Buying and Selling Songs
by Jeffrey & Todd Brabec
As the continuing emergence of new technology enlarges the boundaries of the entertainment industry, the ownership of musical compositions has become more and more valuable not only to the major conglomerates but also to any company creating programming for the general public.
Hit songs and film and television scores earn increasingly large amounts of money from their use on CDs and cassettes; in audiovisual projects such as motion pictures, television series, DVD, video cassettes, and laser discs; royalty bearing downloads; subscription services; and in an unlimited number of other entertainment-related distribution vehicles--print, karaoke, interactive media, Broadway, off-Broadway, regional theater, computer games, video jukeboxes, commercials, music boxes, lyric reprints in novels and nonfiction books, and so on.
The Purchase Price
When songs are being sold, the actual purchase price of the acquisition is almost always based on a multiple of the average annual net earnings of the selling company over the most recent three to five fiscal or calendar years. For example, if an acquisition occurs in 2002, it would normally be based on a multiple of the net income from the compositions for either the period 1999-2001 or 1997-2001. In many respects, taking the five year basis is safer for the buyer, since the longer the period considered, the less likely it is for an isolated event (such as from a one time chart record, audit recovery, litigation settlement, or major commercial use) to have a disproportionate effect on the overall net income. A three year period can be acceptable, however, if the buyer is able to discount such income fluctuations.
Occasionally, a buyer may also be offered the possibility of acquiring all or a portion of the publishing rights to a catalog with a very limited or no earnings history (as in the case of a new recording artist/songwriter with a current album in the Top 10 and a #1 single). Instead of using past earnings as a guideline, the buyer will have to predict future earnings on the chart activity and also project earnings on future not-yet-released albums and singles--a somewhat tricky proposition, even with experience.
Calculation of Net Income
The "net income" of a catalog (which is the basis of the purchase price computations) is virtually always defined as gross royalty income received by the selling company less all royalties payable to songwriters and other third parties.
The most reliable method that gives a true reflection of the worth of a publishing catalog, is the accrual basis of net income computation. Under this method, the buyer takes the gross earnings received during a year and deducts the income actually paid to songwriters and other third-party royalty participants during that year, plus royalties that will be paid out in the future from that income. For example, publishers normally pay songwriters their royalties for income received between January 1 and June 30 of each year within 45 to 90 days after June 30 (from August 15 to September 30). Royalties payable to the songwriters on income received during the July 1 through December 31 period, however, would be paid out between February 15 and March 31 of the next year. The accrual basis, by taking into account the gross income received less the royalties actually paid or due to be paid on that income, will always give a more realistic view of what a catalog is actually worth during a particular year.
Purchase Price Multiples
Once an average annual net income figure is calculated, the buyer and seller will negotiate a multiple to be placed on such earnings to arrive at a final purchase price. In recent years, multiples have been in the 6-18 range, but can be higher or lower depending on a number of factors, including the nature of the rights being acquired, the remaining copyright life of the compositions being purchased, the costs of borrowing the money related to the acquisition, the loss of income from other investment areas in which the purchase price could have been used, the need of the seller to dispose of its publishing assets, the value of owning musical compositions to other divisions of the buyer, whether the buyer has a network of wholly owned or affiliated publishing companies around the world into which the catalog can be integrated, the existence of new technologies that may enhance the use of the catalog, whether the catalog represents a broad range of musical compositions or has a concentration in only one type of music, whether there are other bidders, and the anticipated ability of the buyer to promote the catalog in new areas effectively, along with the additional monies derived from such promotion.
Sunday, November 8, 2009
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