Royalty based businesses are broadly defined as entities or individuals which collect ongoing payments from third parties for the use of their assets or other intellectual property. In ILST’s case, and that of our M&A partner, Budding Equity, we harnessed relationships and the previously untapped intellectual property from “cannabis culture” produced in Hollywood. The net benefit to our shareholders is expected to be a generally stable business that generates income without the necessity of creating and financing the substantial infrastructure that traditional product sales require such as large marketing budgets, large sales teams, manufacturing, and real estate. As a royalty-based business, ILST should be able to avoid these costs and expenses. Currently there are distinct and strong relationships with distributors, manufacturers, and cannabis producers whose businesses are more traditional, and they see a benefit in using the intellectual property contracts Budding controls as an efficient method of moving more products. Marketing and other liabilities are their responsibility. Furthermore, the cost to maintain a royalty-based contract is relatively low, and in the event the salability of that IP is diminished or is no longer economically viable the contract in some cases can easily expire.
After reading this, you may wonder: why don’t all product companies run royalty-based businesses? Some investors push prospective businesses to take a royalty and relinquish operational control to them. Those investors see that as the best position to be in, allowing a company to avoid taking on all the risk of distribution and cost exposure etc. If it works out as planned, all you have to do is sit back and relax and collect a check on all sales.
There is a full range of royalty-based companies, i.e., companies whose entire income is derived from owning IP that someone else wants and is willing to pay for. They exist in the mining and tech sectors to name a few.
What this means for us, is that we can benefit from seeking out and expanding our business into owning or partnering with other intellectual property owners and capitalizing on the resulting synergies in seeking to commercialize it.
This is not an approach that works for everyone. Some companies want to control their processes, others do not have the relationships that would support approaching IP holders and seeking to commercialize them, nor do they have the capital to develop strong contracts. One must also be creative and determine which IP is valuable and that is worthwhile selling. And finally, some IP holders harness the full extent of the commercialization of their IP, so they do not require a third-party manager. In the cannabis industry, this has not been well understood.
We are excited by the opportunities that lie ahead, and we hope to bring shareholder value by optimizing the landscape of intellectual property commercialization.
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 Loosely copied from Investopedia.com