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Accounting for royalty financing

My company is considering obtaining royalty base financing to raise capital. This type of funding is not debt financing nor equity financing as there is no dilution of equity. The lender will give us money in tranches & in return receive a percentage of revenue. The amount they receive will be some multiple, e.g. 5x what was originally lent and can last several years or until an event occurs. My question is what is the proper way to account for this type of transactions.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

My first suggestion is talk to your auditing firm. That being self-evident, I would argue that it is debt financing with a twist on how interest is being calculated.

I would at first blush (and no research) would feel this logic would prevail:

You borrow $100, you owe the $100, but with a payment term that is x months long with an variable interest (royalty) rate. Thus recording would be the same if it were a standard vehicle. Remember to footnote this in your Financials.

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EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I agree with Wayne. It is still a DEBT.

One more point against the term "royalty" ...although the term has been loosely used, (shout out to Mr. Wonderful Kevin Leary/SharkTank), you are NOT assigning, giving away, or using someone else's property/asset (maybe you are, but forgot to mention?). Just because the payment is based on a set percentage of revenue does NOT technically make it a royalty financing. At least that is my opinion.

My thought process (also without research) is...

1. Since the multiple (amount to be paid over the orig loan amount) is pre-determined, how and when do you recognize this, do you need to?.
2. How do you allocate the payment (% of revenue) between principal and "multiple".

Can't make my brain to follow through with the thought process with half a cup of java.

I wonder what everyone else thinks.

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