Unless you’ve been living under a rock (or maybe just have really dodgy wi-fi), the boom in iconic artists selling off their life’s work is unlikely to have escaped your attention.
Universal Music Publishing Group’s acquisition of Bob Dylan’s catalogue in December 2020, hailed by the company as “the most significant music publishing agreement this century and one of the most important of all time” was the most high-profile among a plethora of big money sales.
But far from an easy payday, Tim Smyth (pictured), director of leading international accounting firm Thomas St John (TSJ), tells Music Week that signing their rights away will probably be the biggest financial decision of a songwriter’s career.
“For the creators of the copyrights, it’s more than just a financial decision,” he says. “A sale will normally result in loss of control for the writer, and that separation from a life’s work can be difficult, especially if you see your work associated with products or views that aren’t aligned with your own."
He continues: “If you get past that, there are still a number of considerations that need to be explored before a truly informed decision can be made. The most important of which is what impact the sale will have on your financial plan going forward. You are selling an income stream so you’ll either need to ensure your other income can continue to support you post-sale, or use at least part of those proceeds to generate an income stream to replace it.”
Thomas St John is ideally placed to advise on such transactions: specialising in maximising the price sellers achieve, the speed in which they can close and the amount left in their pocket after tax.
For buyers, meanwhile, it can assist in executing more profitable deals by removing uncertainty around asset value, future performance and tax treatments.
“The process can be long, stressful and can often break down,” notes Smyth. “Our role is to ensure that isn’t the experience for our clients and to date there hasn't been a single deal we've not been able to get done."
As TSJ’s US director and global head of royalties Jon Payne points out, a number of factors have created a “seller’s market”.
“It's a great time to consider selling your catalogue as the number of buyers in the market has grown exponentially over the past several years,” he says. “In addition to the explosion of buyers, there has been a shift in valuation techniques away from the old market-multiple valuation model, and towards the discounted cash-flow model, analysing net present value and internal rate of return, while modelling correlation and building in value resulting from the changing landscape of royalties generated from digital exploitation. This change in valuation technique can often benefit the seller.”
He continues: “While buyers are banking on continued market growth, efficiency in collection, and upside from active song management to realise a return on their investment, sellers are often motivated by the lump sum of capital which can sometimes amount to roughly 15 to 20 times their average annual earnings in royalties.
"If the seller includes in the transaction any copyright reversionary interest – and negotiates the retention of any audit rights in connection with earnings periods prior to the date of sale – the benefit to the seller can increase. Some sellers are only interested in a partial sale of their catalogue, essentially partnering with a buyer. This can also benefit the seller in that the buyer has a vested interest in achieving a good result on their investment.”
It's a great time to consider selling your catalogue as the number of buyers in the market has grown exponentially over the past several years
However, the decision is, ultimately, artist-dependent.
“Though it may be a good time to sell a catalogue generally, it does not necessarily follow that it is a good time to sell your catalogue,” cautions Payne. “To get the best result, catalogues need to be ready for sale. Catalogues need to be structured properly and the revenue streams clean and tidy, ensuring proper registrations have been made and your publishing or recording partners are accounting correctly to you.
“Very young catalogues, with the largest earning compositions or records less than five years old, may not be as attractive to buyers and there may be less competition. There is a natural decline in earnings of songs before they become more predictable/investable. That is not to say great results are not achieved for young catalogues, but there are certainly more challenges and uncertainty on both the buyer and seller side.”
The group recently added industry powerhouses Payne, Krister Axner and Mat Satuloff to its already stacked roster of royalty acquisition specialists. Axner insists the prospect of supply drying up following the flood of catalogue deals does not mean prices will continue to soar.
“Buyers hate risk,” he says. “In a market developing as fast as this one, most buyers do not have the luxury to be methodical in their approach and really get to grips with the issues. Maybe it is a weird interpretation of a contract clause, uncertainty around foreign taxation rights, the rights are held by a foreign corporation, or the artist has a previous history of infringement claims. The more issues that exist the more the buyer will price this risk into their offer. Ultimately, it’s about getting a deal done which usually hinges on price. Eliminating risk yields better returns for buyers and sellers.”
TSJ’s global tax department can provide clarity on the tax treatments for both buyers and sellers, regardless of where they’re based. TSJ director and global head of tax Gary Rowson outlines the key aspects to be aware of.
“A number of potential traps lie in wait, but with proper specialist advice, significant tax savings can be secured,” he asserts.
“We always start with some basic questions – what is being sold? Who created it? When was it created? Who actually owns it? From there, you can start to look at the potential tax impact and formulate a framework for how best to structure any deal.”
He adds: “Songs are likely to have been written over time – some might have been created when the writer was first starting out. As they became more successful, they may have set up a company and been employed by that company when they were writing other songs. Determining ownership of the various compositions being sold is important as this will point to where the transaction is likely to be taxed. The complexity of these issues is often compounded by the global nature of the transactions.”
Jason Brookbanks, Director, Valuation and Consultancy, says that an accurate valuation is a vital tool in informing decisions and strategies during every step of the process.
“Reducing uncertainty is critical,” explains Brookbanks. “The higher the uncertainty the lower the price! We apply statistical methods to either reduce or quantify uncertainty in a way that can be validated by buyers. This has been proven through the incredible results we have achieved for our clients. To date, we’ve never failed to obtain increases in the amount buyers offer – we even managed to double the price on one occasion.”
The company is investing heavily in this area to develop systems that will provide better information more quickly. In addition, it has recently started working with the data science department of a world leading university in London.
“Music assets are complex, often very personal objects of their creators,” concludes Brookbanks. “As buyer valuation techniques become more sophisticated, advisors owe it to creators to stay ahead.”
Thomas St John is nominated for the Music Week Awards in the Accountancy Firm Of The Year category.
MEET THE TEAM
Thomas St John, Founder and Group CEO
Tim Smyth Group, Chairman
Jon Payne, Director, Royalties & Rights
Mat Satuloff, Chief Technology Officer
Jason Brookbanks, Director, Valuation & Consultancy
Krister Axner, Director, Entertainment Law & Royalties
Gary Rowson, Global Head of Tax
Miriam Chang, Director, US Taxation
Tessa van Hilten, Director, European Taxation