RBF – “New” Capital Gladiator

In today’s investment arena, finding an investor for your start up or growing business is much like the gladiators in arenas of old; only this time you are the poor, inexperienced sap who is “fed” to the gladiators much to the delight of the crowd.  Your chances of success are minimal, the outcome all but certain and the bloodbath that will soon stain the ground will be widespread and deep.

The traditional gladiators (banks, venture capital, angel investment vehicles, private placements, etc.) have their pick of the litter and are no longer taking risks based on potential; instead, they want sure opportunities with proven track records or enough capital of their own to make such an investment safer and more secure.  When they do take a risk, they do so with the intent of taking over and/or becoming majority partner in a business whose idea they did not invent.

There is a solution – a little known player that has been around, but is just gaining prominence as a “savior” of sorts for businesses that cannot qualify for more traditional forms of investment; enter Revenue Based Finance (RBF) – the “New” Capital Gladiator.

RBF will advance money to a company in exchange for an assigned percentage of the revenues of that company at a pre-set percentage over a defined term.   Many businesses are suitable for RBF. This is especially true of start-ups, companies in need of a turnaround, businesses based on intangible or intellectual property or for companies that, for whatever reason, cannot issue traditional equity, take on debt or need project specific financing.  Qualifying for RBF does not rely on the credit of the business or its officers, nor is dependent on a valuation of the business as with a traditional placement of equity. Rather, RBF relies on the quality of historic, current or projected revenues. This means that the communication and accuracy of your plan and projections is paramount to successfully accessing RBF.  Having a separate business definition focused on RBF will help investors complete their due diligence and make the right decision.  If you do not have experience with creating such a tailored business definition, seek out those with experience in the arena to help develop the documentation; this will pay for itself many times over!

Traditionally, Oil & Gas, Motion Pictures and the Music industries have used RBF. However, when the credit markets collapsed and with the recent advent of more restrictive underwriting requirements for credit, the RBF market has taken up its position at the top of the gladiatorial ranks, providing what the other combatants can’t or won’t; a potential solution that may provide victory and glory instead of defeat and failure upon the sands of the business arena.

RBF providers include Angel Investors, private equity funds dedicated to providing revenue based finance and some trade partners.  The royalty rate can vary from a few points to a blanket royalty of near 100%. The term will vary depending on the royalty rate and total required return; returns can range from 12% to 25% generally. It is more expensive than bank debt but less expensive than venture capital.  The key is to pick the RBF providers that most closely match your business characteristics.

RBF Instruments are not traditionally debt; however some providers require a standby promissory note which is an underlying note executed in case the revenues to repay the investment do not materialize or are not sufficient to meet the royalty payments as anticipated and agreed. Some providers offer equity revenue based finance which does not have a note or contingent liability to mitigate the investment risks. Typically, an interest in the revenues of the company is evidenced by a Revenue Royalty Certificate and/or a Royalty Agreement.  In addition to the traditional due diligence conducted by all investment groups, RBF providers will specifically focus on the accuracy of revenues and anticipated margins before proposing potential terms and accepting a new business for funding.

Royalties are designed to fit within the margins of the business and will vary accordingly. This is a key component of RBF as the success of the business becomes the vehicle for the investor to make money.  In other words, if RBF hamstrings the business, it will be unable to operate and everyone will lose, so it benefits RBF investors to help ensure business objectives are met/exceeded and to not take a greater percentage of ongoing business revenue than can be realistically absorbed.

So, instead of turning tail and leaving the arena completely or facing the gladiatorial ranks with little more than your fists and some cunning, why not try focusing on developing a business model that will allow yourself to align with an RBF provider; they just might equip your business with what it needs to fight and win, attaining lasting glory on the sands of the Business Arena.

By:

Dave Seligsohn

A2O Consulting LLC, founder and CEO

member firm of XSELLIX.NET LLC.