Whilst many of us are familiar with the two main types of investments – “Debt” which comes in the form of an obligation, and “Equity” which is in the form of ownership, there is a third type: “Royalties” which are a simple share of revenues paid to the investor.
As a business owner, you need to have easy access to capital in order to grow and compete in today’s environment, but you also want to have as much control over your business as possible, so therefore selling shares is not an attractive option.
Royalties offer more flexibility and freedom for the company owner and management, as the investor does not have a vote like shareholders, and there is no desire to influence the company’s management.
The way it works is that capital is injected into the business without taking any ownership, and as the company generates revenue, the investor is repaid an agreed percentage of revenue (between 2-20%). Once the payments have totalled the capital plus an agreed multiple, the company has repaid the loan.
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