While helping an average entrepreneur expand their company, Grenville Strategic Royalty Corp., a publicly traded royalty investment company, began testing out a form of financing that had historically worked well in oil and gas, mining, pharmaceuticals and film: “revenue” or “royalty” financing.
In short, Grenville found a structure that really worked — for entrepreneurs and investors!
What is Royalty Financing?
The premise behind Royalty Financing is simple: a company sells a negotiated percentage of its future revenues to an investor in exchange for a capital investment.
Today, this structure has been taken beyond oil and gas, mining, film production, pharmaceuticals and music to general small businesses (revenues up to $50 million) and it is quickly gaining considerable traction.
How does it work?
Rather than a company making fixed interest rate payments on a bank loan, Royalty Financing generates a return from a percentage of company revenues, over time. The structure is unsecured, subordinate and looks and feels a lot like good old fashioned equity — except it has a small monthly income stream to investors.
While bank loans seem less expensive and lower-risk, they can be difficult for small business owners to obtain and come with a lot of conditions like personal guarantees and pledging your business, to name a few. At the other end of the spectrum are equity investments which are about higher risk and higher return. Royalty Financing is more in the middle-ground, with a current cash stream reducing the risk as part of the structure.
An example of Royalty Financing
A basic example: A five-year old-company has $10 million of revenue. For a $1 million investment, the investment company would “purchase” 2.5 percent of the company’s revenue ($10 million of revenue times 2.5 percent = $250,000 of cash flow generated year). The net result is a stream of monthly royalties from a broad portfolio of companies and the investment company becomes the company’s champion to help them grow their revenues even higher, and the company doesn’t have $1 million to pay back.
Each Royalty Agreement is tailored according to the company’s unique business situation and the investment company works hand-in-hand with portfolio companies to collaborate in developing future buy downs and contract buyout strategies to reduce the royalty rate over time.
How is this source of capital different from other forms of financing?
This type of capital aligns with a company’s plans for growth. However, business owners retain clear control of their businesses; there are no onerous financial covenants, no board seats, and no dilution of ownership associated with the Royalty Financing investment.
Whereas traditional forms of financing, like equity and debt, can be expensive and dilutive, this model is about letting management stay in charge of their company. No security is demanded and no restrictive covenants are imposed.
Value for shareholders?
Put simply, Grenville has built up a portfolio of highly diversified cash-flow generating, long-term focused investments for its shareholders by investing in a mix of businesses which in turn, balances the portfolio and maintains stability. It’s also developed a source of capital for companies that often fits much better than traditional equity or debt, which works well for entrepreneurs, as shareholders and investors in their companies.
In Glenville’s history, fast forward almost three years and the company has found something that is working extremely well in a mix of businesses like financial services, software, health care, infrastructure, construction and various service sectors.
Bill Tharp, CEO and co-founder of Grenville Strategic Royalty Corp., has been building and investing in companies and select entrepreneurs for close to 20 years, after a successful 10 year investment banking career in both Canada and the United Kingdom. As CEO of Climate Change Infrastructure and a leadership focus on low-carbon, water-constrained, alternative energy and efficiency investments, he founded and launched Quantum Leap Asset Management, which successfully invested and exited E2 Venture Fund (the alternative energy and efficiency portion of the Covington Venture Fund), Venture Partners Balance and Equity Funds and also the Renewable Power Funds Series I, II and III, which became Sprott Power.