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The article below appeared in the August 2007 issue of Technology Transfer Tactics. Click here to subscribe.
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Since all licensees want to feel as little pain as possible in their concessions for up-fronts, milestones, minimums and royalties, there is a way to maximize your potential revenue stream on the milestone and minimums side that involves little effort, and in a way that most businesses would deem reasonable. How? By having those payments adjust over time based on the cost of money.
Businesses base their decisions on market size, profitability, ROI, inflation and cost of money. Let’s assume you have terms that state a payment of $500,000 is due and payable upon the licensee achieving a sales revenue target of $20,000,000 that is estimated to occur in five years and a further payment due of $1,000,000 payable upon achieving a sales revenue target of $50,000,000 that is estimated to occur in ten years.
In five years, if projections are correct you will receive a lump sum payment of $500,000. If that figure were tied to the cost of money, usually 10-year treasuries at the time of the transaction, that figure, assuming 5%, would become $638,140 — an increase of $138,140.
In 10 years, if projections are correct you will receive a lump sum payment of $1,000,000. If that figure were tied to the cost of money, that figure, assuming 5%, would become $1,628,894 — a whopping increase of $628,894!
If all goes well with the licensee’s forecasts, you are actually reimbursing yourselves for the cost of the money that you allow others to hold for you.
Submitted by Richard W. Sheehan, President, The Technology Resource of the Southeast, 715 West Locust St., Johnson City, TN 37604. Phone: (423)929-0380; Web: www.technologyresourceSE.com.
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