RBF SCENAIRIO 2

1. VENTURE CAPITAL -  After a time consuming rigorous process, investors take an equity position.  You agree upon the following:

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

The VC made $9.7M on their $1M investment.  If you had kept your equity, the $9.7M would have been yours.  Your cost of capital was $9.7M.

2. ROYALTY BASED FINANCE -  Investors take a small % of the monthly revenue until the debt is paid.  You agree upon the following:

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. Flexible monthly payments rise and fall with revenue.  Unlike traditional debt, the payment plan is flexible and adapts to your business model.  No threat of loosing control, equity 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

Unlike with the VC, you retained 100% of your equity.  Your cost of capital was the $2M paid for the RBF loan. Cost of capital with the VC was $9.7M.

Cost of Capital:

In this scenario, the cost of capital for the $1M investment from the VC was $9.7M.  The cost of capital for the same investment from the Royalty based finance alternative was $2M.   

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 flexible monthly percent of revenue payments. 

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.  You are both successful if you meet your growth plan.

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

Smart Growth Capital