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Private Equity and Venture Capital Glossary



Definition Royalty Based Financing

Royalty Based Financing - Royalty Based Financing presumes a fundamental trade-off between the investor and the business owner. In lieu of an equity ownership stake given to the investor, business owners agree to return to the investor the original principal plus either a predetermined multiple of the original investment (fixed dollar payback) or payment of the royalty until a fixed period of time has elapsed (fixed time payback). In some cases the royalty is based on a percentage of sales of a specific product or set of products.

Investors deploying Royalty Based Financing do not push businesses to be acquired or to launch an IPO. Rather, business owners are encouraged to maintain ownership, to grow, and to develop successful, long-lasting enterprises with solid, profitable revenue streams. For the investor, this prosperity translates into regular and increasing royalty payments. Companies pay as they go, paying more as they grow.

 

 
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