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FastRecap - Faster investment recapture is a natural goal of investors in royalties even if they understand that a lower initial royalty rate will produce a greater return if the royalty is held until the termination date. In this example the investor accepting the A example wishes to complete recapture by the 5th year while the B example requires a longer recapture but a greater ultimate return as it benefits from the longer term projected revenue increases.
MoreEarly - More In Earlier Years is a possible goal of some investors for which they are prepared to negotiate a lesser royalty rate in the later years of the royalty payment period. Institutional investors having large commitments in the later years are more likely to be prepared to have less income in the earlier years in return for greater income in the later years. The A example has a desire for higher early year returns than the B example.
DoubleDown - Some investors may negotiate to allow a decline in royalty payments at the time of a doubling (or other) cumulative return. In this example A and B start off with each agreeing to a reduction in the royalty rate after receiving different cumulative amounts and different levels of reduction. A is proposing a doubling of invested amount and B a tripling. However A is reducing the royalty payment obligation by less than B as a trade-off.
CappedReturn - Some royalty deals can include the concept of a capped and/or assured return for the investor. In this case the A deal is one where the royalty issuer may terminate the royalty once an agreed amount has been paid in cumulative royalties of ten times the original cost of the royalty. While in the case of B the capped amount is five time the invested amount but having to be achieved in ten years.
Royalty transactions can be as simple or complex as the negating parties agree. Revenue sharing royalties are inherently flexible and can be shaped to meet the needs of both the issuer and the investor. Contact me with questions.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
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