No. RCM’s investment is in exchange for a portion of the company’s gross receipts only until the return cap is reached regardless of time. Return caps vary by investment depending on factors such as risk, amount funded, and the royalty percentage of gross receipts. Typically RCM return caps are between 2x and 3x of the investment amount – meaning in a 2x deal where RCM invests $500,000, the company returns the royalty percentage until RCM receives back its $500,000 investment plus a return of $500,000.
Normally, yes. At any point prior to the return cap being reached a company can terminate the royalty agreement by paying the remaining return to the cap. Most investments have provisions providing for a reduction in the cap if the position is purchased from RCM within the first few years.
Changes in control trigger repayment provisions, as do mergers or acquisitions, that require the company to make full payment to the return cap. RCM makes investments in the owners and operators of existing businesses, and changes in that investment require the company to pay the return to the cap. In some instances RCM may be willing to forgo the right to payment and work with new ownership, but this is done only on a case by case basis.
Yes. In such situations RCM is making an investment in the newly configured entity. RCM will evaluate and invest based upon the characteristics and opportunities of the new entity. Partner buyouts and generational transfers requiring a ‘lump sum’ at the time of transfer are often excellent candidates for an RCM investment.
Yes, RCM looks to syndicate with Venture Capital where fitting opportunities arise. RCM invests in RevCap structured deals where companies are in revenue and can support a royalty payment. As a syndicate partner we are looking to co-invest a minimum of $250-500k and provide expertise and documentation surrounding the nuances of royalty investments.
No. There are no financial guarantees of payments by either the company or its owners. RCM makes investments that are dependent only upon business operations for payments. Meaning, only when the company has gross revenues is there any right of RCM to receive payment. If the company does not have gross revenues then no payment is owed to RCM. However, there are significant penalties and compliance provisions that do apply when the company has gross revenues but breaches the investment agreement and fails to make payment to RCM. The basic notion of revenue capital investments is that, unlike commercial loan instruments, payments vary with revenue. Payments are within the control of the company since they are due only when gross revenues occur. If gross revenues decline or stop for a period of time, so does the payment to RCM.
Normally, the company calculates its gross receipts every month and applies the royalty rate. This amount is paid monthly to RCM. RCM may from time to time perform an audit on company finances to verify investment compliance. But this is generally not necessary as RCM is typically provided with “information only” rights to the company’s banking data, and can verify needed information.
Yes. If revenues increase beyond the initial “established” amount there may be opportunity for further investment.
RCM invests in a company in exchange for payments from a percentage of gross revenue, up to a return cap. Unlike a traditional loan, there is no fixed time period for repayment, no balloon date, and no guarantee of return. Instead, RCM receives a percentage of gross revenues until the cap is reached or the company ceases earning revenue. As a result, there is no way to calculate a specific interest rate since the time period of repayment cannot be known in advance. However, where the conditions and guarantees of typical commercial lending are available and agreeable to the company, most bank’s interest rates are likely to be far lower than the return RCM seeks for its investment – though from a cash flow perspective, the difference to a commercial bank loan that amortizes on a 3 or 4 year schedule may not be material to the company’s cash flow on a monthly basis.
RCM works with companies to arrive at an “established” gross revenue figure. For obvious reasons, generally the longer the company’s revenue history the clearer the picture is of “established” revenues. RCM is interested in recognizing a company’s highest level of gross revenues that can reasonably be expected to be sustainable. While RCM investments tend to have earnings histories of five or more years, duration of revenue history is not the only factor. Sometimes, even a short run of existing gross revenues can be used where there is a contractual or other quantifiable basis.