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Big Bank Theory: Inside the Nuances of Blockbuster Catalog Deals

A bank that understands the complexities of artists’ wealth plan and income needs — like City National — is a must for those aiming to cash in on their creative output

Courtesy of CNB
Courtesy of CNB

Sales of music catalogs, by big names for big bucks, have made many headlines in the past year. Experts believe the trend has not yet peaked, and hint that artists other than songwriters may have tempting intellectual property to offer.

But it all hinges on the artist assembling a powerhouse team, because this is no run-of-the-mill transaction.

Dina LaPolt, president of LaPolt Law P.C., says disposing of a catalog is “selling your copyrights or your income streams in perpetuity, and the financial benefits that come with them, for an upfront fee.” She adds, “You spend your whole life writing music that can amass tremendous value by the time you’re 70 or 80 years old.”

Surrounding any such sale is a huge array of complications, including copyright, recording and publishing issues; streaming and other Internet sources; third-party agreements and contract ambiguities; and the involvement of co-writers, producers and even band members.

Reasons for getting in the game vary. “Somebody who is later in their career is more likely to want to cash in their chips to take them off the table,” says Todd Bozick, partner at Boulevard Management. Popularity may wane, but a properly managed portfolio can last a lifetime.

Some younger artists, LaPolt adds, “know that they’ve got another 30 or 40 years left to create. And they’re so well-known, and they’ve got such a big fan base, that, in certain circumstances, [selling their work to date] may be the right choice as they enter the next chapter of their career.”

Artists of all ages suffer from liquidity constraints, says Jeffay Chang, senior trust adviser at City National Bank. Even with a valuable catalog, Chang says, “Other than receiving income, there are often limits as to what they can do with it. But by getting this lump sum of money, maybe they can do some other things that they always wanted to do, like charitable giving, supporting family members or investing in a new business.”

The legislative environment is currently favorable. The 2018 Music Modernization Act (MMA) went into effect in January, updating copyright rules and installing a new blanket licensing system to track and pay mechanical royalties for on-demand streaming, a boon for creatives. As LaPolt notes, whenever there has been a substantial change to copyright law, the industry has entered a seller’s market. For example, after the Digital Performance Right in Sound Recordings Act in 1995, after the Songwriters Capital Gains Tax Equity Act in 2006, and now after the MMA.

Then there’s the pandemic, which crippled what LaPolt identifies as traditional income sources. “Touring had dried up, record releases were postponed, Artists worried about survival suddenly considered selling catalogs, something “they wouldn’t normally have thought about had the money they had always relied on been coming in.”

There are poor reasons for taking the plunge. “If a client is thinking about adding a new wing onto their home, or buying a private jet with the proceeds, that’s the wrong approach,” Bozick warns.

On the demand side, Bozick notes, “the competition for purchasing the catalogs is unprecedented,” which Chang ascribes to buyers seeking alternative income streams. Bonds that would normally provide steady income aren’t paying much due to low interest rates, while “some of these catalogs, these music rights, with all the digital streaming, they’re generating some pretty steady revenue,” Chang says.

When someone conceives that it might be time for artist X to cash in, a business manager typically begins to run numbers (five years’ worth of royalty statements, say), to determine the catalog’s average annual earnings. go to prospective buyers to, as Bozick puts it, “see what sort of lump sum they’re willing to pay.”

Various attorneys and accountants attend to taxes, capital gains issues and other due diligence, at the end of which the multiple might be driven downward (to the artist’s chagrin). Managers compare a final number to the current revenue stream plus projected earnings, and even a whittled-down amount can dazzle. The role of the wealth management team becomes crucial, and Chang is a veteran. “All of a sudden, you’re going to get this pot of money that you have full control over. Let’s say it’s $100 million. What are you doing with it? How do you invest it?”

The right bank, he affirms, will educate a creative artist, who may know music but not finance, “to really help them create a plan to protect and preserve, so that they’re not frittering away their golden egg.”

He says it begins with conversations: “Tell us about what’s important to you? What’s keeping you up at night?” Someone with environmental concerns might want to pivot from occasional contributions to setting up a formal charity. Another may want to preserve their lifestyle in their golden years, while a third may simply say, “Hey, listen. I don’t ever want to have to worry about money.”

Chang emphasizes the wealth management team must address two crucial questions: “What are you trying to accomplish? And do you have the right structures, strategies and team to get that done?” The answers will help the client get to the next level when the catalog sells.

Banks are not equally skillful in such circumstances. Bozick lauds City National as “very familiar with the workings of entertainment clients,” with strong departments in wealth management, investment and philanthropy. “As a bank, they’re one of the best in understanding how an entertainer’s cash flow can vary and understanding the timing of how royalties flow.”

LaPolt agrees. “With CNB, what makes them unique is that most of their clientele are in the entertainment business. And we are a complicated business, especially in music. … A regular bank will say, ‘Well, give us your income statements so we see what you’re making.’ It’s not so easy in the music business. There’s a lot of factors. They get it.”

These days, artists beyond music may be tempted to test the waters. Above-the-line movie talent, Bozick notes, might be able to sell the profit participation in their catalog of films. Writers could peddle movie rights, recording and book royalties, “any sort of income stream. There are buyers for all that.”

But talent of every stripe must rely on their team for authoritative advice when parting with a lifetime’s work. It’s a decision with enormous consequences.

“It’s not like owning a stock that you decide to sell, knowing that you can easily buy it back later,” Bozick muses. “Once you sign on the dotted line, you can’t go back.”