3c hapter - Index of

The Biggest- Impact Financial Sector You’ve Never Heard Of 85
suffi cient collateral, they have little chance of getting a bank loan.
The other option—equity—means ceding control. “Particularly
here in ‘Live Free or Die’ New Hampshire, the idea of giving
up your independence is not taken easily,” says Hamilton. “And
what if you just want to grow the business sustainably and long
term? An equity investor is going to want to get paid out generally
three to fi ve years later. That means being forced to sell the business
in the next few years—not everyone is ready to do that.” Not
to mention, in today’s environment, there’s no guarantee you’ll
even fi nd a buyer.
His solution is a royalty fi nancing model, under which borrowers
pay a fi xed percent of revenue each month until the initial
investment, times a negotiated multiple, has been paid off.
That provides a degree of fl exibility and independence missing in
straight debt or equity deals. On months when business is slow, for
example, the payments are less. When business is booming, they
are more. The interests of investors and borrower are aligned:
The better the business does, the better the investor does. And no
“exit” is required. Royalty fi nancing can be used alongside conventional
loans or as a straight royalty structure.
Royalty fi nancing has been used, with mixed results, in the
angel investing world, and has been catching on with other investors.
Hamilton believes that while it may not be the best solution
for startups, royalty fi nancing is a valuable tool for fi nancing established
businesses with healthy profi t margins.
For CEPS, Inc., a manufacturer of plastic injection- molded
medical devices in Lebanon, New Hampshire, Vested for Growth’s
royalty model helped it acquire a larger rival, Johnson Precision,
whose founder was retiring. James Umland, president of CEPS,
saw an opportunity to combine the two companies and keep
Johnson Precision in the hands of a strategic, rather than fi nancial,
buyer, preserving jobs in the region. In the spring of 2009,
however, credit markets were barely functioning and anything
with a whiff of risk was hard to fund. The company’s local bank
was willing to put up $2 million, but Umland still needed to raise
another $1 million to pull it off.