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Most royalty investors purchase royalties with the intent of holding them to the maturity of the contract, in order to receive the full benefit of the increase of royalty issuer revenues anticipated. However, some royalty owners will be interested in selling their royalties before the royalty payment period ends.
Some income and profit seeking investors will be interested in purchasing royalties from the royalty owners after there has been a history of royalty payments. These investors will be prepared to pay a percentage of the royalties they expect to receive over the remaining course of the royalty payment period.
Our intent in creating the REX-PV.com service was to assist both buyers and sellers of royalties calculate, understand and negotiate a transfer of royalty ownership.
Calculating the Present Value of a royalty
Using the REX-Present Value Calculator
Either through the royalty exchanges we believe will evolve or currently through direct placement, many owners of royalties will want an ability to sell the royalties they own.
From the perspective of the royalty owner the following questions should be asked and answered:
What will be the IRR earned if the sale is at the desired price?
If I know the year of the sale and the cumulative amount of royalties already received, what will be the additional amount necessary to achieve the desired IRR?
What will be my IRR if the projected revenues occur and the royalty is held until maturity?
The REX-Present Value Calculator provides the answers.
From the perspective of the new royalty buyer of whatever are the number of remaining years of royalty payments the following questions should be asked and answered?
What is the amount which should be paid for the entered remaining years of royalty payments?
What will be the IRR earned if the projected revenues occur and the royalty is purchased at the stated price?
What is the minimum IRR required for the investment to be attractive?
As the Present Value of the total of royalty payments expected to be received is wholly dependent on the projected revenues being achieved, what is the discount of the revenues, which will be necessary for the minimum IRR to be achieved?
The REX-Present Value Calculator provides the answers.
The REX-Present Value Calculator allows the user to enter and adjust:
Enterable but non-adjustable
The terms of the royalty as to royalty rate and maturity.
The royalty issuer’s projected revenues.
Adjustable and Calculable
The amount to be paid by the Buyer in the ____ year for ___ remaining years of anticipated royalty payments, if the Seller’s desired IRR is to be achieved.
The discount of the present value of the anticipated cumulative value of the anticipated revenues is ___%
The IRR to be achieved by the Buyer of the royalty is based upon the Projected Revenues provided by the Seller (or Issuer). The revenues and royalties shown to be discounted by ___% are only for comparison.
The IRR to be earned by the Seller of the royalty is based upon the Projected Revenues the Seller (or Issuer) has provided. The revenues and royalties shown as discounted by ___% are only for comparison.
When the Buyer pays the amount necessary for the Seller to achieve the desired IRR, The IRR to be earned by the Buyer of the royalty having ___ remaining years of royalties is ___%.
The REX-Present Value Calculator provides the answers, which allow both sellers and buyers of royalties before the maturity of the royalty payment period, to fully understand the results of the contemplated transaction.
The area of greatest negotiation will be that of the level of discount to be applied to the remaining years of projected revenues and therefore royalty payments.
The purchase of a royalty from the owner, who has already received a significant amount of royalty payments, will allow the seller to achieve the desired IRR through the amount paid by the buyer
The buyer of the royalty, issued by a company having demonstrated its revenue generation and royalty payment history, will justify the amount paid for the royalty, which will be based on the discounted present value as necessary to achieve the minimum required IRR. Of course, the buyer of the royalty will hope the royalty issuer’s revenues will reach and exceed the projected levels.
Users of the REX-Present Value Calculator are invited to let me have their comments and questions.
As the amount of the discounted PV will be significant the buyer’s bid and the seller’s offer should indicate the terms of payment. If the terms are 100% cash the buyer’s bid will be less. Were the buyer to pay an amount of, at least, the original owner’s cost it is possible that some seller’s would accept a partial payment in the form of a continuation of the full royalty payments up to an agreed amount. Were this to be the structure of the transaction the buyer would really be paying for royalties from the issuer for fewer than the full period of time left in the royalty payment agreement. The advantage to the buyer would be one of owning a percentage of revenue from an issuer which has performed in accordance with the contract and which has probably been able to increase revenues. This REX-PV calculator reflects an assumption of a 100% cash trade and not one in which there are delayed payments.
Please review both the Samples and the FAQ sections for a better understanding of our service and send me additional questions and comments. We will not publish these questions or comments without your permission to do so.
We are available for consulting.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7100 – Skype: artlipper
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