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Ready for the second act?
Preparation is key in selling a song catalog
- Selling a music catalog has never been so popular, or so financially rewarding, as it was in 2020, a record-breaking year for the number of catalogs sold and the prices received.
- Artists and their advisors want to maximize the sale price, reduce taxes, and secure the most favorable terms. Planning prior to a sale is equally important to ensure that artists are considering not just the financial aspects of a sale, but also taking into account their goals and core values.
- With more than 65 years of experience in the entertainment industry, and institutional expertise in the music industry, City National works alongside artists, their attorneys, business managers and other advisors to implement planning strategies that meet the goals and circumstances of each artist.
Why are sales happening, and will they continue?
The year 2020 presented a ”perfect storm” for artists thinking about selling their coveted music intellectual property as well as for buyers looking to make a purchase. In-person concerts and other music events, which usually represent a significant portion of an artist’s revenue stream, were severely impacted by Covid-19, and artists looking for alternate revenue streams quickly took notice of historically high multipliers being used to value music portfolios, as much as 15 times their historic annual income from royalty payments.1 Bob Dylan, Neil Young, Stevie Nicks, Imagine Dragons and The Killers are just five of the artists who sold all or part of their song catalogs in 2020.
And the trend continued into 2021 as some artists commanded even larger sums. It is reported that Bob Dylan received as much as 25 times what his songs generated annually.2
A few key factors contributed to this increased appetite to sell:
- Valuation transparency and ease. YouTube, Spotify® and iTunes provide clear data and reporting on song views and downloads, allowing a clear determination of value with respect to a given song.
- The historically low interest rate environment helps new buyers enter the market by financing their purchases.
- Music is viewed as a non-correlated diversified asset, much like an alternative investment, that does not move the same way that financial markets move, and thus presents an opportunity to diversify investments.
- There is a possibility of an increase in the long-term capital gains tax rate as proposed by the Biden administration and Congress.
There is a high probability that sales of song catalogs will continue to be popular, as it is likely that artists’ revenue streams will be constrained by COVID-19 well into 2022. In addition, artists who want to control and shape their artistic and personal legacies will benefit from selling during their lifetimes, when they can have greater input with respect to the terms of the sale.
How it works: The finer points of planning for catalog sales
City National works through five major steps in the planning and sales process with artists, their attorneys, business managers and other advisors.
Step 1: Discover
Before negotiations begin, it may be beneficial to meet with a team of professionals who are well-versed in the nuances of pre-sale event planning. In the early stages, the team will focus on understanding the artist’s broader vision for his or her musical and personal legacies, beyond the usual financial and tax goals. What kind of plan will preserve the artist’s legacy in the manner the artist desires? What if, for example, an artist does not want his or her songs used in commercials, or for their likeness to be turned into a holographic image? The team will consider not just the artistic legacy, but also will ask about the financial, family and philanthropic legacy that the artist would like to have in place after the sale.
Issues that may be considered include:
- Does it make sense to review domicile status, personally as well as for trusts or other entities, to potentially minimize state income tax on the sale?
- Should the artist consider establishing trusts prior to the sale to remove part of the sale proceeds from the artists’ taxable estate for gift and estate tax purposes, while benefitting other family members or charities?
- What are the benefits of private foundations, donor advised funds, and other charitable structures from a legacy and tax perspective?
Step 2: Analyze
Once the team has an understanding of the artist’s goals and vision, City National will prepare an analysis that highlights issues and opportunities with respect to the artist’s current plan. The analysis may include flowcharts illustrating various planning techniques, calculations regarding the flow of sale proceeds, as well as potential financial and tax implications. These illustrations will be reviewed and discussed with the artist and their team to ensure a clear understanding of the advantages and disadvantages of the strategies presented.
After obtaining feedback from the artist and partnering with the external advisors, City National can help formulate an overall plan to address the issues raised from a financial and legacy standpoint. For example, an artist may wish to gift a portion of the sales proceeds to a charitable cause that the artist believes in and wants to benefit. The gift, along with being altruistic, would potentially result in a reduction in income taxes.
At the conclusion of the discover and analyze steps, the artist will have a better understanding of the overall plan and how it accomplishes their financial, charitable and legacy goals.
Step 3: Coordinate
Throughout this process, it is important to have the entire team working together as one unit. We will work alongside the artist’s business manager, intellectual property attorney, CPA and other advisors. Input from each team member is important to ensure that information is shared in a timely manner and all parties are aware of the overall plan and the specific deal terms and timing so that there are no delays or hiccups. City National’s unique position and experience within the entertainment industry can also help artists identify and build their external advisory team by making introductions to resources that may be needed to ensure proper implementation of the plan.
Step 4: Implement
The sale is implemented in coordination with the artist’s legal team with respect to the sales contract and the creation or modification of any tax or entity structures. City National can also assist with implementing the selected strategies by reviewing any drafts of the sale terms, trust agreements or other foundational documents to confirm that the documents are aligned with the artist’s vision and goals discussed during the initial discovery and analysis meetings.3
Step 5: Manage
Post-implementation, ongoing plan management is required to ensure that the sales proceeds are invested and managed according to the artist’s risk tolerance and effectively coordinated with any trust and entity structures created as part of the process. At this juncture, the artist’s entire financial situation may have changed and the associated financial plan and management must reflect that accordingly. City National will work with the artist’s team to create a customized investment plan to address the sale proceeds.
There are many questions to answer regarding the purpose of the sale proceeds, such as:
- What does the artist need in terms of cash flow to maintain an adequate lifestyle?
- Does the artist need liquidity for future business opportunities, real estate purchases or family support?
- How should their legacy assets be invested to provide for their family, charitable or other beneficiaries?
Investment management must address capital preservation, income generation and/or prudent capital growth and tax efficiency. Developing a customized asset allocation and portfolio implementation is critical to ensure that the sales proceeds will continue to be available to support the artist’s lifestyle and legacy goals.4,5
Structuring a sale that meets the goals and values of the artist both financially and psychologically is not easy. It helps to have expert support working with the artist throughout the entire process — business managers, lawyers and entertainment specialists — as well as the planning, investment and fiduciary specialists at City National. Taking the time to consider the financial realities and possibilities of a catalog sale will help ensure the desired second act for the artist’s family and legacy.
If you are an artist who has spent a lifetime building your legacy through your song catalog, do not stop short of finding the right partners who have experience building and protecting their clients’ legacies when it is time to sell. It will pay dividends in the end.
3. Wills, trust, foundations, and wealth-planning strategies have legal, tax, accounting, and other implications. Clients should consider a legal or tax advisor.
4. Brokerage Services are provided through City National Securities, Inc. (member FINRA, SIPC), a subsidiary of City National Bank.
5. City National Bank, its affiliates and subsidiaries, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented taking into account your own particular circumstances.