The following is an excerpt from the book “The Music Catalog Sales Guide”, by Silvino E. Díaz, Esq. It’s a comprehensive dealmaking guide for artists, companies, and professionals in the music industry. It discusses current trends, as well as tips on how to: organize your assets; structure your team; attract major investors; value your catalog; and prepare to sell.
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Music catalog sales involve buying and selling the intellectual property rights and revenue streams associated with songs and recordings. These rights determine who has the authority to use, monetize, control the music, and who receives royalties from its use. Catalog buyers may acquire copyright ownership of the assets or the right to the income or administration of these rights. While the buyer is generally acquiring the seller’s rights to the musical works, this does not necessarily include all of the rights to these works.
What is typically bought and sold in catalog sales?
There are two types of copyrights associated with music: composition and master recordings. The composition relates to the underlying musical work, the melody, lyrics, and arrangement. The master recording relates to the specific recording of a given composition. While a composer may be involved in creating the music or lyrics to a song—and hence be a copyright owner of said composition—if they are not involved in the recording of said composition, then they are not an owner of the master.
Composition rights, known as publishing rights, are held by songwriters and are often administered by music publishers or administrators. When these publishing rights are sold, the buyer assumes the right to collect these royalties and may also gain control over licensing decisions.
Composition rights have many subcategories. For one, performance rights are royalties earned when a song is performed publicly, such as on the radio, and are typically collected and paid out to composers and publishers by performance rights organizations. Further, mechanical rights are royalties earned when the song is reproduced, such as when it’s covered, streamed, downloaded, or sold as a physical copy. Then there are synchronization (sync) rights, which are royalties earned when a song is used in audiovisual content like movies. Finally, there may also be print rights, which are royalties earned when sheet music is sold or distributed.
Master recording rights (known as “masters”), which refer to the actual sound recordings of a song, are typically owned by the record label or the artist. Buyers of master rights gain control over: licensing the recording for use in media, sampling licenses, collecting royalties from the recorded version of the song, and approving or denying future uses of the recording.
Additional income opportunities include those from streaming on platforms such as Spotify and Apple Music. Although streaming platforms pay royalties in the form of performance (paid to collection societies), they may also pay the rights holders directly, based on a portion of the revenue. There may also be income from physical and digital sales, YouTube advertising revenue, and social media platforms. Merchandising revenue is also important, from products that use the song title, lyrics, or associated branding, as well as revenue from alternative products like NFTs and Blockchain.
Name, image, and likeness rights (NIL)—or the legal rights an individual has over the commercial use of their personal identity—may also be included in music catalog deals involving iconic artists.
As you can imagine, depending on the rights granted, there are many permutations of a “catalog sale”. There is no “standard” one-size-fits-all catalog deal—every transaction is unique.
What do investors look for when buying catalogs?
Successful catalog acquisitions rely on evaluating both quantitative metrics (revenue, ownership, and pricing) and qualitative factors (cultural relevance, sync potential, and artist legacy). Investors look for catalogs that balance stability with growth opportunities, while mitigating risks through diversified income streams and clear ownership rights.
Investors look for proven revenue streams, prioritizing catalogs with a history of steady and predictable income. This includes looking at historical earnings, to show that there is consistent revenue over several years. The songs must have evergreen appeal and cultural resonance, meaning the songs—and therefore the catalog—will be relevant for years to come. Additionally, revenue sources from multiple origins (streaming, downloads, sync, performance) are preferable instead of allocating all the risk from a few sources.
A music catalog’s earnings can change based upon unpredictable popularity. A song can resurge— driven by external trends like social media—such as “Dreams” by Fleetwood Mac, which skyrocketed back into charts in 2020 by going viral on TikTok thanks to a video of an influencer, Nathan Apodaca, skateboarding while drinking cranberry juice and lip-syncing to the song.
What is generally the deal workflow in a music catalog sale?
A music catalog sale generally starts with an introduction. A broker may connect the buyer and seller, a seller may reach out to interested parties, or a buyer may go out into the market. After the parties sign a Non-Disclosure Agreement (NDA) to protect sensitive financial and contractual information, they enter preliminary discussions. Here, the parties may review basic information about the catalog, including its rights and earnings.
The seller then prepares a document called a prospectus, which gives the potential buyer information about the assets being sold. It includes information about the titles, the names of credited parties, chart and synchronization activity, and initial information about the catalog’s earnings.
The next step is a Letter of Intent (LOI), a mostly non-binding document that outlines the key preliminary terms of the proposed transaction and expresses the parties’ intent to move forward in good faith. Typically, the buyer delivers the LOI to the seller. Later, during the due diligence stage, the buyer conducts an in-depth review of the catalog’s assets, including royalty statements, copyright registrations, and contracts. This stage may be divided into two phases: legal due diligence and financial due diligence.
Legal due diligence focuses on making sure that the seller owns what they’re selling, and that there are no underlying legal issues related to acquiring the catalog. Meanwhile, financial due diligence involves the buyer evaluating the catalog’s financial performance and future earning potential, including a revenue analysis of the catalog’s historical and projected income stream.
During final negotiations, the buyer may revise their offer or request specific warranties and indemnities to cover for the risks found. The Parties may agree on the final purchase price, payment structure, terms and warranties. Afterward, the parties’ attorneys draft and review the sales contract and other documents. Both parties execute the agreements and documents at closing, where payment is made and the rights are transferred. Later, during post-sale integration, the parties may need to update royalty collection agencies with new ownership information and incorporate the newly acquired catalog into their portfolio.
How is a music catalog valued?
There are two main ways to appraise a catalog: present value of future earnings and comparables.
Calculating the present value of future earnings involves projecting the future yearly earnings over a given period of time, along with other variables. Buyers pay a lump sum for that amount in order to compensate the seller for the future income that they are giving up (“Net Present Value Methods”, “NPV”). Meanwhile, appraising a catalog using comparables involves looking at similar catalogs and paying a comparable amount to what those other catalogs sold for (“Comparables Methods”).
NPV methods involve determining the present value of a catalog’s future cash flows. In music, many acquisitions base the purchase price on the average annual net earnings (sometimes referred to as “Net Publisher Share” or “NPS”) over a period of time. This is loosely called a “multiple,” or how many years’ of earnings (i.e. “multiple”) are going to be paid upfront to purchase the catalog.
Buyers conduct financial due diligence to come to a price. They look at royalty statements from previous years to understand the catalog’s revenue sources and earning trends.
Generally, new music royalty income sees its greatest volume within the first 3-12 months upon its release, and declines over the following 5-10 years. The remaining income remains relatively stable after that. However “non-recurring income events”—events that influenced earnings at one point but may not necessarily repeat themselves, such as publishing bonuses—are typically not considered when appraising a catalog.
One popular NPV method for analyzing a catalog’s value is a discounted-cash-flow analysis (DCF). DCF estimates the present value of projected future cash flows, subtracting the time value of money (inflation, interest rates, etc.) and the specific risks associated with the catalog’s earnings. Once these projections are established, each year’s cash flow is discounted to its present value, and the sum of those values constitutes the catalog’s valuation. The formula is:
Catalog Value= ∑(Expected Cash Flow(t) / (1+r)t).
- t = the year in the projection period (1, 2, 3, etc.)
- r = the discount rate (10% or 0.10)
- Expected Cash Flow = the expected income for each year
Another popular NPV method is the Net Publisher’s Share (NPS) method, which represents the actual income that the publisher earns from the catalog after deducting songwriter royalties and administrative fees. The formula is:
NPS = Gross Income − (Songwriter Royalties + Administration Fees)
Once the NPS is calculated, the value of the catalog is often estimated by applying a market-derived multiple to the NPS:
Catalog Value = NPS × Market Multiple
Here, a “multiple” is a ratio used to value the Net Publisher’s Share (NPS) of a music catalog sale. It takes into account the catalog’s income stability (i.e. a proven track record); growth potential (sync licenses, new media, or modern platforms); catalog quality (many hits); and market conditions (interest rates, etc.). Multiples generally range from 5-15 times (x) the catalog’s NPS or gross income, but they can vary significantly depending on the type of catalog, its age, and its perceived potential.
Interest rates also play a significant role in music catalog sales due to their impact on financing, valuation, and the overall investment climate. Many music catalog acquisitions are financed through debt, and the cost of borrowing is influenced by interest rates. When they are low, borrowing is cheaper, allowing investors to secure more favorable terms for purchasing catalogs, but when interest rates rise, borrowing costs increase and ROIs fall.
If you have questions or would like to discuss the sale or purchase of music assets, please contact EPGD Business Law in Miami, Florida, at (786) 837-6787 or email us to schedule a consultation.
EPGD Business Law is located in beautiful Coral Gables. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.
