So, when to consider royalty financing? Let me share with you a couple general criteria.
The first of which would be that it’s an existing business that has a good, strong growth proposition.
And secondly, there’s a strong management team; that’s a really critical part- a management team that is able to adapt to changes in the future, that’s curious to learn, and that has that “grit” to be successful- that’s a strong management team.
The other thing to look for is a strong cash flow. Because royalty is a pay as you grow model of financing, it’s important to that you’re able to lever the kind of capital to produce a lot of bottom line results. So, if you’re a commodity type business selling things based on “hey come to us, we’re cheaper”, you’re probably not a good match for royalty financing. But if you’re a value-add type of company where you’re solving problems and you earn a healthy gross profit margin – perhaps better than 20 or 25%- that makes you a good candidate to consider royalty financing.
A couple of scenarios where royalty financing might be well suited:
It might be that you’re a company and you’re growing, but more recently you’ve had a hiccup, it hasn’t been a perfect, linear set of progress as you grow the company and the bank’s not able to provide you the kind of growth capital you need. It might be that there’s a turnaround in place and it’s underway and you can see it in the sales pipeline, but it doesn’t yet show up in the financials. So, the bank’s not able to take that into account. Perhaps you’ve hired a new team, perhaps you’ve addressed some pricing change, whatever the change is, the turnaround is underway but not yet showing up in the financials. Another scenario might be that you’re a portfolio company equity-backed and the equity investors consider you a success and you’re off to the races but guess what? You need to extend the runway just a little bit further, you need some additional capital; that’s a scenario that also may work for royalty to be a consideration. So royalty financing really is
It might be that there’s a turnaround in place and it’s underway and you can see it in the sales pipeline, but it doesn’t yet show up in the financials. So, the bank’s not able to take that into account. Perhaps you’ve hired a new team, perhaps you’ve addressed some pricing change, whatever the change is, the turnaround is underway but not yet showing up in the financials. Another scenario might be that you’re a portfolio company equity-backed and the equity investors consider you a success and you’re off to the races but guess what? You need to extend the runway just a little bit further, you need some additional capital; that’s a scenario that also may work for royalty to be a consideration. So royalty financing really is
Another scenario might be that you’re a portfolio company equity-backed and the equity investors consider you a success and you’re off to the races, but guess what? You need to extend the runway just a little bit further, you need some additional capital; that’s a scenario that also may work for royalty to be a consideration. So royalty financing really is
So royalty financing really is about when you’ve got a good growth capital, a good growth plan, and good cash flow and you’re not interested in a sort of “built to flip” kind of situation but more of a “built to last”. You’re not independently deciding to sell the business in the next 3-5 years, so it doesn’t make sense to recruit in a financing tool that really requires you to position your company for sale in the next 3-5 years. So, royalty financing is a way of building companies sustainably and also retaining control and not diluting your ownership. A lot of New Hampshire businesses that are growing that are not yet ready or interested in having an outside decision-maker and so this is a way of growing your company without that.
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