Common Music Catalog Sales Pitfalls and My Tips on How to Avoid Them
Since forming Sound Royalties, our organization’s mission has always been to help artists, songwriters and producers access the funding they need while keeping their copyrights. However, if a creative decides to sell, they need to be aware of the many pitfalls that they may face through the sales process.
The challenges that can arise with catalog sales are numerous, and in working across the industry, we’ve seen far too many creatives struggle with them. Potential pitfalls can appear at every stage in the sale process. These can include complex legal jargon in the contract, lengthy sale processes and sellers not fully understanding what they’re giving up when they sign on the dotted line. To better understand the nuances of this market, here are some common pitfalls creatives may encounter during the catalog sale process.
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Not Correctly Granting the Copyright
Some catalog brokers offer their services dirt cheap with promises of speeding the process along at a lightning-fast pace. What many artists don’t realize is that by saving money and fast-tracking the process, they’re actually cutting corners — with results that can come back to haunt them years down the road.
In some instances, companies tell sellers that they’ll help creatives sell their royalty streams without granting the copyright during the sales process. While this may be faster and cheaper, neglecting to grant the copyright may limit a creative’s ability to recapture those rights 35 years later (as guaranteed by Section 203 of the Copyright Act). This may not seem important now, but it can be an enormous missed opportunity years down the road.
Not Understanding the Value of What’s Being Sold
Is it possible that a buyer knows more about the value of a royalty stream than creatives themselves? In many transactions, this is exactly the case. It’s why we recommend that sellers have a knowledgeable partner or expert review their royalty streams before negotiating a sale.
The reason being is that the margin for error here is huge. A thorough review of royalties will help identify all potential sources of income, from streams creatives are currently collecting to others they may not realize they should be receiving. There may be a great deal of additional revenue being forfeited in a sale. Calculating all of these numbers is an essential part of negotiating the sales price: It’s impossible to know what a catalog is really worth until you’ve calculated how much all of the royalty streams can potentially earn year over year and into the future.
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Not Accounting for a Lengthy Sales Process
Catalog sales can sometimes drag on for many months and even more than a year. In some instances, any royalties collected from the date of the letter of intent are retroactively credited to the buyer as part of the sale. This favors the buyer if they take an extended period of time to close — and deprives the creative of the money they would have earned during the long sale process. It also reduces the true multiple the creative is getting on the sale.
Some sellers also find themselves stuck between a rock and a hard place if their letter of intent requires an irrevocable letter of assignment, which some payers won’t provide. Just before funding, the buyer (who likely already knew that the payer wouldn’t provide this document) will sometimes come back to renegotiate the deal after an already lengthy and arduous process.
The appraised value of a catalog coming in lower than the originally agreed-upon sale amount is another problem that can arise during the lengthy sales process. In this case, the buyer will typically lower their purchase price, often leaving the seller with limited options: They can walk away and start the entire process over again, or they can sell for less than they expected.
Not Crafting a Catalog Sales Strategy
As a creative approaches the catalog sales process, it’s important to craft a comprehensive strategy. The first step is to have a summary of your assets — three to five years of statements, agreements and amendments — put together.
Next, I’d advise them to look at the big picture and potential lifetime value of their works, even when they’re presented with a big multiple. It is most likely that the buyer is paying this multiple because they expect the value of that piece to go up over time.
This leads to the next bit of strategic advice: Know the buyer and understand all of the important nuances when options are presented. As you work with catalog sales buyers, it’s crucial to know what the buyer’s goal is, who is likely to close, how long it will possibly take and what changes may come when the deal finally happens.
Of course, I’d recommend considering working with a catalog sales specialist. When deciding who will handle your deal, look at past clients they have worked with and deals they have closed. What kind of multiple did they secure and what was it based on? What was the time frame of the deal? Do they have relationships with a wide network of buyers in order to find the right one who can see the value in the assets that are being put forward?
When you craft a catalog sales strategy, you’re that much more prepared to navigate through the process — and around any of the pitfalls that could derail your deal or keep it dragging on without a close date in sight.
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