you help me raise money for my company?
A : We are not offering financial advice services, nor will we invest directly in royalty finance projects ourselves, nor serve as finders of financing for others. However, we are prepared to offer royalty issuers advisory services in the construction of royalty offerings and serious investors in assessing the terms offered by issuers.
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