Crunching Revenue Share Loan Numbers

Jim Verdonik

JFV@Wardandsmith.com

(919)  277-9188

Capital Talks are  a series of conversations Jim Verdonik is having with interesting people about anything he wants to talk about.

Viewer discretion is advised.

In this session Jim Verdonik talks with Benji Jones about: CRUNCHING REVENUE SHARE LOAN NUMBERS

BENJI: Jim, We’ve already discussed the general positives and negatives of Revenue Share Loans, but we’ve forgotten one important thing.

JIM: What’s that?

BENJI: The numbers.  How do people know the Revenue Share loan numbers work for them and their business?

BENJI: Before you start talking numbers, let’s do a short recap on how a Revenue Share Loans work.

BENJI: A revenue share is a loan that is paid back over time by the borrower “sharing” a percentage of its “revenue” at regular intervals until it has returned to the lender a fixed multiple of the amount loaned. The percentage of revenue the business pays can vary widely based on projected revenue and operating profit.

JIM: How long are the loans?

BENJI: The business’ repayment obligation might be open ended (meaning the loan remains outstanding until the stated return is met without a final due date), but more often the payback amount must be repaid in full within a specific time window (say 3 to 5 years). Having a definite end date may require the business to make a “balloon payment” at the end of that period if the monthly or quarterly revenue percentage repayments are less that the total payback amount. BENJI: Are there any economic tests you use to determine whether a business can repay its revenue share loan?  How do you know you won’t default on the loan.

BENJI: Now that I’ve explained the basic loan terms, let’s discuss three basic economic points:

  • What are the returns on investment for Revenue Share Loans?
  • How do businesses know what terms they can afford to pay so that they don’t default?
  • How do you decide whether selling equity or Revenue Share Loans is in the owners’ interests?

JIM:   I’ll jump into investment returns first.  There is a correlation between the payout multiple investors demand and the maturity date the business wants.  For example, a Rev Share loan with a three-year maturity might be marketable to investors at a 1.5x multiple.  For a five year maturity, investors might want a 1.75x multiple.

BENJI: Is there an upside for the investor?  Or is it always the same rate of return?

JIM: The total amount the investor receives is fixed, but the shorter the length of time the company takes to fulfill its obligation — the quicker the payout and the higher the rate of return (ROI).  If a company can convince investors that it can repay the loan quickly, it can attract investors with a lower payback multiple.  If a loan has a five year maturity date and the company repays the loan in three years, investors can achieve double digit annual compounded interest rates.  So, investors can “hit the jackpot,” if revenue increases faster than the company projects.

BENJI: Since the total amount investors receive is always the same, explain this jackpot concept.

JIM: The investor wins because the investor can reinvest any money the investor receives earlier than expected. Any profit from that reinvestment is a windfall for the investor.

BENJI: So, what are the best types of businesses to sell Rev Share loans?

JIM: The big three industries are: food, booze and software.

BENJI: I see the connection with food and booze, but what does software have in common with food and booze?

JIM: Restaurants, breweries and software all fit the model of starting to generate revenue after a relatively small investment.  They also tend to have repeat customers.  Software has the added advantage of having both relatively high margins and high annual revenue growth rates.

BENJI: That tells us about industries generally, but are there specific economic characteristics that tell us a particular business is a good Rev Share loan candidate?

JIM: The business attributes we look for when we recommend Rev Share deals are:

  • Either a track record of having revenue or certain near term prospects for generating revenue so that investors will start getting money back within a few months.
  • Companies that are or soon will become profitable. You can’t repay debt from revenue that you have to spend to pay your operating expenses. Revenue growth without profit growth can cause borrowers to default, because their monthly repayments increase at the same time their other expenses are increasing.
  • High margins hold the potential for profitability, but that’s only true if management controls expenses. So, the best Rev Share candidates are business where expenses don’t grow as fast as revenue.
  • Projections for high annual revenue growth rates enable companies to repay their loans from the faster growth they generate from the loan proceeds.
  • The business can make a good case that every dollar invested in marketing or expanding production has historically resulted in multiple dollars of additional revenue.

JIM: We use the traditional the Debt Service Coverage Ratio that banks use to help businesses decide whether they can repay a Rev Share loan. Banks usually want a 1.25 or 1.3 to 1 ratio of adjusted net operating profit to total debt service obligations.  A 1:1 ratio is theoretically sufficient to repay, but banks want a cushion to avoid defaults. Rev Share borrowers must decide how much of a safety net they want to build into their offering terms.

BENJI: Are there any other differences from how banks make loan decisions?

JIM: Banks also tend to be conservative about projected revenue and profit growth rates, which affect the Debt Service Coverage Ratio calculation after the first year of the loan. Business owners have to decide whether they really believe their own growth rate projections. If they believe their own projections, they can move forward based on projections a bank would heavily discount.

BENJI: How can businesses easily run the numbers to see whether they make the cut?

JIM: We have financial modeling tools that use the clients’ own data about current revenue and profits and projected growth rates to help clients quickly analyze multiple offering terms and repayment scenarios.

BENJI: What financial information do our tools give businesses?

JIM: Our tools calculate projected interest rates, projected repayment instalments and Debt Service Coverage Ratios based on the amounts they want to borrow, proposed maturity dates and the payback multiples they are considering offering investors.

BENJI: How long does that process take?

JIM: We collect relevant information from businesses using short questionnaires. A business can usually provide the information we need in less than ten minutes, if it already has historical financial information and projections

BENJI: So, then do we guaranty a successful payback? I don’t like the sound of that.

JIM: Of course not. Our financial modeling tools just show how the loan terms will work using the loan terms the business wants to test and the data and projections that businesses provide. Many factors affect whether the loan will actually be repaid. Projections are often wrong. If they are, the business may not be able to repay the loan.

BENJI: So, it all depends on the business’ own projections.

JIM. Right. Businesses decide what their projections should be. We just help businesses understand how the loan terms work in light of the data and projections they provide. Later in the offering process, we ask businesses questions about their projections that help them make disclosures to investors. Sometimes businesses change their projections because of our questions. Ultimately, however, businesses are responsible for their own data and projections. We don’t make that decision for them.

BENJI: So, what happens if business owners don’t know how to do projections? Are they out of luck doing an offering?

JIM: No. If the owners need help, we can recommend other experts to help them. It’s just not what we do.

BENJI: A lot of business owners are trying to decide whether to sell stock or other equity securities. Selling equity dilutes their stock ownership, but they need capital to grow so that they can eventually sell the business for a high price.  Can you tell us whether Revenue Share Loans will provide a higher resale price for owners than selling equity?

JIM: Selling equity usually promotes faster revenue growth than borrowing does, because if you sell equity you are not repaying debt installments each month like you have to do with a Revenue Share Loan.  That means the business can reinvest more money in growth every month.

BENJI: Is the slower monthly revenue growth significant?

JIM: Not in any single month, but it adds up over the 36 to 60 months of a loan.

BENJI: So, that means Revenue Share Loans will probably reduce the total resale price of a business compared to the resale price a buyer would pay if the business had sold equity securities.

JIM: But that’s not the whole story, is it?

BENJI: Of course not.  When you sell equity, you’re selling the investors part of the resale proceeds.  The original owners won’t receive all the resale proceeds.  How do owners know what the best deal is after you take dilution into account?

JIM: Whether equity or Rev Share is a better dilution deal for the founders and earlier investors depends on a combination of the rate of return on investment the new equity investors would want and the multiple of revenue a buyer would pay at exit when the company is sold.

BENJI: Let’s deal with the multiple of revenue when the business is sold.  There are pretty common industry standards to predict that.  But things like growth rates, margins, net profits and balance sheet items like assets and liabilities can affect the actual multiple.

JIM: Right.  The price a business will sell for is partially industry related, but company specific factors also play a role.

BENJI: Now, let’s deal with the investor expectation factor. Explain how that varies.

JIM:   Investor return expectations affect the percentage of equity investors receive.  Typically, venture investors want a 10x return on investment.  Sophisticated angel investors are often willing to accept a 5x return on their investment.  In either case, that means you give up a big percentage of ownership that usually results in the investors getting more of the sale proceeds when the company is sold.

BENJI: 10x sounds pricy.  I could buy my own island if all my investments paid 10x.

JIM: Of course, most investments don’t return 10x and Crowdfunding equity investors often expect less.  So, a business might find equity investors in the Crowd who only require a 3x return in investment.  If that happens, you might be better off taking the dilution by selling equity to boost revenue growth, but only if you can sell the company for a very high multiple of revenue.

BENJI: So Jim, what’s the bottom line?

JIM: Whether equity or Rev Share is a better deal for the founders and earlier investors depends on a combination of the rate of return on investment the new equity investors would want and the the multiple of revenue a buyer would pay at exit when the company is sold.

BENJI: So, you’re saying “It depends.”  That sounds like the type of evasive answer people don’t like about lawyers.  Give the folks a break.  Be more specific.

JIM: OK.  Here it goes.  In most scenarios, our numbers crunching indicates that selling Revenue Share loans produces a higher net sale price at exit to existing owners than selling equity does.  In short:  Rev Share loans protect not only against percentage dilution but protect against value dilution.  I hope I don’t get disbarred for giving a clear answer.

BENJI: That wasn’t really so hard.  Was it?

JIM: I just hope I don’t get disbarred for giving a clear answer without any hedges.

BENJI: You’re right.  That’s totally not very lawyerly behavior, but we’re not your average lawyers.

This is Jim Verdonik signing off until our next Capital Talk.

This article is one of a series of three articles that discuss Revenue Share Loans in detail.  You can find our other two articles at:

Loving Revenue Share Loans

https://gatewaycapitalx.com/2017/10/09/iloverevshare-and-you-shohld-too/

Why Investors and Businesses May Not Love Revenue Share Loans

https://gatewaycapitalx.com/2017/10/10/197/

 

The content contained on this article does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship.  All uses of the content contained in this article, other than for personal use, are prohibited.

Why Investors and Businesses May Not Love Revenue Share Loans

Jim Verdonik

JFV@Wardandsmith.com 

(919)  277-9188

Capital Talks are  a series of conversations Jim Verdonik is having with interesting people about anything he wants to talk about.

Viewer discretion is advised

In this session Jim Verdonik talks with Benji Jones talk about:

WHY INVESTORS AND BUSINESSES MAY NOT LOVE REVENUE SHARE LOANS

BENJI: Jim, in our last discussion about Revenue Share loans, we gave a pretty flattering description of Revenue Share loans.  Two lawyers can’t talk about this without talking about the downside.  Go ahead.  Spoil the party.  What are the problems with Revenue Share loans?

JIM: Like anything that sounds too good to be true, sometimes it is.  Here are the issues you need to watch out for – reasons you might not to LOVE Rev Share:

  1. Repayments can slow a business’ ability to reinvest in long-term growth compared to equity.
  2. Slower revenue growth may mean a lower sale price at exit (if that’s what the business owners are looking for).
  3. Paying investors is an ongoing expense and can be headache, unless you hire someone do it like a payroll service.
  4. Paying investors also requires sharing periodic revenue numbers with many people.  This info may leak to competitors and customers.
  5. In an LLC or other pass through entity, owners will be taxed on phantom profits used to repay the loans.  That’s not a problem with equity.
  6. Future lenders may be unwilling to make new loans to the company while the Rev Share debt is outstanding.

JIM: Benji, don’t make me do all the hard stuff.  It’s your turn.

BENJI: OK, I still LOVE Rev Share, but raising capital through investment crowdfunding is complicated.  Businesses need to be prepared for added regulatory and compliance costs, as well as the distractions that accompany taking investments from a “crowd” of people.  Management still has a responsibility to provide information and respond to these investors, even if they are not “owners” of the business.  In addition, businesses raising capital through Rev Share loans will need to manage the payout process carefully.

JIM: What about investors?

BENJI: Investors should recognize that there are always risks associated with any kind of investment – particularly investments in small businesses and startups.  There is no guarantee that the business you love will actually continue to operate successfully or derive sufficient revenue to repay your loan.

JIM: Can you talk some more about what investors should consider before investing?

BENJI: Many of the things that might be appealing for companies about Rev Share loans cut the other way for investors.  For instance, unlike equity, Rev Share investors don’t have any voting, economic or management interest in the business.  Although they are creditors, they typically don’t benefit from personal guarantees, security interests, financial covenants, or other restrictions that protect banks or institutional investors.  Rev Share loans are often junior to other loans the business has now or may obtain in the future.  That means that other lenders may get paid while Rev Share loans remain unpaid.  This risk of junior debt is why Revenue Share loans offer higher interest rates than banks typically charge.

JIM: Are there any other reasons investors should be cautious?

BENJI: Although Rev Share loans offer the opportunity to support the businesses you care most about – investors should consider all of the terms being offered by the company and all the facts the company discloses, including whether the company is generating revenue, to minimize your risk of not getting paid back and maximize your expected return.  It is critical to understand the terms that govern an investment before you commit.

JIM: What’s the best way for investors to deal with these risks?

BENJI: Diversification.  Don’t invest too much of your capital in any single business or in any single type of deal.

JIM: So, are you advising investors to LOVE Rev Share loans in moderation?

BENJI: Yes.  Too much of anything can be bad for you.  Revenue Share loans are no different.

JIM: What about taxes?

BENJI: Rev Share has a more complex tax impact than say, straight debt or equity, due to the variable nature of the installment payments.  Businesses and investors alike will need to understand how tax payments and paperwork will be handled post-closing.  (Many platforms, like Streetwise and LocalStake, offer post-closing payment services to help companies manage these hurdles.)  You should consult your personal tax, accounting and legal advisors before making an investment.

JIM: Do you have any parting advice for potential Rev Share issuers and investors?

BENJI: I’ll tell them the same thing my Mother told me growing up.  It always started like this:

Before you get “hitched” . . . and ended with a tragic story.

JIM:  Sounds like you have the makings of a country-western song there.

BENJI:  There’s a lot of drama in raising capital.  So, why not?  Of course, LOVING Rev Share when you plan your deal is a lot like getting married.  Most people are in LOVE when it starts, but how long the LOVE lasts is what counts.  Having a long lasting LOVE of Rev Share depends on whether your projections were realistic and how you manage your business.  So, be careful your LOVE affair with Rev Share doesn’t end in a messy divorce.

This is Jim Verdonik signing off until our next Capital Talk.

This article is one of a series of three articles that discuss Revenue Share Loans in detail.  You can find our other two articles at:

Loving Revenue Share Loans

https://gatewaycapitalx.com/2017/10/09/iloverevshare-and-you-shohld-too/

Crunching Revenue Share Loan Numbers

https://gatewaycapitalx.com/2017/10/10/crunching-revenue-share-loan-numbers/

The content contained on this article does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship.  All uses of the content contained in this article, other than for personal use, are prohibited.

 

 

Crowdfunding Is Child’s Play

Jim Verdonik

JFV@Wardandsmith.com 

(919)  277-9188

Capital Talks are  a series of conversations Jim Verdonik is having with interesting people about anything he wants to talk about.

In this session Jim Verdonik talks with Benji Jones about Crowdfunding and The Birds and the Bees.

JIM: Benji, what do you do when you aren’t advising people about raising capital?

BENJI: That’s all I do.  I’m very focused.

JIM: But surely, you have other interests – like family.

BENJI: Well, of course, but I find creative ways to combine work and family.

JIM: How do you combine family and raising capital?

BENJI: I’m advising my daughter about how to do a Crowdfunding campaign.

JIM: Is you daughter starting a business?

BENJI: Sort of.  Audrey wrote and is acting in a movie called “The Birds and the Bees.”  We’re raising money for the film through a Crowdfunding campaign.  Audrey has reached about two-thirds of her $6,000 goal.  Check out more about Audrey’s movie campaign at https://ifundwomen.com/projects/birdsnbees.

JIM: How old is Audrey?

Benji: 12 year old going on 21.  She’s planning on skipping her teen years.

JIM: Audrey sounds ambitious.

BENJI: Find out for yourself.  Here she is now.

JIM: How did you become an actress?

AUDREY: My Mom was an actress before she became the world’s best lawyer.  Guess I was born for the role.

JIM: Who’s a better actress? You?  Or your Mom?

AUDREY: Me.  I hope I never have to be a lawyer.

JIM: What’s your movie about?

AUDREY: Didn’t your parents ever tell you about the Birds and the Bees?

JIM: You really are a lot like your Mom.

JIM: Why did you write a movie?

AUDREY: I’d been working on a shorter piece with my drama coach, Estes Tarver.  He and my parents thought I could turn it into a funny short film.

JIM: So, did you get help writing the movie?

AUDREY:  Yep, Estes and I worked on it together.  What do you expect?  I’m only 12 you know.  Acting is a cutthroat business.  No one gets to the top without help and I’m going to be a star someday.

JIM: Well, how did you decide to raise money by Crowdfunding?

AUDREY: My Mom made me do it.  She is a Crowdfunding expert.  So, what choice did I have?

JIM: Do you have any tips for people who want to raise money by Crowdfunding?

AUDREY: Yes.  Ask my Mom to help you.

JIM: Sounds like you and your Mom do a lot together.

AUDREY: Yes, Mom is a lot of fun. Is it OK to say Mom is the best lawyer in the world again?  Mom pays me each time I say it.  In the movie industry that’s called product placement.

JIM: Why are you leaving now?

AUDREY: Mom wants me to start writing my Academy Awards acceptance speech.

JIM: Do you really think that’s necessary?

AUDREY and BENJI: Of course it is.  We never do anything that doesn’t deserve an award.

JIM: That says it all about my partner Benji Jones and her daughter Audrey.

JIM: Watch for Audrey in a theater near you.

BENJI:  In the meantime contact Jim or me about your capital raising needs.

This is Jim Verdonik signing off until our next Capital Talk.

The content contained on this article does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship.  All uses of the content contained in this article, other than for personal use, are prohibited.

 

 

What’s Your BlockChain/Coin Strategy?

Jim Verdonik

JFV@Wardandsmith.com 

(919)  277-9188

This article was originally published by Triangle Business Journal in September 2017.

We’ve all seen the cartoons about a person holding a sign: “Repent: The End of the World is Coming!”

It would be nice if earth shaking events were always preceded by clear signs, wouldn’t it?

Actually, the history of signs is that most people ignore them – just like we ignore the End of the World signs we see in cartoons.

After economic bubbles burst, the pundits all point the signs that most people ignored. Most signs are clear only in hindsight. Even clear signs tell you what will happen, but not when.

So, here are some warning signs you will probably ignore.

  • In July 2017 The SEC declared that many block chain based artificial currencies may be securities.
  • On August 1, 2017, Delaware changed its corporate law to permit corporations to use block chain technology to keep stockholder records. But block chain is becoming an important finance and business tool that extends far beyond its original popular uses. Remember, the first people to make real money using the Internet were porn websites. Porn is still a big Internet business, but now people buy everything over the Internet.That’s the reason two of the most important corporate and securities organizations decided its time to address block chain technology.
  • These are warning signs, because most people think of block chain as the basis for shady crypto currencies. Drugs, terrorism and tax evasion come to mind.
  • The SEC knows that leaving block chain financial instruments unregulated would create huge holes in its securities and capital raising regulatory structure.’
  • The Delaware legislature realizes that stock certificates and traditional stock ledgers remain the most inefficient part of the system that keeps track of ownership interests and wants to keep Delaware’s lucrative business of being home to most major corporations.
  • That raises a question: Does your business need a block chain strategy to avoid becoming irrelevant?Much of the brick and mortar world relished the Dotcom stock market crash that occurred at the turn of the 20th Century. Hundreds of Dotcom companies crashed. Fortunes disappeared. By 2002, it seemed the brick and mortar world was safe from the Dotcom barbarians. Yay!Will we see something similar with block chain technology?
  • Probably. Initially, we will see a boom and bust cycle. Overenthusiastic investors often create bubbles. But bubbles only kill investors. Bubbles don’t destroy disruptive technology and block chain technology has many disruptive capabilities, including:
  • Fifteen years later, the brick and mortar world’s relief over the Dotcom bust was premature.
  • Before you answer No, let’s look at another Internet example.
  • In effect, both institutions have put the world on notice that they don’t intend to let a new disruptive technology make them irrelevant. To avoid irrelevancy, the decided they need a block chain strategy.
  • Transparency.
  • Replacing paper with digital information.
  • Cost reduction.
  • Eliminating human error.

Eventually, people find ways to use disruptive technology that no one imagined before. With new uses, people refine technology to minimize weaknesses. What seemed like dead ends become super highways.

It’s happened before and it will happen again.

So, I repeat my earlier question: Does your business need a block chain strategy?

 

 

 

#ILOVERevShare – And You Should Too

Jim Verdonik

JFV@Wardandsmith.com 

(919)  277-9188

Capital Talks are  a series of conversations Jim Verdonik is having with interesting people about anything he wants to talk about.

Jim Verdonik will talk with Benji Jones Revenue Share Loans in three parts: the Good, the Bad and the Numbers.

Viewer discretion is advised.

In this session Jim and Benji talk about: Why Benji Loves Revenue Share Loans for financing growing businesses.

JIM: I’m here with my partner in Crowdfunding Crime Benji Jones.

JIM: Benji recently returned from a speaking engagement at a West Coast conference about Crowdfunding.

JIM: What’s the hottest new type of security businesses are using to raise growth capital?

BENJI: The conference was buzzing about Revenue share loans.  It’s not an exaggeration to say that the Crowdfunding world is falling in love with Rev Share loans.

JIM: I notice that you’re wearing a button.  What’s the Button say?

BENJI: You know me. I’m never half-hearted about anything. My button screams: #ILOVERevShare

JIM: Can you tell us why people love Revenue Share Loans?

BENJI: Revenue Share loans are attracting interest from both accredited and non-accredited investors in Regulation CF and state crowdfunding offerings.

JIM: I’ll tell our audience what Rev Share is about before you dive into the details.  A revenue share is a loan that is paid back over time by the borrower “sharing” a percentage of its “revenue” at regular intervals until it has returned to the lender a fixed multiple of the amount loaned.  Benji, how about giving us an example?

BENJI: Let’s say a local brewery or restaurant or software company needs $500,000 to expand.  The business borrows $500,000 from investors with a promise to return to them a fixed amount (say, 1.5x or 1.75x the amount loaned) over time.

JIM: That sounds pretty simple.

BENJI: It really is.  The business pays off the loan by paying investors a percentage of its revenue in installments until the fixed return (in this case $750,000) has been repaid. As an investor, you would receive your pro rata share of such payments based on the amount of money you loaned the business.

JIM: Are there any variations in terms?

BENJI: The percentage of revenue the business pays can vary widely based on projected revenue and operating profit.  The business’ repayment obligation could be open ended (meaning the loan remains outstanding until the stated return is met), but more often the payback amount must be repaid in full within a specific time window (say 3 to 5 years).  Having a definite end date may require the business to make a “balloon payment” at the end of that period if there is any shortfall.

BENJI: Tell us about risks to investors.

JIM: As with any investment in a security, investors risk losing their investment – especially since many issuers are small or new businesses.  But many retail investors like an immediate monthly or quarterly investment return. They don’t like waiting five to ten years for an equity investment to hit a home run.  Every dollar an investor gets back in monthly payments reduces investor risk.  In some situations, investors can make a profit even if the company later goes out of business.

BENJI: Are Revenue Share loans totally new?

JIM: Rev Share isn’t a new concept.  It has been used in the oil and gas industry, real estate and film and music industries for years.  Franchising, and even share cropping, are other forms of Rev Share that long preceded Crowdfunding.

JIM: So, Benji.  Can you tell us about the size of the Rev Share market and where the most Revenue Share deals are being done?

BENJI: Crowdfund Capital Advisors recently released data focusing on the “small but significant group” of companies utilizing Rev Share to raise capital under Title III of the JOBS Act under Regulation Crowdfunding. The numbers they cite are impressive.  Picking up on this trend, Startwise.com, the newest FINRA approved Regulation Crowdfunding platform, is specifically targeting Rev Share, allowing anyone (not just accredited investors) to invest in businesses for as little as $100. LocalStake has been featuring Rev Share for the small businesses it helps raise capital for several years.

JIM: That’s exciting news.

JIM: I understand that in many situations Rev Share loans can serve dual purposes.  Can you tell us how businesses can use Revenue Share loans both to raise capital and attract and keep customers?

BENJI: You’re right.  Rev Share loans can be a great win-win for investors and small businesses – particularly those businesses that are close to, or already have a history of, producing revenue.  Take our brewery example, as an investor if you know that you basically get a dime (or a quarter for expensive beers) for each beer the brewery sells each month, then it’s not hard to imagine where you will go for happy hour on Friday afternoons; whether you might buy that extra round for your friends while you are there or where you recommend your neighbor buy the keg for the next Labor Day cookout.

JIM: So, are you saying that Rev Share loans can be like a customer loyalty program?

BENJI: Exactly!  Rev Share creates an incentive for investors to buy a company’s products and services and to become marketing ambassadors for the business, which in turn builds revenue the company needs to repay its loan.  Getting repaid money when you buy a product is a whole lot better than collecting airline points you can’t ever use.

JIM: Please go on.

BENJI: Crowdfunding is mostly about giving ordinary people the chance to invest in businesses (and products and services) they love.  Rev Share builds brand loyalty and incentivizes customer-turned-investors (who are already committed to the business) to buy more products and services and to encourage their friends, neighbors and colleagues to do the same.  This in turn increases the company’s revenue and, potentially, allows the company to pay the loan faster and at a higher ROI for its investors.  So, when all the stars align and things work as planned, Rev Share is an optimal solution for companies seeking capital and customers-turned-investors looking to support the businesses they love while having access to a relatively quick and decent ROI.

JIM: But I to have say Benji, that you seem to be one of Rev Share’s most enthusiastic supporters.  Tell us: WHY do #ULOVERevShare.

BENJI: As the poet said: “Let me count the ways.”

Here are the top 10 reasons we LOVE Rev Share for crowdfunding offerings:

  1. Rev Share is NOT equity. Investors are not buying any ownership interest in the business. Investors who purchase Rev Shares have no rights to vote or control management.
  2. Rev Share investors are creditors, not shareholders or owners. There is no “messy cap table” as a result of investment crowdfunding offerings. Once the promised return is paid, the obligation is cancelled and any contractual relationship between investor and the business is terminated.
  3. Rev Share is NOT dilutive. Rev Share doesn’t dilute the ownership, control or economic interest that small business owners (and their core investors) have in the business.
  4. Rev Share avoids setting a “valuation” on the business. The company does not need to set or negotiate a valuation of its business to sell Rev Share.
  5. Rev Share offers investors liquidity and immediate ROI, assuming the business is close to or producing revenue. The quicker the obligation is paid, the higher the ROI.
  6. Rev Share does NOT require an exit strategy. Most small businesses considering investment crowdfunding are run by owners looking to grow the company long-term and stay true to their business’ core mission. They usually aren’t looking to have a near-term exit (by selling the company or going public). With Rev Share investors do not need to wait for an exit to earn ROI.
  7. Rev Share reduces default risk. With a Rev Share loan the amount a company owes each measurement period varies solely based on the amount of revenue it generates. This reduces the chance of default when compared to traditional loans where the borrower must find cash to service set interest and principal payments on a regular basis or risk default (and the bad things that accompany missed payments) irrespective of how its business is doing.
  8. Rev Share is based on projected cash flow and is good for companies with seasonal or variable sales. Since Rev Share is based on projected cash flow, it’s a really interesting alternative for companies that have wide seasonal cash flow swings. Extreme seasonal examples would be Christmas tree farms and beach bars. During months with higher revenues, they can repay more of their debt. On the flip side, when sales are slower, their repayment would be less.
  9. Rev Share has benefits when compared to traditional bank financing. While it’s true that the cost of this kind of loan can be more expensive than traditional bank financing (i.e., the implied interest rate paid to investors is higher than what a bank might charge), many small businesses that are good Rev Share candidates are not ideal candidates for bank financing. In addition, a business using a Rev Share loan typically avoids bank requirements for collateral, personal guarantees, security interests on assets and other financial covenants.
  10. Rev Share is stackable. You can combine Rev Share loans with other types of financings to fund a single project. For example, a business can raise capital through an accredited investor equity offering, a secured bank loan or equipment financing loan in addition to a Rev Share offering (if the other investors and bank permit).

JIM: That sounds like a pretty good deal.  But isn’t there a downside.

BENJI: Of course there’s a downside, but let’s not end this discussion on a downer.

Let’s do that in another discussion.

This is Jim Verdonik signing off until our next Capital Talk.

This article is one of a series of three articles that discuss Revenue Share Loans in detail.  You can find our other two articles at:

Why Investors and Businesses May Not Love Revenue Share Loans

https://gatewaycapitalx.com/2017/10/10/197/

Crunching Revenue Share Loan Numbers

https://gatewaycapitalx.com/2017/10/10/crunching-revenue-share-loan-numbers/

The content contained on this article does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship.  All uses of the content contained in this article, other than for personal use, are prohibited.

Reaching for the Clouds is Our Mission

 

Reach for the Clouds
Go BIG or Don’t go at All: Jim V Reaching for the Clouds Hiking Inca Trail

 

Gateway Capital X was organized by Jim Verdonik and to help People who want to go BIG.

To do that we provide “X Multiplier” Strategies that blend traditional and new business practices with technology and legal changes to solve long-standing capital-raising problems by:

Creating Dynamic Capital-Raising Strategies: Integrating Crowdfunding and ICOs with traditional financing solutions to create dynamic capital raising strategies for growing businesses. 

Building Local Ecosystems: Facilitating  “system integration” economic development strategies to identifying and recruiting investor, consulting, networking and other resources for turnkey capital-raising solutions.

Promoting Capital Raising Diversity:  Helping underserved populations find their seats at the capital-raising table by taking advantage of the new opportunities technology and legal reforms provide.

Blending the For Profit and Non-Profit Worlds:  Helping non-profits leverage their resources by partnering with investors who want to to combine financial, social and artistic returns on their investments