Royalties...

ABC unleashed a hit business series sharing the ranks with such greats as The Apprentice; Shark Tank pairs 5 independent, multi-millionaire investors with novice business entrepreneurs who have to sell their business opportunity. Most have okay to better than okay ideas, but lack in the overall understanding of, not how business works, but how to create great wealth. I’m starting to think this isn’t so much a show about business, but more about money; cash is king.

Don’t get me wrong; this is reality TV, so of course some of the entrepreneurial opportunities are laughed right out of the room. A sticky pad for sticky pads?? An implanted bluetooth headset that requires you to charge your head at the end of each day??

Some of the ideas are really quite genius; Shakespeare turned into music, a foldable guitar, and a seatbelt sensor that won’t turn on your car unless your seatbelt is locked. I’m often amazed by the ideas that people come up with, the amount of personal money already invested and their overall lack of what to do next. The Sharks lay it out pretty clearly, either they are out (meaning your idea has too many financial risks, you haven’t done your due diligence homework or your idea is flat out insane) or they take your deal or they counter your deal in their minds, with a better deal. Remember, Sharks don’t want to be in the guitar manufacturing business; they want to make money!

Robert Herjavec, who sold his first company for $100 million and Daymon John, founder of FUBU clothing line, often counter the entrepreneurs with more aggressive offers, many times requesting control ownership of the company or 51%. As Barbara Corcoran, who has a five billion (that's with a B) dollar business, pointed out on last’s night episode, remember the difference between 50% and 51% is a partner where decisions are made together and someone who will call all the shots without you. Kevin O’Leary, who sold his business of educational software for 3.7 billion (that's with a B) dollars, explains that entrepreneurs with product patens should sell the rights to the product and negotiate royalty fees for long-term wealth. Kevin Harrington, the king of infomercials, often times agrees.

Royalties is where long-term, sustainable, hassle and risk free wealth stems from. The owner of LifeBelt should have sold the rights to his paten for between a quarter of a million to half a million dollars with a 2-3% royalty fees for each unit sold. What does that mean? That means, if Robert bought the rights, he would cut a check to Mr. LifeBelt for $500,000 and Robert is free to do what he wants with the product, but for each unit sold, he owes Mr. LifeBelt 2% of the sale price. Robert feels there is a market for this type of product but doesn’t want to be in the car accessory business, he wants to license the paten to car manufactures who will add the accessory stock to most models. In the licensing deal, Robert negotiates a royalty deal with the car manufacture for 6%. For each unit installed, Robert gets paid 6% of the unit sale price and turns around and sends a check to Mr. LifeBelt for 2%. Mr. LifeBelt doesn’t have to do a thing get the 2% check.

Okay, so 2% doesn’t sound like a lot, if each unit sells for $30.00, Mr. LifeBelt only gets 60 cents. Robert sells license to use the product to a car manufacture who installs the product in 2500 cars per week, earning Mr. LifeBelt $1500 a week, $78,000 a year, $2,340,000 in 30 years. I’m sure there are ways you can earn more money faster, but Mr. LifeBelt doesn’t have to do anything for his $78,000 income per year. He can sit at home watching HGTV all day, sleep until 3pm and walk the dogs. He doesn’t have to lift a finger and he’s making a decent yearly salary.

What happens if Robert tries to sell LifeBelt to car companies and no one bites? Mr. LifeBelt was already paid a half a million dollars for his idea; he’s been paid even if the product is flops, plus he’s not out any more cash, time or effort. Robert has all the hassle and all the risk. Mr. LifeBelt has his half a million dollars already in the bank! If Robert is successful, then Mr. LifeBelt makes more!

Royalty fees are with you until the day you die. Imagine the possibilities. Why don’t more of the entrepreneurs take these kinds of deals? Do you really want to be manufacturing seatbelt sensors in your basement for the next 30 years hoping to sell enough to make $2 million or do you wan to sit back, relax and let the cash roll in?

http://beta.abc.go.com/shows/shark-tank/index