An Innovative Way to Finance Entrepreneurial Companies
- by Bruce Blechman
One of the major roadblocks that eventually kills many deals is valuation. Ultimately, the entrepreneur and investor must reach an agreement on the valuation of the business. Unfortunately, each resides in a different “value world,” and each approaches the matter from a different point of view.
For entrepreneurs, the business should be valued based on the potential revenues and profits. It’s their idea, their work, their research, and their time and effort. Even with the investor’s capital, it will be their “blood, sweat and tears” that will make the business successful—and pay back the investor.
However, for the investor, that “blue sky” may or may not happen. No one can predict the future, so the investor has to value the opportunity at its present value and at its present stage of development. There is a high degree of risk and a great chance of loss if everything doesn’t go just right.
While both parties are correct, this duality is representative of why business valuations are often deal killers.
One solution? Let’s just do away with valuation!
What if there was a way to invest in a business that did not include discussion about valuation or result in a dilution of ownership? This way, the entrepreneur and their management team could keep 100 percent equity ownership of the business.
Let me introduce you to Revenue Participation Financing (RPF), a new way to invest in entrepreneurial companies in which entrepreneurs don’t have to give up one share of stock to the investor—thus eliminating all discussion about equity investments, valuation and control. RPF financing requires no loans, no inflexible interest payments and no collateral.
RPF is a structured finance program in which the investor receives a percentage of the business’ revenues. An RPF is simply a predetermined percentage of the revenues of a business before any expenses are deducted; in this way, an RPF can be compared to a royalty payment to inventors. RPF contracts are contracts between parties requiring the payment of a negotiated percentage of revenues for an agreed percentage of return. As a percentage of revenues, the RPF increases or declines with revenues.
Utilizing this RPF method, investors receive monthly payments from the first dollar of revenue generated by the business in which they have placed an investment. It also provides the entrepreneur with the data necessary to more accurately determine the costs of operations because it includes the actual cost of capital. The RPF approach allows for payment to the investor to be taken out of “pre-tax” dollars. Moreover, this approach will improve both budgeting and net-revenue forecasting for businesses, even for early-stage businesses .
In sum, the RPF model alleviates the traditional disconnect between the source of capital and the user of that capital.