Making the Music Move: The Art of Selling Catalogues

Helen 00:00

Hello and welcome to The Wealth Chat, brought to you by SG Kleinwort Hambros. I'm Helen Gammons, Director of Media and Entertainment clients. And in today's episode, we're asking what's driving the uptick in music catalog sales, and what considerations should artists and their managers have before, during and after a successful sale?

To help me explore this, I'm joined by Vasileios Touronis, CEO of Star Music Fund.

Vas 00:27

Hi, nice to be here.

Helen 00:28

Lance Phillips, a Partner in the Music group at Sheridans law firm.

Lans 00:32

Hello, nice to meet you.

Helen  00:34

And Nji Lorimer, Head of UK Domestic Wealth Planning at SG Kleinwort Hambros

Nji 00:37

Hello.

Helen  00:38

So, Vas, music catalog purchases have been a long-standing alternative asset, frequently bought in the past by pension providers for their relatively stable income streams. In recent years, we're seeing more specialist music funds, like Star Music Fund, and traditional private equity funds taking an interest in music catalog sales. Can you walk us through what a music catalog is and how these types of assets are valued?

Vas  01:17

Well, a music catalog is an asset that refers to a collection of music rights, typically including compositions, recordings or both. And all these types of rights can generate revenue streams for the owner of the rights.

These rights include the royalties earned from a number of sources, like performance rights, which is the, you know, the money earned when a song is performed live or on TV or radio, or the mechanical royalties, which come from the reproduction of the physical reproduction of the physical product, like CDs, vinyls or on the digital space, digital downloads. We have the synchronisation rights, the sync rights that we call which is that revenue earned from when a song is licensed to it to Film TV or a commercial. And finally, we have the streaming royalties, which is the most important at this stage with the growth of streaming, which is, you know, obviously the money that's earned when the song is played on Spotify or Apple Music and all these streaming platforms.

Now, music catalog obviously, as you said, there's strong interest because it's a very valuable asset. It has the main characteristic that, you know, investors like, we have recurring income over, you know, many years, and it's considered an alternative asset with stable cash flows and predictable cash flows, which is what investors like. Investors like the risk versus the return profile. It's a low risk versus good and stable return. So, this is appealing.

Valuing music catalog is a complex process that analyses a number of factors. The three main groups of things that we are looking at is a/ the quality of the music, which is very important, especially for funds who are interested in working with the catalog over a long period of time, then the income the catalog generates, and also the potential for future earnings.

From there on, we have all you know, every player in this market has evaluation model, which is usually based It's a DCF model, a Discounted Cash Flow model with, you know, takes care of all this information I told you before, you know, has some inputs there. And we also have a secondary, let's say, comparative approach, which is, what are the multiples that we have seen in similar transactions for similar catalogs in the past. That's the basis of the way we value the catalogs.

Helen  03:45

It's very interesting. You mentioned the quality of the music. How do you judge that?

Vas  03:51

I think there are universal standards right now about music. So, you know, if there's an artist that you know, it's a legendary artist, an iconic artist, or someone who could be a niche artist, but has had a significant cultural impact, you know, in his time. Also is the music evergreen? You know, do we still listen to it today? Everybody likes it.

The quality of the music is the number one most important thing for anyone who's really interested in doing this.

Helen  04:28

Looking at all those factors, what makes you really excited about getting your hands on a new catalog? What is it that you sort of home in on and aim for?

Vas  04:39

As I said, the music. So evergreen music, you look at a number of things that are, you know, in the music category, that potentially need to be examined.

For example, what genre this music is coming from? Is it a broad appeal genre, a mainstream genre, or is it a niche genre? But obviously mainstream are, you know, very popular, but we have the Niche genre with a very passionate fan base, so that, you know, is important.

Then you go to the, you know, to the stability and the consistency of the revenue, so you analyse the historical data of the last three to five years, and you see how the catalog is performing. You know, you're getting stable revenue streams.

You also want to see if there's diversification in the catalog. You know, is the income coming from one market, from one geography, or from one income source, or from multiple geographies and multiple income sources, because that's very important, the potential for ‘synch’, synchronisation. I mean, how often has it been used in the past? And do you think that this type of music can be part of, you know, commercials, or of other licensing opportunities.

The vintage of the catalogue, so how long has it been around? Because that's an important factor. Usually, investors are looking for things that have, you know, a stable income stream. So, it has been over five years. You don't have to do too many assumptions about the decay curves.

The ownership, so are you getting an active catalog or a passive catalog? That's a very important distinction, because for if the rights are active, so it means you can, you know, use them and license them as you please, and work with them and do the issues and do stuff with the rights that can grow the earnings.

Then, you will apply different valuation, a better valuation, a bigger valuation, but if it's passive rights, still could be very interesting, because some you know, iconic passive rights of some very important artists that you'd love to be associated with.

And also, is there administration available? Usually when you're buying a catalog, you know, administration may be with someone else, but maybe it is already expired and you just have to give notice. Or maybe, it's coming up in a few years, all these factors play.

Usually when you have the whole thing, it's, you know, active catalog, active rights and administration, you're very excited!

And the growth potential is something that's very important also. You know, is this catalog performing well in streaming? Because streaming is the driver of growth today, you know, there's another angle to that. If it's underperforming on streaming, maybe it hasn't been properly, you know, worked on streaming. So that's, that's a hidden and upside, which makes it interesting.

Finally, the final part I want to talk about is the technological advances that are coming up. I think AI is going to be a very important revenue generator for catalogs in the future. And actually, you know, when, a year ago, that song by The Beatles was released with, with the help of AI, I was emotional, because I'm a big music fan, you know, vinyl collector, so hearing the Beatles singing like it's today, it was very interesting for me. And I think, you know, that there can be revenue if properly used.

Helen  08:30

So you've mentioned, AI, but are there any other sort of trends that you can see in the types of catalogs or opportunities coming out at the moment?

Vas  08:38

There are a lot of people who are interested in selling their rights. We're seeing also a lot of people who are interested in acquiring rights. So, there's a number of new players all the time. That's good and bad, it has a number of, you know, advantages, disadvantages. Basically, that means that there is a good market for sellers and a good market for buyers. So, that's fine.

The quantity we're seeing as far as catalog opportunities doesn't always mean there's the same quality attached to it. So, we see, for example, a lot of newer catalogs of artists who are trying to cast in on a recent success, which is not ideal, because obviously then the decay curves are uncertain. So, you know, you're going to make too many assumptions, and that's not going to be the benefit of the artist. So, I think if they wait a little more, then they're in a better position to do that. We're seeing also some, you know, genres that are coming up, and they were not before available, like Latin music. We're seeing a lot of Latin music, which is a trending genre. It's growing very fast, especially in the US, and so that's making us in the Latin Americans in general market that's very upcoming. All that creates a very interesting environment in the catalog market.

Helen  10:25

You mentioned that there's a lot more catalogs out there at the moment being sold, and I would open this question up to the floor. So, we're having a number of different tax changes that are coming into clients minds, sort of potential capital gains tax changes, changes to business property relief when inheriting catalogs, inheritance tax in general, what are some of the considerations clients should have in terms of their catalogs? Maybe we go to you Lance.

Lance  10:57

Thanks Helen for inviting me.

Helen 11:02

You’re welcome.

Lance  11:03

My experience over the last few years and as a law firm, we've acted for both buyers and sellers, but the more significant catalog sales we've been involved in, we've acted for sellers. I would say that probably tax is not a hugely important consideration in the decision to sell the catalog or the rights in the first place. Everybody will have a different reason for doing it. It could be estate planning. It could be they just want out. They're done. They've been doing this for 60 years. They want to retire and hand over all the difficult bits of the job to somebody else. Could be a number of reasons, but clearly, what then becomes critical is, once the person's decided to sell is to do it in a tax efficient way. But again, that will depend upon what is their motivation for doing it, and not to put too fine a point on it. What are they going to do with the cash? Where are they going to do it? Are they going to bequeath it to their inheritance, their states? Are they going to give it to charity? Are they going to invest in other businesses? So, there's no one size fits all. We generally counsel against being overly reliant on tax considerations when you're thinking of just, am I going to sell this? You know, that's something to think about down the line when you structure the deals, but it shouldn't be a deciding factor more frequently. I'm sure Vas will have some experiences. It's as much an emotional reason for an artist to sell their rights as anything else. I've been fortunate enough to act for people who are significantly wealthy already. So, I don't mean to sound glib or disingenuous here, but the money is a very important part of what they're getting out of this. But it's not the be all and end all. They may have a reason for doing it. They want to use that money for a specific purpose. So, we sort of take a bit of back seat on the tax side of things at the very beginning of literally sitting someone down and saying, all right, you'd like to sell your rights. Okay, at that point, we don't really talk too much about tax, except to say, once you've decided to do this, and once you've either found a willing buyer or a willing seller, depending upon which side, then you need to start thinking as early as possible about the tax implications, and certainly there are a number of transactions I've been involved with over the last six months where there was a definite Hurry up to get it done because of the change of government and because of the well, either fear or whatever, other words, depending upon where you sit on the political spectrum, of what, what the first budget was going to do.

So, from a practical point of view, that accelerated the process very definitely. You know, something that was we'd set a completion date on for maybe three months now, had to be done by the end of September, or something like that. But as lawyers, we are not tax lawyers. We don't give advice on tax, we have a tax department, but we generally trust if we're acting for the seller, they will we will advise them to get on board specialist tax consultants, whether that's an accountant or a specific expertise firm of tax advisors.

Obviously, if we're acting for the buyer, they will almost certainly have their own tax arrangements on board. And if the buyer is bringing in third party capital to assist with the transaction, if it's a particularly big transaction, they will have their tax people on board as well. So, I think the short answer that is, it's always in the back of your minds. It helps you structure the deal, but it's not normally a driver from a seller. In my experience, from a seller's perspective, for doing it.

Helen  14:39

Yes, I think you're absolutely right. Purpose tends to lead a lot of these transactions.

Lance  14:44

We worry if the tax dog wags the transaction time.

Helen  14:50

100%

Lance  14:51

Because we've been involved in a transaction recently where we sort of went down a rabbit hole on tax for about four or five months. Whilst the tax advisors came up with a number of ways of selling a catalog, none of which were wrong or bad, but equally, none of them suited the transaction or the individual sellers, because it was a group of people. Reasons for doing it. So, it's good to investigate it, but there comes a point where you sort of have to put the brakes on a bit and say, hang on a minute, we're getting away from what we're trying to do here. We need to reset and go again, and then we'll bring it back in. But absolutely, it's it couldn't be more critical, once you get to that stage of, I wouldn't say, no return, but where the transaction seems to have legs and it looks like it's going to go ahead, then the tax guys become really, really important, and for that reason, they need to be involved as early as possible, even if it's just to say we're thinking of doing this transaction, we'll let you know in a couple of months. But take it on board. You're going to be instructed to do this.

Helen  15:57

Yeah, absolutely. And Vas, in your experience, are there any particular structures that you like to see, don't like to see.

Vas  16:03

It's a very interesting point, and I like what I'm hearing from Lance. You know that the tax is not the number one consideration, because we've been facing a recent dilemma with a few catalogs.

Catalog sales can be done in two ways usually. One way is an asset sale. So, the catalog sale is an asset or it's a company sale. The asset sits in a company somehow, as a loan or as an asset there, and you are buying the shares of the company. That has, tax implications for a music fund, for us as well. And on the other side also, it's a double-sided thing. So, on our side, when we're buying an asset, we can advertise the asset over, you know, the next 10 years, and then the zero tax to be paid on the incoming revenue, and that, of course, is then input into the valuation, and you're providing a higher valuation and a higher price to the seller. But if you're buying the company, then amortisation is not an option. So, in that case, you're paying corporate tax, which is, you know, much higher, and then you are again inputting this into the valuation, and you're providing a lower valuation to the price, to the seller.

Lance  18:03

I mean, you Vas, I'm sure, have experienced this, but when I've done due diligence, we'll touch on due diligence later, I'm sure, even when you're acting for a seller, and let's say it's an evergreen catalog that goes about 50/60 years, you'll look back to some of the paperwork from the 70s and the 80s, and you go, why on earth did they do that? That's completely out of kilter, from what I'd expect to see, and invariably, it's because it was designed to take advantage of a tax regime that existed at that moment, disappeared two years later, and has done nothing but cause trouble to everybody ever since. So, you do need to, sort of, you need to tread carefully with tax and not let it drive things too much. But there comes a point where the transaction gets momentum, where then it becomes very important. And I think your point Vas about CGT versus income tax, I mean, certainly again, acting for sellers. The transactions we've done, they've all been shares purchase.

Helen  19:58

So we really look at this. Seller's journey. I turn up at Lance's door day one and say, Help. I'd like to sell my catalog. What does that look like?

Lance  20:07

Funny to say that, because that actually did happen to me last week. What you have to bear in mind, I think, in our experiences, although these become, and can become complicated transactions with multiple parties involved. There are three very basic questions that you ask as a seller, which are: What are we selling? Who owns it? How much?

And if you stick to those three first principles all the way down the line, when things start to be veering off course slightly, or there are bumps in the road, there will be bumps in the road, or the buyer starts asking, you know, a lot of questions. You keep coming back to this, and you keep saying, no, no, you don't worry about that, you're not buying that, but you're only buying this. Now, it could be they're buying everything. It could be they're only buying certain assets. So, they might just be buying the assets, the copyrights in the recorded music and not the music publishing, or the other way around. They could be buying both. They could just be buying income streams. So, for example, producers who are paid royalties on records they've produced, and if they've been successful records and evergreen records, those royalties are significant. I mean, successful producers are very wealthy people.

You know is that being sold? So, from day one, even before you start getting into the complexities of the legal documentation, you need to be very clear amongst your seller group and with the buyer. What exactly is it are you buying? Sorry, I'm looking to Vas here, because I'd see him as the role of the push. What exactly is it the star fund is buying? And you must be very clear from that, because as the transaction goes on, idiots like me will leap in and go, well, you're buying the recording rights, but you're not buying the rights to the artist's name. So that means that the artist could still go out there and make records as name of band. So, are you okay? Are you comfortable with that or and then they go, Ah, well, we better buy those rights as well. And the seller goes, no, no, no, no, we still want to carry on in the future being this band, you're buying catalog, you're buying history, you're buying legacy, you're not buying future. So that's something that needs to be clearly dealt with.

So what you should do, what I would advise people do, is, and it's a collaborative process with the buyer, is you set it down, you document it. It's either an information memorandum. It's an invitation to offer. It's an invitation to treat, it's a Deal Memo. It's a heads, it's whatever it is. And you go in very simple bullet point terms, we're buying this, we're buying this, we're buying this. We're buying the recorded rights. We'll buy the merchandise rights. We're not buying the trademarks because you still want to use them, but we want a license to use them. We're not buying the name we want to use, or it might be. We're buying everything.

So the next question you have to ask your client, if you're acting for a seller, and I know it sounds like a really silly question, but is who owns this stuff? Do you own this stuff individually, as the group? Do you own this stuff, or is it owned by a company you created 30, 40, years to trade through? Is it actually not owned by you at all? Are the rights that we're buying actually owned by a third-party record company because you assigned those rights back in the day. So, in fact, we're really only buying an income stream, and you need unanimity amongst the seller group to present that to a buyer, because that will then determine, as Vas touched on earlier, is this an asset sale? I will I don't own the rights on my own. I only a certain part of the rights, or is it a share sale? We own the company. The company owns the rights. Here's the company.

And then the last question is, how much? Again, it sounds like a very simple question. I think Vas very and for me, actually very helpfully explained the buyer approach here, and I would not interfere with that at all. I would add a couple of things to that, which is the value of the catalog is what you're buying. When you buy recorded music, you're buying copyright. You're buying the right to own the copyright in the either the songs or the recordings. And copyright has a finite life, although it tends to get extended quite regularly, normally, when the Beatles first album comes into public domain, there's usually a rush to get the copyright extended, or Mickey Mouse is about to fall into public domain, they'll do something to extend the copyright. But currently, there is a finite amount of time left on recordings, and that time will depend upon when the recording was originally released. So you may actually be buying a catalog that's maybe only got five, six years left before under the current leap framework, it falls into the public domain and the value disappears. So that's a pricing point. That's a so your pricing point is, well, we're buying this, but we're not buying that. They do own most of it, but in order, all of it. And we've only got 10 or 15 years left on the copyright, then you'll factor in the things that Vas was talking about, multiples and those are other bits and pieces, but that's a number that you need to have settled before you even get anywhere.

So those are the three things you need to have done, and you need to always bear them in mind, because they will get stressed as the transaction progresses. There will be an entirely understandable need on behalf of the buyer to try and get a bit more and not pay any more for it. And there'll be an entirely understandable need on behalf of the seller to go, well, we weren't going to sell that, but actually fine, but you're gonna have to pay for it, so your price point is going to change.

So, those are the three things you stick with before you even start getting into the contractual matrix. Now, I would argue that theoretically, these are relatively simple transactions to paper, because once you've got over the fact that you're dealing with a slightly unusual asset with a life of its own. It's an asset, you know, it's a purchase transaction. You've done it a million times before. I'm looking at you guys around the room. You know, whether it's, whether it's, you know, buying another company, buying a plant, buying whatever it is, widgets, it doesn't matter. It's, it's pretty much the transactional documentation is relatively the same.

Where things get complicated is the ancillary documentation that has to go with it. So you may have a share purchase agreement, which is one document, but there could be 30 or 40 ancillary documents that support that. I mean, first of all, there's a transfer of a company from one hand, set of hands to another, as you'll know, that involves a huge amount of paperwork, even boring stuff like stock transfer forms. But they have to be done. And they have to be done by completion. If you miss anything like that, the whole thing can fall over.

Then there's a paperwork around all the ancillary rights you may be buying, they need to be dealt with. Who's going to own the trademarks? Are we going to have to license the trademark? So we use the trademarks if you own the trademarks, and all that kind of stuff, and the merchandise and rights and all that kind of stuff. So the volume of paperwork becomes quite significant. They're not individually difficult, and there's not usually too much toing and froing, but there's a lot of it.

So it's very important that you have clear strategy if you're acting for the seller, from the legal perspective, that you understand that this is a multi-legal disciplinary transaction, you'll be calling upon, certainly corporate lawyers, music specialists such as myself, possibly employment, possibly litigation. If there's ongoing litigation, resorting out possibly property. If there are lease holes that need to be dealt with. You'll be dealing with tax, you'll be dealing with, you know, all manner of a number of things.

So the legal journey in terms of the documentation is relatively well, we're well versed in it. It's relatively well understood. But keeping the show on the road is where the is, where the real skill is. And I think that's where hopefully people are like us, or whoever the tax consultants are, that's where they earn their money, because they actually keep it going and keep it moving towards completion.

And then the last thing is, I often have to deal with multiple sellers, and they may have their own representation. Some of them may not be actually the original let's say the group that did the recordings may not be the original group members. They may have passed away, which means I'm dealing with estates and beneficiaries who have an entirely different perspective, perhaps on this, than the living group members, who may justifiably or unjustifiably think that. Well, their view should carry more weight than the estates, so you have to sort of corral them all together and try and do that so they all sign off on the same paperwork.

So actually, the legal challenge for lawyers is not the nuts and bolts of the contract, although that can be complicated, it's actually just managing the whole process and also not getting in the way. You know, my principals don't want me calling them every two minutes saying clause 2.6…

They're gonna say, “Yeah, I'm in Sardinia. Just tell me when it's done and, you know, and we'll look at it then”.

Helen  29:21

So on that point from both the seller and then it would be great to get the buyer point of view. What are some of those main pitfalls that can kind of add big hurdles or stumbling blocks to transactions?

Vas  29:36

The number one thing, that's the number one problem we're seeing on the buyer side is the over valuations, because there's been so much hype around the music, catalog sales and, you know, billions thrown around, and all this information, you know, and that sometimes there may be poor, poor, also expectation management on the side of the seller. So we're seeing people coming into these conversations with unrealistic expectations, you know, multiples that are 20, 30, times, you know, the income of the catalog, which is on the side of the music fund of the investors this is an asset that needs to produce a return. And has, you know, it's a low risk, obviously, asset, but state has produced a return. So if you're buying it at a multiple, that is, you know, 25 times. That's a return less that you will get if you had your money in the bank. It doesn't make sense financially. So that's, the number one, you know, obstacle we're seeing this, this expectation management that needs to happen at every level to be able to do a transaction.

Another thing that is becoming a little bit, you know, for red flag for us is that catalogs often are marketed very widely, so, rather than, you know, there are a few sellers who just care about, you know, maximising the price, and they give the catalog away to 10 different brokers. When we’re sitting on my on my side, you know, the buyer side, and you are getting a catalog for five sources, that's a red flag you don't want to be involved with that, because that means that the catalog is just it's not marketed properly, and that damages the artist's legacy. It's not a good thing that's happening. So, that's another thing.

Another challenge we are seeing is the poor data quality. That's not a problem that exists in the music industry. Just now it was, it is created by the lack of uniform standard data standard in the music industry. That's how it was created. So, we often have, you know, very poor data, missing data, as Lance said, you know, some of this data are on paper, sitting in somewhere in a warehouse for very old catalogs, you know, the contracts or something there. So, it's a challenge, but also, it's something that, you know, it takes a long, a long time to collect the data. So, I often get, you know, a summary from a catalog that, you know, I get it today, and then I wait a couple of months to get the data, the actual statements, and, you know, data files, which is, which is a problem. And so that causes delays in the valuations. You know, uncertainty in the valuations, if you're doing the full data. And but so those are the main challenges I say around the process.

Helen

And Lance on the seller side.

Lance  32:42

Well, it actually endorse everything that Vas has just said, for us, it is managing expectations. You may feel your catalog is worth $750 million because Bruce Springsteen has just sold this for 500 and you're better than Bruce Springsteen. You've been around longer. But the commercial reality is that's probably not actually right, and you're not going to get that, so let's not even go down that route.

Having spent quite a bit of time saying then three principles are, how much you are getting into this, you must manage your clients’ expectations that number will probably move up or down depending as the transaction goes along. So you don't want to move too far away from it. And that's certainly your start point. I think probably things start to get sticky, if they're going to get sticky, when you go through the due diligence process. And I think couple of points on that, even when we act with the sellers, excuse me, we say to the sellers, do your due diligence. Do your due diligence. Now, not on the buyer, but on yourself. Okay, go and start looking into all of this stuff, because I want to know what the answers are to the questions I know Vas is going to ask. And I need to be able to say to Vas, yes, you're right. We'll get that for you. No, we don't have that document, whatever it may be. So you know, we don't want there to be any surprises, or if we do, or if there are surprises, we want to know where they are, so that if Vas asks them, I've got open and maybe sometimes we go, well, let's just hope we didn't ask about that.

And so what will then happen is, at the same time, the sellers should be doing their own due diligence. And sellers actually artists, particularly heritage artists, or long standing artists, they should be doing this anyway on an annual basis. They should be looking at their database of contracts. So, they should be going: “that video that we did three years ago, have we got the directors contract? No, right? Well, where is it? Let's go and fight”. So it should be an ongoing thing, but it certainly is the case that when you've got an artist that's been recording since, you know, the early 70s, that's a lot of product, and that's a lot of paperwork, and it needs to be investigated properly.

It goes back to my second principle, which is, who owns this? That's how you find out who’s own this.

So once you start getting into the due diligence process, and when the buyer starts getting into due diligence, one of the challenges we face as a seller is, what is the risk profile that a buyer is prepared to take, and where do they draw the line? So, if we have a massive selling album that we're selling as part of a catalog of album rights, and it then becomes clear that actually the ownership position is not quite as secure as we thought it was on an asset that is really a crown jewel, that's likely to have a price point issue. And the buyer then has to go: Okay, fine. We thought we were getting this. We're not. We're getting this. Is the buyer prepared to move the transaction forward on that basis, or are they not?

At the other end of the scale, you will find you'll do a list of all the assets that are being sold. It will be very forensic. It will say, for example, yeah, that Top of the Pops footage from 1972 we can sell you that. And then the buyer go, Oh, great. Can we see the agreement? And you'll go, it turns out we don't have an agreement. Now that's by no means a crown jewel as far as anybody's concerned the transaction is not going to fall over because the situation is less clear on that particular asset, but a buyer might go, Yeah, you know what? We'll take a punt on that. It's fine. It's been used for 50 years. No one's complained about it. There's been no claims, no litigation. We'll take a risk on that, and they may want that risk mitigated by warranties and indemnities in the transaction documentation, and then we can have a discussion about how that's going to work, or they may take the view, no, we are taking a zero risk approach to this transaction because of the money we're spending. And you say that you need to go away, and you need to sort that out and come back to us when it's done. So that's where things start to get a little bit sticky, and you get asked a lot of due diligence questions as a seller, and you need to be able to answer them, because to be fair to the buyers, it's their money. They're entitled to be asking these questions, and they're entitled to make a decision on the transaction based upon the answers they get.

Helen  37:28

Absolutely and so, we've had a seller who has successfully sold the catalog, which is the day we all want you know, Vas has got a lovely, new, shiny catalog to play with. Lance has tied up the contracts, and now the seller has $50 million in their bank account. Nji, over to you, what happens at that point? Because I can only imagine the overwhelm the client is feeling, and the sort of lostness that they might think of: Oh, I never thought this far ahead. What next?

Nji  38:02

Well, firstly, I mean, it's fascinating having Vas and Lance here, and a lot of the discussion has been on sort of the transaction side, where we come in is very much the end client. What does this mean for you? What was your overall objective in doing this, which I think you touched on before, and I fully agree with you, Lance and what you were saying in that the tax consideration and a lot of the stuff that we are sort of taught to consider when we first go into these roles is not always what's driving it. So we sort of will have a two pronged approach to it.

So, the first will be, what are your objectives, both on the quantitative side, and that's where the tax efficiency comes in. So how much do you need? How much do you need every year for the rest of your life? And how can we deliver that in the most tax efficient manner? So, we can sort of tick off those quantitative objectives quite quickly, and there will always be a sort of finite number of solutions which will be tailored to that specific family or individual.

And then it comes to what, obviously, I'm biased, because this is very much my role and what I do day to day, but what I would say is the fun side. So with any sort of transaction like this, you have these sort of this stressful lead up to something that is once in a lifetime event, and you now have this fund, and quite often there will be a moment of decompression that's needed after that, because you could have had quite a long lead up of a lot of stressful meetings in your lawyer's office, so there's a moment of decompression, and ideally we would have been involved early. We always say it's never too early to have someone involved that's looking after you as an individual. After this has happened, because a lot of the advisors that will be involved are looking at getting the transaction completed.

So, the first bit of advice that we would always give is have someone on your side that's looking after you at the end, and hopefully that's us, and then in the decompression moment, that's when we are asking clients to get really clear on what does the future look like for you? And not to sound sort of cheesy and trite, but there is nothing too big to dream, right? So, it's up to you to decide, what does it look like from a qualitative aspect, where are you resident? Where are your families being educated? Where were you spending winters? Where are you spending summers? What is your ongoing legacy going to be? Is there any philanthropy that you want to consider? So, in the decompression stage is where we're asking those sort of big, almost existential questions. You know, who am I and what do I want from life?

And then it's up to us to deliver that. And that's where the tax does come in the most tax efficient way because that is always an easy win, right? So the market does what the market does, depending on how we've structured your underlying portfolio, but the tax is an easy win. And to go back to your point initially, of things being structured from a tax perspective, that goes, you know, after two years and it's no longer relevant Lance, we're very much of the opinion that we shouldn't take you down a cul de sac, and anything that we put in place today, you should be able to get out of relatively easy without any sort of punitive tax consequences. So that's number one, but that's very much our issue.

So when they've come back to us with, you know, these are our hopes and dreams, and sometimes they can be intergenerational. So when I said dream big, I meant that literally. It might not just be about your lifetime, but the lifetime of 2, 3, 4, generations after you're gone, depending on the sums that we're thinking about, it's up to us to then put a plan in place, and that is when the tax does become relevant. So that is an easy win. How can we structure this in the most tax efficient manner so you get everything that you want from the very, very simple this is how much I need a month, a year, a quarter, to live on comfortably, right down to the more complex, how do I want my philanthropic legacy to be delivered in the most tax efficient way and everything in between?

So, we will, then, at that point, present some sort of proposal, but it's a dynamic thing. It's something that we're sitting with you quarterly, half yearly, monthly, even in the first instance, to make sure that it's right, and then it's changing with you and your family. So, I would say that's the exciting part, and the sort of the bit that you're all working towards right? Because you've started this for a reason, you've come to the end of it, and then what's next?

Lance  43:07

I like the distinction you've drawn there between the tax advice given on the transaction and then tax advice given to the individuals. We absolutely do get tax advice once it said the transactions got to a stage where we have an agreement in principle, for example, we will always have tax advisors looking at that and giving advice from that point on to completion. And any decision that gets made will always be run by the tax advisors from a transactional point of view.

But I like, I like that approach that you're absolutely right. You work away, you get this thing across the line. Everyone pops the champagne, although the last one I did completion took place at 2h30 in the morning. I was sitting, I was sitting alone in my kitchen with a whiskey. Feeling a bit: This looks a bit sad. It was very anti-climactic, but there is generally a feeling of a job. All done, and congratulations on all sides. And then it's like… and you're right. And for sellers, particularly, you know the principles the individuals concerned, they do have, then face, be careful what you wish for. This has worked. Here is a large amount of money in your bank. Now, what are you going to do with it? And has how we got this to where you want it to be to use that money. And I think I only really see the tax from the transactional point of view, but I think enjoy what you're saying about the tax for the individuals is critically important.

Nji 45:31

And that is where all the advisors have to be in synergy, because we don't give tax advice, but we will work closely with the tax advisor. And I sort of see them as they are the numbers behind why we're doing it this way. We are more the vision, if that makes sense. So we will take into account, right? This is how your tax advisor said it could be structured. We're looking at it from what does your life look like, and how can we work with both you and the tax advisor to, I guess, bring that to life a little bit.

Helen  46:04

So thank you guys so much for the Chat. Today, I want to tap you up for one last little comment. So your top tip when selling your catalog, what's the one thing that a client should keep in mind?

Lance  46:21

Well, I'm not sure there is one thing in mind, but I think to take a step back and look at it holistically, I suppose, from a seller's point of views, why are you doing this? What's the reason for doing this? And to try and make sure that the transaction continues along those lines, so you're never less than comfortable with that, and that will depend upon the personal circumstance of the individual is concerned.

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Helen  47:44

And Vas your top tip?

Vas  47:45

I would say to sellers that the best thing they should do is try to find the right home for their children. Because I think it's very often they consider their music as a child. It's an emotional decision, and finding the right home is the best thing they can do. And that doesn't necessarily mean only the more money. It means also the legacy that they want to live with. I mean, how are the rights going to be used from now on? And personally, I mean, we would love artists that want to be involved in that in the future, and we try to build that into our conversations, in our discussion. So it's, I think that's the best, big way.

Helen  48:24

And Nji, the final word?

Nji 48:26

I think, yeah, it's hard to just pinpoint one, but I would say, firstly, try to look beyond the transaction. It can feel very intense and all consuming whilst you're in it, but ultimately you're doing it for the life post transaction. So think about that. Think about what that life looks like for you.

And secondly, is to build a good team around you, a team of people that you can trust and don't ever feel it's too early to have someone at the table who is looking at you personally, rather than focused on the transaction in front of you, because that can, I guess, provide a bit of respite for the intensity of it all.

Helen  49:08

Fantastic. Look. I want to say a big thank you to all our guests so Vasileios Touronis, Lance Phillips and Nji Lorimer for their time today and thank you all for listening.

Hopefully this episode has helped answer some of those questions you may have about music, catalog sales, and if you'd like to find out more, or if you have any specific questions, do not hesitate to contact the KH Private Client team. The wealth chat is available on Spotify and Apple podcasts, so make sure you subscribe so you don't miss our latest episodes until next time. Goodbye, everyone.

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Wealth Chat - Music Catalogue Sales

Tue, Oct 22, 2024 1:30PM • 49:39

SPEAKERS

Lance, Vas, Nji, Helen

Helen  00:00

Hello and welcome to The Wealth Chat, brought to you by SG Kleinwort Hambros. I'm Helen Gammons, Director of Media and Entertainment clients. And in today's episode, we're asking what's driving the uptick in music catalog sales, and what considerations should artists and their managers have before, during and after a successful sale?

To help me explore this, I'm joined by Vasileios Touronis, CEO of Star Music Fund.

Vas 00:27

Hi, nice to be here.

Helen  00:28

Lance Phillips, a Partner in the Music group at Sheridans law firm.

Lans 00:32

Hello, nice to meet you.

Helen  00:34

And Nji Lorimer, Head of UK Domestic Wealth Planning at SG Kleinwort Hambros

Nji 00:37

Hello.

Helen  00:38

So, Vas, music catalog purchases have been a long-standing alternative asset, frequently bought in the past by pension providers for their relatively stable income streams. In recent years, we're seeing more specialist music funds, like Star Music Fund, and traditional private equity funds taking an interest in music catalog sales. Can you walk us through what a music catalog is and how these types of assets are valued?

Vas  01:17

Well, a music catalog is an asset that refers to a collection of music rights, typically including compositions, recordings or both. And all these types of rights can generate revenue streams for the owner of the rights.

These rights include the royalties earned from a number of sources, like performance rights, which is the, you know, the money earned when a song is performed live or on TV or radio, or the mechanical royalties, which come from the reproduction of the physical reproduction of the physical product, like CDs, vinyls or on the digital space, digital downloads. We have the synchronisation rights, the sync rights that we call which is that revenue earned from when a song is licensed to it to Film TV or a commercial. And finally, we have the streaming royalties, which is the most important at this stage with the growth of streaming, which is, you know, obviously the money that's earned when the song is played on Spotify or Apple Music and all these streaming platforms.

Now, music catalog obviously, as you said, there's strong interest because it's a very valuable asset. It has the main characteristic that, you know, investors like, we have recurring income over, you know, many years, and it's considered an alternative asset with stable cash flows and predictable cash flows, which is what investors like. Investors like the risk versus the return profile. It's a low risk versus good and stable return. So, this is appealing.

Valuing music catalog is a complex process that analyses a number of factors. The three main groups of things that we are looking at is a/ the quality of the music, which is very important, especially for funds who are interested in working with the catalog over a long period of time, then the income the catalog generates, and also the potential for future earnings.

From there on, we have all you know, every player in this market has evaluation model, which is usually based It's a DCF model, a Discounted Cash Flow model with, you know, takes care of all this information I told you before, you know, has some inputs there. And we also have a secondary, let's say, comparative approach, which is, what are the multiples that we have seen in similar transactions for similar catalogs in the past. That's the basis of the way we value the catalogs.

Helen  03:45

It's very interesting. You mentioned the quality of the music. How do you judge that?

Vas  03:51

I think there are universal standards right now about music. So, you know, if there's an artist that you know, it's a legendary artist, an iconic artist, or someone who could be a niche artist, but has had a significant cultural impact, you know, in his time. Also is the music evergreen? You know, do we still listen to it today? Everybody likes it.

The quality of the music is the number one most important thing for anyone who's really interested in doing this.

Helen  04:28

Looking at all those factors, what makes you really excited about getting your hands on a new catalog? What is it that you sort of home in on and aim for?

Vas  04:39

As I said, the music. So evergreen music, you look at a number of things that are, you know, in the music category, that potentially need to be examined.

For example, what genre this music is coming from? Is it a broad appeal genre, a mainstream genre, or is it a niche genre? But obviously mainstream are, you know, very popular, but we have the Niche genre with a very passionate fan base, so that, you know, is important.

Then you go to the, you know, to the stability and the consistency of the revenue, so you analyse the historical data of the last three to five years, and you see how the catalog is performing. You know, you're getting stable revenue streams.

You also want to see if there's diversification in the catalog. You know, is the income coming from one market, from one geography, or from one income source, or from multiple geographies and multiple income sources, because that's very important, the potential for ‘synch’, synchronisation. I mean, how often has it been used in the past? And do you think that this type of music can be part of, you know, commercials, or of other licensing opportunities.

The vintage of the catalogue, so how long has it been around? Because that's an important factor. Usually, investors are looking for things that have, you know, a stable income stream. So, it has been over five years. You don't have to do too many assumptions about the decay curves.

The ownership, so are you getting an active catalog or a passive catalog? That's a very important distinction, because for if the rights are active, so it means you can, you know, use them and license them as you please, and work with them and do the issues and do stuff with the rights that can grow the earnings.

Then, you will apply different valuation, a better valuation, a bigger valuation, but if it's passive rights, still could be very interesting, because some you know, iconic passive rights of some very important artists that you'd love to be associated with.

And also, is there administration available? Usually when you're buying a catalog, you know, administration may be with someone else, but maybe it is already expired and you just have to give notice. Or maybe, it's coming up in a few years, all these factors play.

Usually when you have the whole thing, it's, you know, active catalog, active rights and administration, you're very excited!

And the growth potential is something that's very important also. You know, is this catalog performing well in streaming? Because streaming is the driver of growth today, you know, there's another angle to that. If it's underperforming on streaming, maybe it hasn't been properly, you know, worked on streaming. So that's, that's a hidden and upside, which makes it interesting.

Finally, the final part I want to talk about is the technological advances that are coming up. I think AI is going to be a very important revenue generator for catalogs in the future. And actually, you know, when, a year ago, that song by The Beatles was released with, with the help of AI, I was emotional, because I'm a big music fan, you know, vinyl collector, so hearing the Beatles singing like it's today, it was very interesting for me. And I think, you know, that there can be revenue if properly used.

Helen  08:30

So you've mentioned, AI, but are there any other sort of trends that you can see in the types of catalogs or opportunities coming out at the moment?

Vas  08:38

There are a lot of people who are interested in selling their rights. We're seeing also a lot of people who are interested in acquiring rights. So, there's a number of new players all the time. That's good and bad, it has a number of, you know, advantages, disadvantages. Basically, that means that there is a good market for sellers and a good market for buyers. So, that's fine.

The quantity we're seeing as far as catalog opportunities doesn't always mean there's the same quality attached to it. So, we see, for example, a lot of newer catalogs of artists who are trying to cast in on a recent success, which is not ideal, because obviously then the decay curves are uncertain. So, you know, you're going to make too many assumptions, and that's not going to be the benefit of the artist. So, I think if they wait a little more, then they're in a better position to do that. We're seeing also some, you know, genres that are coming up, and they were not before available, like Latin music. We're seeing a lot of Latin music, which is a trending genre. It's growing very fast, especially in the US, and so that's making us in the Latin Americans in general market that's very upcoming. All that creates a very interesting environment in the catalog market.

Helen  10:25

You mentioned that there's a lot more catalogs out there at the moment being sold, and I would open this question up to the floor. So, we're having a number of different tax changes that are coming into clients minds, sort of potential capital gains tax changes, changes to business property relief when inheriting catalogs, inheritance tax in general, what are some of the considerations clients should have in terms of their catalogs? Maybe we go to you Lance.

Lance  10:57

Thanks Helen for inviting me.

Helen 11:02

You’re welcome.

Lance  11:03

My experience over the last few years and as a law firm, we've acted for both buyers and sellers, but the more significant catalog sales we've been involved in, we've acted for sellers. I would say that probably tax is not a hugely important consideration in the decision to sell the catalog or the rights in the first place. Everybody will have a different reason for doing it. It could be estate planning. It could be they just want out. They're done. They've been doing this for 60 years. They want to retire and hand over all the difficult bits of the job to somebody else. Could be a number of reasons, but clearly, what then becomes critical is, once the person's decided to sell is to do it in a tax efficient way. But again, that will depend upon what is their motivation for doing it, and not to put too fine a point on it. What are they going to do with the cash? Where are they going to do it? Are they going to bequeath it to their inheritance, their states? Are they going to give it to charity? Are they going to invest in other businesses? So, there's no one size fits all. We generally counsel against being overly reliant on tax considerations when you're thinking of just, am I going to sell this? You know, that's something to think about down the line when you structure the deals, but it shouldn't be a deciding factor more frequently. I'm sure Vas will have some experiences. It's as much an emotional reason for an artist to sell their rights as anything else. I've been fortunate enough to act for people who are significantly wealthy already. So, I don't mean to sound glib or disingenuous here, but the money is a very important part of what they're getting out of this. But it's not the be all and end all. They may have a reason for doing it. They want to use that money for a specific purpose. So, we sort of take a bit of back seat on the tax side of things at the very beginning of literally sitting someone down and saying, all right, you'd like to sell your rights. Okay, at that point, we don't really talk too much about tax, except to say, once you've decided to do this, and once you've either found a willing buyer or a willing seller, depending upon which side, then you need to start thinking as early as possible about the tax implications, and certainly there are a number of transactions I've been involved with over the last six months where there was a definite Hurry up to get it done because of the change of government and because of the well, either fear or whatever, other words, depending upon where you sit on the political spectrum, of what, what the first budget was going to do.

So, from a practical point of view, that accelerated the process very definitely. You know, something that was we'd set a completion date on for maybe three months now, had to be done by the end of September, or something like that. But as lawyers, we are not tax lawyers. We don't give advice on tax, we have a tax department, but we generally trust if we're acting for the seller, they will we will advise them to get on board specialist tax consultants, whether that's an accountant or a specific expertise firm of tax advisors.

Obviously, if we're acting for the buyer, they will almost certainly have their own tax arrangements on board. And if the buyer is bringing in third party capital to assist with the transaction, if it's a particularly big transaction, they will have their tax people on board as well. So, I think the short answer that is, it's always in the back of your minds. It helps you structure the deal, but it's not normally a driver from a seller. In my experience, from a seller's perspective, for doing it.

Helen  14:39

Yes, I think you're absolutely right. Purpose tends to lead a lot of these transactions.

Lance  14:44

We worry if the tax dog wags the transaction time.

Helen  14:50

Lance  14:51

Because we've been involved in a transaction recently where we sort of went down a rabbit hole on tax for about four or five months. Whilst the tax advisors came up with a number of ways of selling a catalog, none of which were wrong or bad, but equally, none of them suited the transaction or the individual sellers, because it was a group of people. Reasons for doing it. So, it's good to investigate it, but there comes a point where you sort of have to put the brakes on a bit and say, hang on a minute, we're getting away from what we're trying to do here. We need to reset and go again, and then we'll bring it back in. But absolutely, it's it couldn't be more critical, once you get to that stage of, I wouldn't say, no return, but where the transaction seems to have legs and it looks like it's going to go ahead, then the tax guys become really, really important, and for that reason, they need to be involved as early as possible, even if it's just to say we're thinking of doing this transaction, we'll let you know in a couple of months. But take it on board. You're going to be instructed to do this.

Helen  15:57

Yeah, absolutely. And Vas, in your experience, are there any particular structures that you like to see, don't like to see.

Vas  16:03

It's a very interesting point, and I like what I'm hearing from Lance. You know that the tax is not the number one consideration, because we've been facing a recent dilemma with a few catalogs.

Catalog sales can be done in two ways usually. One way is an asset sale. So, the catalog sale is an asset or it's a company sale. The asset sits in a company somehow, as a loan or as an asset there, and you are buying the shares of the company. That has, tax implications for a music fund, for us as well. And on the other side also, it's a double-sided thing. So, on our side, when we're buying an asset, we can advertise the asset over, you know, the next 10 years, and then the zero tax to be paid on the incoming revenue, and that, of course, is then input into the valuation, and you're providing a higher valuation and a higher price to the seller. But if you're buying the company, then amortisation is not an option. So, in that case, you're paying corporate tax, which is, you know, much higher, and then you are again inputting this into the valuation, and you're providing a lower valuation to the price, to the seller.

Lance  18:03

I mean, you Vas, I'm sure, have experienced this, but when I've done due diligence, we'll touch on due diligence later, I'm sure, even when you're acting for a seller, and let's say it's an evergreen catalog that goes about 50/60 years, you'll look back to some of the paperwork from the 70s and the 80s, and you go, why on earth did they do that? That's completely out of kilter, from what I'd expect to see, and invariably, it's because it was designed to take advantage of a tax regime that existed at that moment, disappeared two years later, and has done nothing but cause trouble to everybody ever since. So, you do need to, sort of, you need to tread carefully with tax and not let it drive things too much. But there comes a point where the transaction gets momentum, where then it becomes very important. And I think your point Vas about CGT versus income tax, I mean, certainly again, acting for sellers. The transactions we've done, they've all been shares purchase.

Helen  19:58

So we really look at this. Seller's journey. I turn up at Lance's door day one and say, Help. I'd like to sell my catalog. What does that look like?

Lance  20:07

Funny to say that, because that actually did happen to me last week. What you have to bear in mind, I think, in our experiences, although these become, and can become complicated transactions with multiple parties involved. There are three very basic questions that you ask as a seller, which are: What are we selling? Who owns it? How much?

And if you stick to those three first principles all the way down the line, when things start to be veering off course slightly, or there are bumps in the road, there will be bumps in the road, or the buyer starts asking, you know, a lot of questions. You keep coming back to this, and you keep saying, no, no, you don't worry about that, you're not buying that, but you're only buying this. Now, it could be they're buying everything. It could be they're only buying certain assets. So, they might just be buying the assets, the copyrights in the recorded music and not the music publishing, or the other way around. They could be buying both. They could just be buying income streams. So, for example, producers who are paid royalties on records they've produced, and if they've been successful records and evergreen records, those royalties are significant. I mean, successful producers are very wealthy people.

You know is that being sold? So, from day one, even before you start getting into the complexities of the legal documentation, you need to be very clear amongst your seller group and with the buyer. What exactly is it are you buying? Sorry, I'm looking to Vas here, because I'd see him as the role of the push. What exactly is it the star fund is buying? And you must be very clear from that, because as the transaction goes on, idiots like me will leap in and go, well, you're buying the recording rights, but you're not buying the rights to the artist's name. So that means that the artist could still go out there and make records as name of band. So, are you okay? Are you comfortable with that or and then they go, Ah, well, we better buy those rights as well. And the seller goes, no, no, no, no, we still want to carry on in the future being this band, you're buying catalog, you're buying history, you're buying legacy, you're not buying future. So that's something that needs to be clearly dealt with.

So what you should do, what I would advise people do, is, and it's a collaborative process with the buyer, is you set it down, you document it. It's either an information memorandum. It's an invitation to offer. It's an invitation to treat, it's a Deal Memo. It's a heads, it's whatever it is. And you go in very simple bullet point terms, we're buying this, we're buying this, we're buying this. We're buying the recorded rights. We'll buy the merchandise rights. We're not buying the trademarks because you still want to use them, but we want a license to use them. We're not buying the name we want to use, or it might be. We're buying everything.

So the next question you have to ask your client, if you're acting for a seller, and I know it sounds like a really silly question, but is who owns this stuff? Do you own this stuff individually, as the group? Do you own this stuff, or is it owned by a company you created 30, 40, years to trade through? Is it actually not owned by you at all? Are the rights that we're buying actually owned by a third-party record company because you assigned those rights back in the day. So, in fact, we're really only buying an income stream, and you need unanimity amongst the seller group to present that to a buyer, because that will then determine, as Vas touched on earlier, is this an asset sale? I will I don't own the rights on my own. I only a certain part of the rights, or is it a share sale? We own the company. The company owns the rights. Here's the company.

And then the last question is, how much? Again, it sounds like a very simple question. I think Vas very and for me, actually very helpfully explained the buyer approach here, and I would not interfere with that at all. I would add a couple of things to that, which is the value of the catalog is what you're buying. When you buy recorded music, you're buying copyright. You're buying the right to own the copyright in the either the songs or the recordings. And copyright has a finite life, although it tends to get extended quite regularly, normally, when the Beatles first album comes into public domain, there's usually a rush to get the copyright extended, or Mickey Mouse is about to fall into public domain, they'll do something to extend the copyright. But currently, there is a finite amount of time left on recordings, and that time will depend upon when the recording was originally released. So you may actually be buying a catalog that's maybe only got five, six years left before under the current leap framework, it falls into the public domain and the value disappears. So that's a pricing point. That's a so your pricing point is, well, we're buying this, but we're not buying that. They do own most of it, but in order, all of it. And we've only got 10 or 15 years left on the copyright, then you'll factor in the things that Vas was talking about, multiples and those are other bits and pieces, but that's a number that you need to have settled before you even get anywhere.

So those are the three things you need to have done, and you need to always bear them in mind, because they will get stressed as the transaction progresses. There will be an entirely understandable need on behalf of the buyer to try and get a bit more and not pay any more for it. And there'll be an entirely understandable need on behalf of the seller to go, well, we weren't going to sell that, but actually fine, but you're gonna have to pay for it, so your price point is going to change.

So, those are the three things you stick with before you even start getting into the contractual matrix. Now, I would argue that theoretically, these are relatively simple transactions to paper, because once you've got over the fact that you're dealing with a slightly unusual asset with a life of its own. It's an asset, you know, it's a purchase transaction. You've done it a million times before. I'm looking at you guys around the room. You know, whether it's, whether it's, you know, buying another company, buying a plant, buying whatever it is, widgets, it doesn't matter. It's, it's pretty much the transactional documentation is relatively the same.

Where things get complicated is the ancillary documentation that has to go with it. So you may have a share purchase agreement, which is one document, but there could be 30 or 40 ancillary documents that support that. I mean, first of all, there's a transfer of a company from one hand, set of hands to another, as you'll know, that involves a huge amount of paperwork, even boring stuff like stock transfer forms. But they have to be done. And they have to be done by completion. If you miss anything like that, the whole thing can fall over.

Then there's a paperwork around all the ancillary rights you may be buying, they need to be dealt with. Who's going to own the trademarks? Are we going to have to license the trademark? So we use the trademarks if you own the trademarks, and all that kind of stuff, and the merchandise and rights and all that kind of stuff. So the volume of paperwork becomes quite significant. They're not individually difficult, and there's not usually too much toing and froing, but there's a lot of it.

So it's very important that you have clear strategy if you're acting for the seller, from the legal perspective, that you understand that this is a multi-legal disciplinary transaction, you'll be calling upon, certainly corporate lawyers, music specialists such as myself, possibly employment, possibly litigation. If there's ongoing litigation, resorting out possibly property. If there are lease holes that need to be dealt with. You'll be dealing with tax, you'll be dealing with, you know, all manner of a number of things.

So the legal journey in terms of the documentation is relatively well, we're well versed in it. It's relatively well understood. But keeping the show on the road is where the is, where the real skill is. And I think that's where hopefully people are like us, or whoever the tax consultants are, that's where they earn their money, because they actually keep it going and keep it moving towards completion.

And then the last thing is, I often have to deal with multiple sellers, and they may have their own representation. Some of them may not be actually the original let's say the group that did the recordings may not be the original group members. They may have passed away, which means I'm dealing with estates and beneficiaries who have an entirely different perspective, perhaps on this, than the living group members, who may justifiably or unjustifiably think that. Well, their view should carry more weight than the estates, so you have to sort of corral them all together and try and do that so they all sign off on the same paperwork.

So actually, the legal challenge for lawyers is not the nuts and bolts of the contract, although that can be complicated, it's actually just managing the whole process and also not getting in the way. You know, my principals don't want me calling them every two minutes saying clause 2.6…

They're gonna say, “Yeah, I'm in Sardinia. Just tell me when it's done and, you know, and we'll look at it then”.

Helen  29:21

So on that point from both the seller and then it would be great to get the buyer point of view. What are some of those main pitfalls that can kind of add big hurdles or stumbling blocks to transactions?

Vas  29:36

The number one thing, that's the number one problem we're seeing on the buyer side is the over valuations, because there's been so much hype around the music, catalog sales and, you know, billions thrown around, and all this information, you know, and that sometimes there may be poor, poor, also expectation management on the side of the seller. So we're seeing people coming into these conversations with unrealistic expectations, you know, multiples that are 20, 30, times, you know, the income of the catalog, which is on the side of the music fund of the investors this is an asset that needs to produce a return. And has, you know, it's a low risk, obviously, asset, but state has produced a return. So if you're buying it at a multiple, that is, you know, 25 times. That's a return less that you will get if you had your money in the bank. It doesn't make sense financially. So that's, the number one, you know, obstacle we're seeing this, this expectation management that needs to happen at every level to be able to do a transaction.

Another thing that is becoming a little bit, you know, for red flag for us is that catalogs often are marketed very widely, so, rather than, you know, there are a few sellers who just care about, you know, maximising the price, and they give the catalog away to 10 different brokers. When we’re sitting on my on my side, you know, the buyer side, and you are getting a catalog for five sources, that's a red flag you don't want to be involved with that, because that means that the catalog is just it's not marketed properly, and that damages the artist's legacy. It's not a good thing that's happening. So, that's another thing.

Another challenge we are seeing is the poor data quality. That's not a problem that exists in the music industry. Just now it was, it is created by the lack of uniform standard data standard in the music industry. That's how it was created. So, we often have, you know, very poor data, missing data, as Lance said, you know, some of this data are on paper, sitting in somewhere in a warehouse for very old catalogs, you know, the contracts or something there. So, it's a challenge, but also, it's something that, you know, it takes a long, a long time to collect the data. So, I often get, you know, a summary from a catalog that, you know, I get it today, and then I wait a couple of months to get the data, the actual statements, and, you know, data files, which is, which is a problem. And so that causes delays in the valuations. You know, uncertainty in the valuations, if you're doing the full data. And but so those are the main challenges I say around the process.

Helen

And Lance on the seller side.

Lance  32:42

Well, it actually endorse everything that Vas has just said, for us, it is managing expectations. You may feel your catalog is worth $750 million because Bruce Springsteen has just sold this for 500 and you're better than Bruce Springsteen. You've been around longer. But the commercial reality is that's probably not actually right, and you're not going to get that, so let's not even go down that route.

Having spent quite a bit of time saying then three principles are, how much you are getting into this, you must manage your clients’ expectations that number will probably move up or down depending as the transaction goes along. So you don't want to move too far away from it. And that's certainly your start point. I think probably things start to get sticky, if they're going to get sticky, when you go through the due diligence process. And I think couple of points on that, even when we act with the sellers, excuse me, we say to the sellers, do your due diligence. Do your due diligence. Now, not on the buyer, but on yourself. Okay, go and start looking into all of this stuff, because I want to know what the answers are to the questions I know Vas is going to ask. And I need to be able to say to Vas, yes, you're right. We'll get that for you. No, we don't have that document, whatever it may be. So you know, we don't want there to be any surprises, or if we do, or if there are surprises, we want to know where they are, so that if Vas asks them, I've got open and maybe sometimes we go, well, let's just hope we didn't ask about that.

And so what will then happen is, at the same time, the sellers should be doing their own due diligence. And sellers actually artists, particularly heritage artists, or long standing artists, they should be doing this anyway on an annual basis. They should be looking at their database of contracts. So, they should be going: “that video that we did three years ago, have we got the directors contract? No, right? Well, where is it? Let's go and fight”. So it should be an ongoing thing, but it certainly is the case that when you've got an artist that's been recording since, you know, the early 70s, that's a lot of product, and that's a lot of paperwork, and it needs to be investigated properly.

It goes back to my second principle, which is, who owns this? That's how you find out who’s own this.

So once you start getting into the due diligence process, and when the buyer starts getting into due diligence, one of the challenges we face as a seller is, what is the risk profile that a buyer is prepared to take, and where do they draw the line? So, if we have a massive selling album that we're selling as part of a catalog of album rights, and it then becomes clear that actually the ownership position is not quite as secure as we thought it was on an asset that is really a crown jewel, that's likely to have a price point issue. And the buyer then has to go: Okay, fine. We thought we were getting this. We're not. We're getting this. Is the buyer prepared to move the transaction forward on that basis, or are they not?

At the other end of the scale, you will find you'll do a list of all the assets that are being sold. It will be very forensic. It will say, for example, yeah, that Top of the Pops footage from 1972 we can sell you that. And then the buyer go, Oh, great. Can we see the agreement? And you'll go, it turns out we don't have an agreement. Now that's by no means a crown jewel as far as anybody's concerned the transaction is not going to fall over because the situation is less clear on that particular asset, but a buyer might go, Yeah, you know what? We'll take a punt on that. It's fine. It's been used for 50 years. No one's complained about it. There's been no claims, no litigation. We'll take a risk on that, and they may want that risk mitigated by warranties and indemnities in the transaction documentation, and then we can have a discussion about how that's going to work, or they may take the view, no, we are taking a zero risk approach to this transaction because of the money we're spending. And you say that you need to go away, and you need to sort that out and come back to us when it's done. So that's where things start to get a little bit sticky, and you get asked a lot of due diligence questions as a seller, and you need to be able to answer them, because to be fair to the buyers, it's their money. They're entitled to be asking these questions, and they're entitled to make a decision on the transaction based upon the answers they get.

Helen  37:28

Absolutely and so, we've had a seller who has successfully sold the catalog, which is the day we all want you know, Vas has got a lovely, new, shiny catalog to play with. Lance has tied up the contracts, and now the seller has $50 million in their bank account. Nji, over to you, what happens at that point? Because I can only imagine the overwhelm the client is feeling, and the sort of lostness that they might think of: Oh, I never thought this far ahead. What next?

Nji  38:02

Well, firstly, I mean, it's fascinating having Vas and Lance here, and a lot of the discussion has been on sort of the transaction side, where we come in is very much the end client. What does this mean for you? What was your overall objective in doing this, which I think you touched on before, and I fully agree with you, Lance and what you were saying in that the tax consideration and a lot of the stuff that we are sort of taught to consider when we first go into these roles is not always what's driving it. So we sort of will have a two pronged approach to it.

So, the first will be, what are your objectives, both on the quantitative side, and that's where the tax efficiency comes in. So how much do you need? How much do you need every year for the rest of your life? And how can we deliver that in the most tax efficient manner? So, we can sort of tick off those quantitative objectives quite quickly, and there will always be a sort of finite number of solutions which will be tailored to that specific family or individual.

And then it comes to what, obviously, I'm biased, because this is very much my role and what I do day to day, but what I would say is the fun side. So with any sort of transaction like this, you have these sort of this stressful lead up to something that is once in a lifetime event, and you now have this fund, and quite often there will be a moment of decompression that's needed after that, because you could have had quite a long lead up of a lot of stressful meetings in your lawyer's office, so there's a moment of decompression, and ideally we would have been involved early. We always say it's never too early to have someone involved that's looking after you as an individual. After this has happened, because a lot of the advisors that will be involved are looking at getting the transaction completed.

So, the first bit of advice that we would always give is have someone on your side that's looking after you at the end, and hopefully that's us, and then in the decompression moment, that's when we are asking clients to get really clear on what does the future look like for you? And not to sound sort of cheesy and trite, but there is nothing too big to dream, right? So, it's up to you to decide, what does it look like from a qualitative aspect, where are you resident? Where are your families being educated? Where were you spending winters? Where are you spending summers? What is your ongoing legacy going to be? Is there any philanthropy that you want to consider? So, in the decompression stage is where we're asking those sort of big, almost existential questions. You know, who am I and what do I want from life?

And then it's up to us to deliver that. And that's where the tax does come in the most tax efficient way because that is always an easy win, right? So the market does what the market does, depending on how we've structured your underlying portfolio, but the tax is an easy win. And to go back to your point initially, of things being structured from a tax perspective, that goes, you know, after two years and it's no longer relevant Lance, we're very much of the opinion that we shouldn't take you down a cul de sac, and anything that we put in place today, you should be able to get out of relatively easy without any sort of punitive tax consequences. So that's number one, but that's very much our issue.

So when they've come back to us with, you know, these are our hopes and dreams, and sometimes they can be intergenerational. So when I said dream big, I meant that literally. It might not just be about your lifetime, but the lifetime of 2, 3, 4, generations after you're gone, depending on the sums that we're thinking about, it's up to us to then put a plan in place, and that is when the tax does become relevant. So that is an easy win. How can we structure this in the most tax efficient manner so you get everything that you want from the very, very simple this is how much I need a month, a year, a quarter, to live on comfortably, right down to the more complex, how do I want my philanthropic legacy to be delivered in the most tax efficient way and everything in between?

So, we will, then, at that point, present some sort of proposal, but it's a dynamic thing. It's something that we're sitting with you quarterly, half yearly, monthly, even in the first instance, to make sure that it's right, and then it's changing with you and your family. So, I would say that's the exciting part, and the sort of the bit that you're all working towards right? Because you've started this for a reason, you've come to the end of it, and then what's next?

Lance  43:07

I like the distinction you've drawn there between the tax advice given on the transaction and then tax advice given to the individuals. We absolutely do get tax advice once it said the transactions got to a stage where we have an agreement in principle, for example, we will always have tax advisors looking at that and giving advice from that point on to completion. And any decision that gets made will always be run by the tax advisors from a transactional point of view.

But I like, I like that approach that you're absolutely right. You work away, you get this thing across the line. Everyone pops the champagne, although the last one I did completion took place at 2h30 in the morning. I was sitting, I was sitting alone in my kitchen with a whiskey. Feeling a bit: This looks a bit sad. It was very anti-climactic, but there is generally a feeling of a job. All done, and congratulations on all sides. And then it's like… and you're right. And for sellers, particularly, you know the principles the individuals concerned, they do have, then face, be careful what you wish for. This has worked. Here is a large amount of money in your bank. Now, what are you going to do with it? And has how we got this to where you want it to be to use that money. And I think I only really see the tax from the transactional point of view, but I think enjoy what you're saying about the tax for the individuals is critically important.

Nji 45:31

And that is where all the advisors have to be in synergy, because we don't give tax advice, but we will work closely with the tax advisor. And I sort of see them as they are the numbers behind why we're doing it this way. We are more the vision, if that makes sense. So we will take into account, right? This is how your tax advisor said it could be structured. We're looking at it from what does your life look like, and how can we work with both you and the tax advisor to, I guess, bring that to life a little bit.

Helen  46:04

So thank you guys so much for the Chat. Today, I want to tap you up for one last little comment. So your top tip when selling your catalog, what's the one thing that a client should keep in mind?

Lance  46:21

Well, I'm not sure there is one thing in mind, but I think to take a step back and look at it holistically, I suppose, from a seller's point of views, why are you doing this? What's the reason for doing this? And to try and make sure that the transaction continues along those lines, so you're never less than comfortable with that, and that will depend upon the personal circumstance of the individual is concerned.

Helen  47:44

And Vas your top tip?

Vas  47:45

I would say to sellers that the best thing they should do is try to find the right home for their children. Because I think it's very often they consider their music as a child. It's an emotional decision, and finding the right home is the best thing they can do. And that doesn't necessarily mean only the more money. It means also the legacy that they want to live with. I mean, how are the rights going to be used from now on? And personally, I mean, we would love artists that want to be involved in that in the future, and we try to build that into our conversations, in our discussion. So it's, I think that's the best, big way.

Helen  48:24

And Nji, the final word?

Nji 48:26

I think, yeah, it's hard to just pinpoint one, but I would say, firstly, try to look beyond the transaction. It can feel very intense and all consuming whilst you're in it, but ultimately you're doing it for the life post transaction. So think about that. Think about what that life looks like for you.

And secondly, is to build a good team around you, a team of people that you can trust and don't ever feel it's too early to have someone at the table who is looking at you personally, rather than focused on the transaction in front of you, because that can, I guess, provide a bit of respite for the intensity of it all.

Helen  49:08

Fantastic. Look. I want to say a big thank you to all our guests so Vasileios Touronis, Lance Phillips and Nji Lorimer for their time today and thank you all for listening.

Hopefully this episode has helped answer some of those questions you may have about music, catalog sales, and if you'd like to find out more, or if you have any specific questions, do not hesitate to contact the KH Private Client team. The wealth chat is available on Spotify and Apple podcasts, so make sure you subscribe so you don't miss our latest episodes until next time. Goodbye, everyone.

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