So you've heard about these numerous highly-publicized cases when artists sold their music catalogs and earned huge amounts of money. You're inspired by them and now want to do the same. But how is it done from the legal point of few? Is selling a catalog as cloudless as it may seem? Is there anything to be aware of? Or should you wait a few years and sell the catalog later to get the most out of it? Can you even do it alone?
We asked a few entertainment lawyers all that, and here's what they have to say.
🎙 Michael Vater, The Ticktin Law Group
Some of the pros of selling the music catalog is that it provides potentially greater access for the songs to be marketed and utilized. Often times, individuals who need to acquire music for theatrical or film productions will go to large clearinghouses of music to obtain the music rather than going through an individual artist. Some of the cons includes that an artist loses control of access and distribution of the music.
A musician would want to sell a catalog to obtain a future revenue stream from an entity that can actively market the catalog. A musician would not want to sell the music catalog when the value of the catalog is not maximized.
One of the legal implications of selling one’s music catalog is that the sales should be written. It is very difficult in most jurisdictions, if not impossible, to enforce an oral contract for the sale of a music catalog as the proceeds of the sale extend beyond a one-year period.
Furthermore, a legal consideration is what happens if the relationship goes bad or one side wants to prematurely end the relationship. Those types of legal considerations are best to be hammered out in the initial agreement between the artist and the entity to whom the music catalog is being sold. Other legal considerations include the dispute resolution to resolve any disputes between the artist and the entity, such as mediation, arbitration, or even where a lawsuit could be filed.
🎙 Heidi Tandy, Berger Singerman
The main reason of selling a catalog is to have an immediate and guaranteed source of revenue; however, doing so may limit an artist’s ability to create new recorded iterations that they have control over. They also would not have complete control over its usage in commercial settings, or by third parties who they may disagree with.
Their income isn't tied to how popular their songs stay over time or any future issues in the music industry. The big plus for the seller is getting a quick cash boost, which can be pretty hefty if the songs in their catalog are well-liked.
For the cons, there’s the emotional attachment. You'll have no say in how your music gets used or exploited in the future, and you might not be able to use these works in new projects, depending on the deal's terms.
This can cramp your artistic freedom and leave you without a voice in how your music is shown to the world. Plus, you'll miss out on long-term earnings. Even though a quick payout is tempting, you'll lose all the money from streaming, merch, royalties, licensing deals, or downloads.
They are taxed as capital gains on the federal US level, but each state needs to be handled separately, as do non-US tax implications. Since they are a capital gains situation, they are taxed at a lower rate than income—but the amount is all front-loaded either way.
🎙 Heidy Vaquerano, Fox Rothschild
Whether an artist is in need of money because they have outstanding debt or need money to reinvest in their art, the appeal of selling your catalog has grown exponentially. It takes the artist’s full team to analyze whether it is a good time to sell their music catalog as you need to have an understanding of any limitations in underlying agreements, such as first right of negotiation or if the collective royalty average is high enough to appeal to a buyer. Many buyers have financial thresholds for deals because of internal bandwidth issues.
It takes a full analysis of the financial and legal aspects of the catalog and making sure that you do your own due diligence on the works you plan on selling.
Many artists are caught unprepared because they don’t have agreements with producers or ex-band members that a buyer may require for chain of title purposes.
Arm yourself with the right team to advise you on the legal and financial implications and seek a financial advisor to help you with tax issues. It is important that you do your own due diligence and try to take care of all the due diligence issues before going to market or else it will take longer to finalize the deal.
🎙 Cynthia Katz, music attorney at Fox Rothschild
Firstly, the idea is to realize the value of the future royalty income streams right now. This large amount of money upfront reduces the market risks for the artist, helps alleviate pressure to work the catalog and allows the artist to invest or utilize the money in other ways (including for estate planning purposes or future artistic endeavors, etc.).
Secondly, depending on the specific assets and deal structure, there may also be significant tax advantages for the artist (capital gains vs. ordinary income tax). While multiples have come down a bit in recent years, there are still a lot of buyers in the market right now and prices remain very high. It is a good time to sell.
Bottom line is that there are significant economic benefits to selling at the right time.
It is essential that a seller must have an experienced team of professionals working with them to sell their catalog and they should be engaged as early in the process as possible. There is a bunch of work that needs to be done to prepare the assets for market and flesh out any potential issues (e.g., frivolous claims, lack of registrations, tax liens, etc.) that could cause problems before the buyer sees red flags. A good team can ensure the highest price and a smooth deal process.
