RBF Scenario 1

Grow Your Business Without Giving the Farm Away

Suppose you have built a technology driven service company that has been in business for 5 years and is billing $12 million per year.

Your business plan proves that you can triple the revenue in 5 years with $1 million dollars of growth capital. Growth can be organic, and or acquisition. But, you don’t want or can’t qualify for a bank loan or venture debt.

What Are Your Financing Options?

VENTURE CAPITAL:

After a rigorous process, investors take an equity position.

Valuation:
You and the equity investor need to agree upon a valuation.  Your EBITDA is $1.2 million, so the VC decides to value your company at 6x EBITDA - $6,120,000.  As a result,  the $1 million growth capital investment will give the VC about 17% ownership of your company and leave you with 83%.

Conditions:
Additionally, the VC demands a board seat, monthly performance milestones, a personal guarantee and other conditions. Above all, their is an exit strategy that calls for the company to be sold in 5 years.

Risk:
If you can't hit the monthly milestones you may lose control, equity and possibly personal wealth.

Reward:

If you hit your plan, at the end of 5 years your company will have:

• $36 million annual revenue:
• 20% EBITDA = $7.2 million
• Valuation of 8X EBITDA = $57.6 million
• VC Equity = 17%, which is $9.7 million.   
• Nearly a 10x return to the VC
  
• Your Equity = 83%, which is $47.8 million

ROYALTY BASED FINANCING:

Investor Takes Small % of the Monthly Revenue Until the Debt Is Paid. 

The Faster the Revenue Grows the Faster the Debt is Paid.

Valuation:
Not necessary. In this case, there is a mutual agreement to pay 1.5% of your monthly revenues until the investor receives a $2 million royalty cap (2x return).  Consequently, the royalty cap obligation is usually met within 4 to 6 years.

Conditions:
No equity, board seat, control issues, monthly performance milestones, personal guarantees or other conditions.  Additionally, an exit strategy is not required.  Most importantly, revenue growth equals mutual success.

Risk:

In this example, the only requirement is to pay 1.5% of the monthly revenue until the debt is paid.  Monthly payments rise and fall with revenue.  There is no threat of losing equity, control or personal wealth.

Reward:
If you hit your plan, at the end of 5 years your company will have:

• $36 million annual revenue
• 20% EBITDA = $7.2 million
• Valuation of 8x EBITDA = $57.6 million
  
• Your Equity = 100%, which is $57.6 million

Cost of Capital:

In this scenario, the cost of the $1M investment from the VC  was $9.7M, but only $2M from the Royalty based finance alternative.  It cost almost 5x more to take the VC money. Additionally, with RBF,  you keep 100% of the equity and retain control of the company.

Summary:

The Royalty Based Finance (RBF) option eliminates the complex, time consuming rigorous process to find VC financing. With RBF financing, you fill out an application, the investor evaluates your financials, track record and business plan to verify that you can meet the monthly revenue % payment. You and the investor mutually agree upon a fixed payback amount (royalty cap).  The royalty cap obligation is usually met within 4 to 6 years.

Keep your equity and grow the business without giving away the farm.

Smart Growth Capital