Royalties to Live Like a King & Queen

It didn’t take long for the meeting to get confusing. He started talking about ideas unrelated to the business he wanted to sell. Bart (not his real name) is an accomplished business owner, but years of living on the entrepreneurial edge are taking their toll. “I’m worn out,” he told me during our meeting in his conference room. The large table in the middle of the room was full of gadgets and stuff, from balls to flashlights to coffee cup warmers. “We have ideas right here worth millions of dollars,” Bart said nodding toward the table, “but this old boy is out of energy to see them come together. Whoever buys all these ideas will make a fortune.”

In 2008, Bart sold a company in which he had one-third ownership. He took a few months off to try quasi-retirement, but as an inveterate tinkerer, he had to get back in the game. He started a new company in 2010 based on development of military-themed toys. One of the products he invented was a cool toy for young boys; almost a throwback to the kinds of things I used to play with as a kid. He put together a decent sales team and distribution channel, and started to make money in 2015, not a lot, but finally in the black. I told Bart now was not the best time to sell the company because he had just started being profitable. Given his reasonable growth projection, Bart was likely to see his business value increase significantly if he stayed with it just a couple of more years.

I hear you,” he said. “I know this product has not reached maturity but that’s why I wanted to show you these other ideas, this is where the company’s real value is.”

Bart was obviously excited about these innovative ideas, in fact, he showed more interest in those than the product that had started to make money. I had to bear the bad news that it is tough to sell ideas, especially when those ideas have no intellectual property rights. In Bart’s mind, some of the prototypes on the table represented big money, but I had to tell him that translating those ideas into cash today is hard, and maybe impossible.

But Bart was not dissuaded by my bad news. I asked him what he wanted for his company and he said “not a penny less than $6 million.” I asked him how he came to that number and I heard exactly what I expected to hear (because this is a frequent response): “that’s how much I have invested and I wanna get my money back out.”

So here’s the problem. Bart is an innovative guy and he’s come up with a number of cool products. Right now, only one of those products is working, yet he wants to sell the company for a valuation that is well beyond what the financials for that one product justifies. Simply said, he wants to be paid for his ideas. While I generally don’t believe in absolutes, I’m pretty firm in my belief that Bart cannot sell his ideas for cash. Even if we found a buyer who might be in a position to monetize Bart’s ideas, the payment would likely be based on future earnings, not cash today.

There are a number of ways to structure a future-earnings deal. Bart might retain ownership of the products ideas but license them to a third party, or he could just sell them outright and be paid royalties on future sales. The latter is my recommended approach for Bart because it is obvious he wants to be done with all aspects of running a business: the creative side, HR, managing the manufacturing and the financial aspects. If he finds the right buyer, he stands to make a lot of money over time, and maybe even live like royalty from his royalties. But cash today in exchange for ideas for tomorrow, not gonna happen.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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