The Larry and Barry Guide to Understanding Royalties: The Better Way of Investing in and Financing of Businesses

By Arthur Lipper

The purpose of this book is to help both business owners and income focused investors understand why "Royalties Are The Better Way for Both Investing In and Financing of Businesses".

The providing of growth capital, on fair and performance-related terms, is both good and important for the community. It is the smaller and privately owned businesses which provide the bulk of new employment opportunities as typically they need more people to handle increased sales. Inversely, almost all larger companies have as a corporate objective the reduction in the number of employees per unit of production. This is true the world over.

• Language: English
• Publisher: BookBaby
• Release date: Feb 3, 2017
• ISBN: 9781543918700

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The Larry and Barry Guide To Understanding Royalties –

The Better Way of Investing In and Financing of Businesses

© Copyright 2017 British Far East Holdings Ltd.

All rights reserved.

This edition published by British Far East Holdings Ltd.

For information contact

British Far East Holdings Ltd.

14911 Caminito Ladera

Del Mar, CA 92014

[e-mail]

All rights reserved. Published in the Untied States of America.

No part of this book may be used or reproduced in any manner

whatsoever without the written permission of the publisher.

First edition.

ISBN 978-1-4835927-6-3

Library of Congress Cataloging-In-Publication Data

Lipper, Arthur

The Larry and Barry Guide To Understanding Royalties –

The Better Way of Investing In and Financing of Businesses – 1st ed

Manufactured in the United States of America

10 9 8 7 6 5 4 3 2 1

Dedication

To Anni, my wife and life of 54 years,

who continues to be so wonderfully understanding

and supportive, even in the face of some of the

dumb things I have done.

To our sons, Chris and Greg

and to their families,

of whom we are so proud.

To those business owners and investors who

have allowed me to educate them as to why

royalties are logically the better way of both

Investing in and financing of businesses.

I say, "Thank you for allowing me to be a part

of your lives. Helping you has been a

privilege and wonderful journey."

Arthur Lipper

Table of Contents

All dialogues and articles are interactive

Foreword

1. Introduction: Larry and Barry Discuss Revenue Royalties

2. Larry and Barry as Business Owners

Larry And Barry Discuss The Cost Of Royalty Funding

Larry And Barry Discuss Maturity And Term Of Royalty

Payment Period

Larry And Barry

Learn About Terminating Royalties

Larry And Barry

Consider Debt And Royalties

Presenting The Possibility Of Using Royalties In

The Financing Of A Successful Business

Larry And Barry Present Royalties

To A Practical Owner Of A Successful Business

Larry And Barry Creating

An Investor Pitch And Scaled Royalties

Larry and Barry Discuss Selling a Royalty

They Have Held for a Number of Years

Using A Combination Of Debt And Then A Royalty To Get Some Growth Capital

Larry and Barry Using

REXScaledRoyalties.com

Larry And Barry

Get Into The Details Of Royalties

3. Larry and Barry As Investors

Larry And Barry Assessing The Amount

Of Royalty Investment And Scope

Of Issuer’s Potential

Larry And Barry, As Prospective Royalty Buyers,

Considering The Royalty Rate And IRR

Larry And Barry Assess The Potential

Of A Company Seeking Royalty Financing

Larry And Barry Presenting Royalties To An

Aggressive And Sophisticated Investor

Larry And Barry

Worrying About Contractual Compliance

Larry And Barry Consider Debt And Royalties

From The Investor’s Perspective

Larry And Barry Consider Buying A Royalty

From An Early Stage Company

Larry And Barry Buying Royalties

From Mature Companies

Larry and Barry Explain why Business Owners

are Better Advised to Sell Royalties than

Selling Stock or Incurring Debt

Larry And Barry

Discuss Exit Planning for a Royalty

Larry And Barry Considering The Advantages of Royalty Issuer

Assured Return Royalties

Larry And Barry Using The Negotiation-Realistic

REX Scaled Royalties Approach

4. Royalty Income Fund

Larry And Barry Consider

Starting a Royalty Income Fund

Presenting Royalties

To A Cautious Investment Manager

What’s Wrong With Royalties

Thoughts for Portfolio Managers

of Royalty Income Funds

5. Revenue Royalties: General Interest

Section 1: Investors Perspective

Highly Speculative Royalty Financing of Early Stage, Pre-Revenue, Technology Oriented Companies, or Revenue Sharing Based Funding of Companies Yet To Have Revenues

Financing A New Concept

Through The Use of Royalties

The Investor’s Difference Between Focusing On

Per Share Profits Versus Revenue Growth

The Difference In Deciding to Buy A Royalty

As Opposed To a Stock

Profile and Questions Regarding Royalty Issuers As Wanted By Prospective Royalty Investors

Assuring Royalty Issuer Contractual Compliance

For the Benefit of Royalty Investors

Comparing Rates of Return and Royalties

Section 2: Business Owners Perspective

Royalty Terms Can Be Scaled To

Reflect The Revenues Achieved

Versus The Revenues Projected

Why Royalties Are The Better Way

Of Financing A Business

Protecting the Interests of Royalty Investors

Donation of Royalties by

Royalty Issuing Companies

It is Better to Contribute a Portfolio of Royalties

Than Cash as Royalties Provide a

Greater and Longer Term Benefit

Advantages of Royalties in

Financing a Business

Why Royalties Issued By Early-Stage Companies May Not Be Found Attractive By Investors and What To Do About It

Royalty Investors Getting Paid Royalties

Section 3: Analysis

Changing the way the world invests in privately-owned and early-stage companies

Royalties – Questions and Answers

What’s Good and Bad About Revenue Royalties

Who Profits From Royalties

Royalty Investing and Financing

Use of Royalties In University Project Financing

Creating a Royalty Exchange

Organizing Royalty Investment Funds to

Benefit Community, Business Owners and Investors

Atychiphobia - Fear of Failure and Achievemephobia – Fear of Success

Using Royalties To Provide And Profit

From Immediate Short Term Funding

If the Use Of The Funding

Will Quickly Generate Significant Revenues

Arthur’s Ancient Arabic Sayings

Annual REX Royalty Use Competitions

Certified Royalty Advisors (CRA)

Conversation with a Venture Capitalist:

Possible Discussions and Solutions

Will Venture Capital Firms

Ever Embrace Royalties?

Is It a Good Idea to

Borrow Money To Buy Royalties?

Reasons for Business Owners and Investors

NOT to Use Royalties

Royalties Are Not Dividends and

Dividends Are Not Royalties

The Natural Enemies

of Royalty Financing

The Royalty Forum:

Investors Financing Businesses With Royalties What’s

Right and What’s Wrong

What’s Fair and What’s Unfair

Why It Is Difficult To Predict The Profitability of Privately Owned Companies and Easier to Project Revenues

6. Conclusion

REX Royalty Writings and Calculators

Business Owners Considering The

Folly And Justification of Belief

What I Want To Do Regarding Royalties

Summation

Back to Table of Contents

Foreword

The Larry and Barry Guide To Understanding Royalties

By Arthur Lipper

Lawrence Larry Lion and Bernard Barry Beaver are characters I created and used in my monthly Chairman’s Comment column in Venture, The Magazine for Business Owners and Entrepreneurs, as a means of giving life to instructional dialogue.

Larry: These, of course, are only our minimum projections

Larry is the extrovert, marketing, outside partner and Barry is the more contemplative Chief Operating Officer-type. They are a good team.

There is one other image I wish to impress on you.

I developed this justice scale to use as a logo for myself and my work as a balancing of risk and reward or pain and pleasure, or good and bad – with an attempt to peer into the future, using the image of a telescope -- signifying that which can be achieved through the use of royalties.

Following are the dialogues. Please let me have any questions, which the questions and or answers engender and I will do my best to respond/ [e-mail] will get to me.

All of the writings which follow have been written as free standing dialogues and essays over the course of the past 20 months. They were prepared for those having shown an interest in learning more about royalties and also in response to questions or my thoughts regarding the different aspects of royalties and their use.

The articles appearing after the Larry and Barry dialogues are an attempt to logically group some of the writings. This effort has been accomplished by my friend and associate, Michael North. Michael and I are co-founders of Pacific Royalties LLC and the library of Pacific Royalties is a trove of information about royalties.

Back to Table of Contents

Larry And Barry: Understanding Revenue Royalties

Larry: Sure, we can well use additional money to make this business grow faster and bigger, but I’ve never before heard of a company selling a small percentage, or as they call it, a sliver, of future revenue.

Barry: No, neither had I, as it’s a brand new idea, one they have patented in both the United States. The fact that it is both new and very different means they have a lot of education marketing to do.

Larry: I really like the idea of neither having to borrow more money or sell any equity as I am not anxious to have other than you and your family members as my partners in this business.

Barry: That’s good, as I doubt we could borrow much more money on reasonable terms and one of the things I’ve been considering is using the money they are suggesting to pay off all of our debt.

Larry: Being debt free would help us in a lot of ways, but at what cost? The quarterly royalty payments, though mechanically easy to arrange, will take money away from us, which we may need at times in the operation of the business.

Barry: That’s why they said that unless we now have or will have a high profit margin that revenue participation may not be in our best interest. However, it’s really a great deal for companies earning good profit where the owners do not want to have more shareholders or debt.

Larry: I like the part of not having to ever repay the funds they will provide.

Barry: There may be some tax issues, in some jurisdictions, about our selling future revenues but I’m pretty sure we can find a way to deal with the matter.

Larry: The part I like best is not having to report higher profits every quarter as some of our friends feel they have to do once they became publicly traded. That means they have to pay higher taxes all the time and also it’s not really good business to force profit reporting as sometimes it’s better to spend more on research and longer term projects, which reduce shorter term profits.

Barry: I didn’t realize you had become so conservative. Bravo. Yes, you are right the need to report profits to keep transient shareholders happy can be disruptive to the building of a solid business.

Larry: Ok, let’s talk about the $20.0 million we need to open the next city, which looks like it should be so very profitable.

Barry: We could easily afford to pay a small percentage of the revenues from that operation for 20 years and transfer all of the directly related assets to the trustee they require as long as we had the use of those assets until we met our obligations to the royalty entitlement holders.

Larry: But would they give us the full $20.0 million we need without more of an inducement?

Barry: I don’t know, perhaps they’d want to only deal with the whole company. That’s what we’d have to negotiate with the parties interested in owning a share of our revenues. If, in effect, they’d let us do project financing, we could give them additional security by transferring additional assets to the trustee or even guarantee that at the end of the contract period an agreed minimum amount of royalties would have been paid.

Larry: We could even afford to give them a higher royalty after the first few years after opening or an agreed minimum royalty payment every quarter. There are lots of ways this deal could be made to work.

Barry: It’s all a matter of how much we are prepared to pay to keep the control and ownership of our company exclusively in our hands. To me that’s worth a lot.

Larry: Yeah, I agree. I also understand we can buy in and cancel the revenue participation contract units either on an exchange trading the royalties or through a tender offer, perhaps even using securities should we ever decide to go public.

Barry: But what happens if we go through a losing period where our costs exceed our revenues, do we still have to pay the royalties?

Larry: We sure do unless we negotiate to pay a premium for an accrual and delayed payment. It’s all up to the results of a negotiation as to what they are willing to accept.

Barry: So, we get $20.0 million, less some level of placement fee of say 5% to 10% and have to pay a negotiated percentage of the unit’s revenues for 20 years. Now what happens when some large company wants to buy us at a time when we want to sell? Wouldn’t they pay less if they have a continuing royalty payment obligation?

Larry: Sure, but we would still own the stock we would have had to give up for the $20.0 million and we’d be in a better position to arrange for the funds to buy back the royalty entitlement contract units so we could cancel them or we could just accept a lesser price for the company. We’d still have been the only decision makers in managing the company.

Barry: The royalty holders have no seats on our board or ability to give us advice or in any way help us run our company. As long as we pay the royalties we need have no contact with the investors who provided the $20.0 million.

Larry: So what’s wrong with the deal?

Barry: Nothing as long as we continue to enjoy good profit margins so we can afford to pay the royalty and still have sufficient money to run and expand the company. The trustee holds the assets we or anyone else need to keep the company in business so we have no alternative but to comply with the contract.

Larry: One more thing. How do they collect the royalties and know they are getting a good count?

Barry: The terms of the deal are tough. You, I and all the other directors have to personally attest as to the accuracy of the revenues we report. Then annually there is a revenue audit by an accounting firm on which we agree.

Larry: And the royalty collection process?

Barry: That’s even simpler. We designate a limited number of banks into which we agree, for the entire period of the contract, to deposit all payments received for the sale of goods or services. We have to give those banks irrevocable instructions to deduct the agreed royalty from every deposit and quarterly to transmit the funds to the trustee company, which then makes distributions to the royalty entitlement contract unit holders. If the bank won’t agree to make the deductions then an agreed party having access to our account will do so.

Larry: As the trustee company already owns, until the end of the royalty payment period, all of the critical assets of the company, though we can use them without any payment, we have no option but to comply with the terms of the contract.

Barry: We would anyway as we are honest people, as the due diligence the investor or their agent did before agreeing to buy the royalty would have learned.

Larry: Yes and they agree to help us write the offering document describing the company and the industry in which we compete. They also will provide us with the list of facts we are obliged to advise the investor(s).

Barry: Do you really believe in the expansion project enough for us to take their money and enter into such a long-term relationship?

Larry: Well, we could give them a higher royalty for a lesser period or take a lesser amount of money so it would be easier to buy back the contract units.

Barry: Yes. An if the royalty units were to be listed on an exchange that would allow us to know the price we would have to pay to get some or all of them back.

Larry: Right. I like the idea of there being a royalty exchange, as that will probably reduce