Has anyone used rev share in lieu of equity?

February 26, 2020

by an investor from University of California, Berkeley - Haas School of Business in Moorestown, NJ 08057, USA

I am interested in if anyone has agreed to a revenue share model where the investors receives X% (say 1-2%) of monthly/quarterly/annual revenue (starting after hitting a certain revenue target) and goes until the investors gets an agreed upon return on invested capital?

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Reply by a searcher
from Butler University in Indianapolis, IN, USA

One of the deals we closed, we paid the seller 2.5% of revenue each quarter until it reached a total of $2.5 mllion or seven years. If revenue ever fell below a certain threshold the payments would be suspended. This was done since the company had a pretty high customer concentration. For us as buyers this was basically a interest free loan that would be forgiven if sales fell, which would happen if the largest customer left. For the seller it got him a little more potential cash. Fortunately for all sales grew quite a bit and the seller got the whole amount sooner than we initially projected. I am looking at another deal where we may use the same structure to mitigate a heavy customer concentration.

Reply by a searcher
from INSEAD in Sydney NSW, Australia

I'd personally stay away from revenue share and rather look at some sort of profit share, ideally even post-interest profit share. The lower you go along income and cash flow statement line items, the less risky it becomes for you, and the more risky for the investor. As a searcher or business owner, I would never agree to revenue share, but maybe that's just me.

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