Off-balance-sheet financing is no panacea, though. Like any type of financing, it carries a price. The most common criticism is that the stream of royalty payments has the effect of mortgaging a product's future. In the case of Interactive Multimedia Limited Partnership, investors were to receive a royalty equal to 10 percent of the sales of the products they financed--not much on the front end when everything is on the drawing board but a lot on the back end when there's overhead to consider.
There was another challenge Swartz faced with his off-balance-sheet deal. When he took his company public in May 1996, "[our] limited partnership investors saw that there was a lot of upside in the company that they weren't participating in," says Swartz. "Next time I do a deal like this, we'll add in a convertibility feature to give investors the option of converting their interest into common stock."
In this regard, though, Swartz and Microleague are unique. Few companies can go public at such an early stage in their development. But it was less than two years after forming the partnership that Swartz was able to pull off a $6 million initial public offering. Apparently, being in a hurry has its rewards.
David R. Evanson, a writer and consultant, is a principal of Financial Communications Associates in Ardmore, Pennsylvania.