Catalogue sales are currently one of the hottest topics in the music business as larger companies rapidly buy the catalogues of smaller companies, and songwriters and heirs sell their rights for large amounts of upfront cash. These days, everyone wants to know “What multiple did you get?”
While catalogue sales generate exciting movement of rights and money throughout the music business, they are actually complex transactions with many considerations for both buyers and sellers, and the press reports vastly skew the reality of the catalogue acquisition world.
A recent panel for the Los Angeles Chapter of the Association of Independent Music Publishers (AIMP), offered a thorough explanation of the nature of catalogue acquisition deals, and information from those on the inside of these transactions. Todd Brabec, Esq. (Co-author of Music, Money, and Success) moderated the expert panel which included, Cedar Boschan (owner of forensic accounting firm, Boschan Corp.), Tim Cohan, Esq. (Sr. Vice President, Business & Legal Affairs at peermusic), Jeff Brabec, Esq. (Sr. Vice President, Business & Legal Affairs at BMG and co-author of Music, Money, and Success), and Erin M. Jacobson, Esq. (The Music Industry Lawyer, and, as author of this article, I will refer to myself in third person throughout for consistency herein).
Here are some highlights of this informative panel:
1. Types of Deals
The nature of rights in acquisition deals can vastly vary. As Jeff Brabec explained, the deals can cover major set catalogues, existing writers with back catalogue and additional compositions to be written in the future, deals where the writer is also an artist, deals where the writer only writes, deals that may or may not include writer performance income, or a deal where only a writer’s royalty stream is acquired, rather than a copyright interest in a catalogue. Tim Cohan expanded on this, explaining that many deals are asset purchase deals, whereby only the copyrights and royalty streams are purchased, whereas some deals are legal entity purchases, whereby one company will buy the entirety of the other company, including its legal entity, name, and goodwill.
2. Nature of the Marketplace
Not only is the music industry in a new era of streaming, but the catalogue acquisition market is in a new phase as well. As Tim explained, traditional acquisition deals only involved the publisher’s share of income and were based on net publisher’s share (average of gross revenues less the average of payouts to songwriters or co-publishers over a period of time). Now, many deals also include writers’ royalty streams. In addition, buyers have traditionally been music publishers, but a new type of non-publisher buyer has emerged, backed by venture capital funds.
As Erin Jacobson explained, “Venture-based buyers are hitting the press because those people have large amounts of money and that is actually skewing expectations of sellers…. These sellers then negotiate with publishers who are basing deals on what the songs are actually worth and what they can do with them, and a lot of sellers are then disappointed that they will not suddenly be retiring in Tahiti.” She further explained, “Sometimes estates or heirs will decide not to sell based on these offers they determine to be low, so they hold onto the catalogue. With the catalogue not exploited as it should be, the value continues to decrease, so when they do sell at a later point, the sale price will be even lower because the transaction will be based on prior earnings and those earnings would have decreased due to the heirs holding onto a catalogue with diminishing income.”
“Sometimes estates or heirs will decide not to sell based on these offers they determine to be low, so they hold onto the catalogue. With the catalogue not exploited as it should be, the value continues to decrease, so when they do sell at a later point, the sale price will be even lower because the transaction will be based on prior earnings and those earnings would have decreased due to the heirs holding onto a catalogue with diminishing income.”
~Erin M. Jacobson, Esq.
Jeff also pointed out that this new breed of buyers doesn’t see publishing administration as important as purchasing the assets.
Erin explained that the lack of administration can harm the investment because “the lack of administration creates the problem of improper collection, so [an investor] will not get the anticipated return on the investment. While some songs will earn a lot of money just because of what that song is, not all of them are that way. Even songs that are earning money still need to be tracked and exploited properly so that all monies owed can be collected, otherwise, one is leaving money on the table.”
“Lack of administration creates the problem of improper collection, so [an investor] will not get the anticipated return on the investment. While some songs will earn a lot of money just because of what that song is, not all of them are that way. Even songs that are earning money still need to be tracked and exploited properly so that all monies owed can be collected, otherwise, one is leaving money on the table.”
~Erin M. Jacobson, Esq.
3. Due Diligence and Red Flags
Tim further explained that in the due diligence phase of acquisition deals, the legal team will research legal chain of title of the compositions, all agreements that fall under the acquisition, as well as assess the selling party. Cedar Boschan offered the financial side of the due diligence phase, whereby financial advisors will assess the income of the titles, whether past payments have been correct, and work together with the legal team to see if any liabilities in the assets will impact the purchase price. Cedar also pointed out that catalogues with diverse revenue streams are worth more than catalogues that rely heavily on a particular income stream, such as synchronization income that might not be repeatable. The financial and legal teams also work together to forecast future earnings for each of top titles in a catalogue, adjust for regressions and nonrecurring income, performance bonuses for hits, and trends.
The due diligence phase also looks for red flags in a transaction, and Jeff raised the examples of potential claims in the catalogue, matching rights in prior deals, and keyman clauses that could affect the buyer’s rights going forward.
Erin explained how termination rights can affect an acquisition. She covered both contractual and statutory termination rights, the former being allowances in the previous contracts for the compositions to revert to the songwriter, whereas the latter being a legal right under copyright law granted to authors and heirs regardless of prior contracts. As the window for many statutory reversions is now open, this topic must be addressed more frequently than in years past. Reversions can severely affect a purchase whereby a buyer purchases a catalogue only to be obligated to relinquish the newly-purchased rights after a couple of years. Astute advisors will plan for these roadblocks by adjusting the purchase price or building safeguards in the structure of the purchase agreement to compensate for the losses that will potentially be incurred.
4. Structure of Acquisition Deals
Different buyers approach the process of acquiring catalogues in different ways, with Jeff favoring a signed letter of intent before a long-form agreement is completed, while Tim favors starting out with a long-form agreement.
The way buyers are approached by sellers also varies, with some companies receiving a “prospectus” or a summary of the catalogue, its activity, and its earnings for catalogues being shopped in the market, whereas other companies receiving something as simple as an email chain with the information to get started for pre-market transactions.
Erin also pointed out that some of the previous acquisition deals she has handled were completely off-market in which it was up to her to compile the information needed for her client to make an offer before the full due diligence procedure had begun.
All panelists agreed that the purchase price of an acquisition is not all about the “multiple”, i.e. the market multiple with the notion that the purchase price is simply based on a multiple of earnings. The analysis is much more complex, and often a combination of several valuation and projection methods, while also allowing for discounts. However, the multiple is typically what the seller wants to know, and as Erin pointed out during the panel, the multiple number is really the bragging rights of the acquisition deal, akin to when artists used to brag about how many points they received from their major label record deals.
“The multiple number is really the bragging rights of the acquisition deal.”
~Erin M. Jacobson, Esq.
6. What Happens After Acquisition?
After the deal, the work continues. Buyers must send letters of direction to all third-party payors and royalty collection organizations to make sure future payments are paid to the buyer. Payment information often doesn’t get updated correctly or at all, so this process can be the cause of many buyers’ frustrations and a test of perseverance. Buyers must also train their staff on the newly acquired compositions, how to pay the writers of these compositions based on their previous songwriter agreements and royalty rates, and familiarize the team on how to best exploit these compositions.
Overall, this panel gave a comprehensive overview of these complex and interesting transactions, of which there will only be more to come. As an independent attorney representing sellers and buyers in catalogue acquisition transactions (although not at the same time), I can attest to the need for both sides to have expert advisors in these transactions to navigate the varying considerations pertinent to both sides. Those interested in selling a catalogue should contact an attorney experienced with acquisitions in order to assess the state of the catalogue, what it can command in the market, as well as finding the right buyer.
Note: This article does not constitute legal advice.
A video of the full panel is available for AIMP members at www.aimp.org.
Found this post useful? Why not check out:
- For What It’s Worth: Putting a Value on Music Publishing Catalogues
- Copyright Terminations: What Music Rightsholders Need to Know
- Preparing Today’s Hitmakers to be Tomorrow’s Legends: A Q&A with Atlantic Records’ VP Marketing Catalogue, Tom Mullen
- How to Earn More from Your Catalogue – Best Practices from Synchtank