How Investors Value Royalties

Selling music royalties is nothing new. Selling them to private investors, however, is.

Traditional labels and publishers have historically offered unfavorable deals. You may know someone who has entered into those deals, but we talk about several here. Private investors interested in long-term investments in some cases are willing to pay more than music companies. While Royalty Exchange makes it easy to sell royalties to private investors, it’s important to know how they evaluate music royalties before you get started.

Here’s how to make sure you’re making them an offer they can’t refuse.

PRIVATE INVESTORS VS. PUBLISHERS & LABELS

First, you have to understand why an investor would want to buy music royalties. Unlike music publishers or labels, most investors aren’t interested in building a library of music rights.

Investors are not looking to control your catalog or tell you what to do with it. They’re the perfect silent partner---they give you a lot of money upfront and leave you alone to build your career and create your art. 

WHAT INVESTORS WANT

When investors buy royalties, they’re not typically betting that the royalties will increase in value, as if they were stocks. What they look for are consistent earnings paid on a regular basis. And they're willing to trade a lot of money upfront for longer term income payments.

In fact, that leads us to the second reason. Royalties are “uncorrelated” with the stock market. Uncorrelated means that the next stock market crash won't cause royalties to crash.

Smart investors understand that diversifying is a key to reducing risk and protecting their assets. Having all your eggs in one basket is risky and they know it.

Right now, most investors have all their money in the stock market. The market is currently at all-time highs, so they are looking for alternatives to diversify. That has led many to take an interest in royalties with a small part of their assets.

It's a win-win because rightsholders have the opposite situation of investors. With most of their assets in royalties, the next stock market crash may not hurt artists, but the next big music industry disruption could cause a lot of pain.

Artists can reduce their risk and increase their potential long-term gain by selling a portion of their royalties to invest in their career or buy other assets like a home... or even stocks. 

VALUING ROYALTIES: RISK vs REWARD

When considering how much to pay for a royalty stream, investors will first want to see how much the royalty has earned in the past. They want to see as much earnings history as possible.

Next, they use a something called Price Earnings Ratio, often called a “P/E” or “multiple,” to compare this investment with others that are available to them.

It works like this:

If a song generated $10,000 in the last year and those royalties are listed for auction on Royalty Exchange with a starting price of $30,000, the Price to Earnings Ratio (or multiple) would be 3.

The starting price of the royalty is last year's income ($10,000) multiplied by 3.

A lower multiple makes more investors interested.

With our auction platform, low starting multiples don't mean lower final sale prices.

When the starting multiple is low, more investors participate in the auction, where they compete to buy the royalty stream.

In nearly every case, auctions with lower starting multiples end up with a larger closing price and thus, a larger payment to the artist.

RISK

A 'multiple' or the P/E of a royalty helps the investor compare this investment with others. Investors must factor in risk.

The size of the multiple the buyer is willing to pay is determined by risk. Since there’s no guarantee that royalties will continue to earn the same amount in the future as they have in the past, the buyer has to evaluate how much risk he/she is willing to take.

Royalty investors look at a number of different factors to determine this risk. Among them are:

  • History: The longer the history of earnings that a royalty can show, the more confidence investors have that those earnings will continue, even if they are on a slight decline.
  • Consistency: Music that delivers the same level of returns over time is a safer bet than music that sees wild spikes.
  • Variety: Betting on a single track is often (but certainly not always) riskier than betting on a catalog of tracks.
  • Royalty Type: Music that has a current publisher or label pushing the catalog or with a rising artist is often more valuable to investors.
  • Location: Music with a history of breaking into other markets worldwide has longer lasting potential than music that never gains traction outside a single country.

Some examples from Royalty Exchange Auctions:

  • A production music catalog earning most of its royalty income from one placement in a single infomercial was showing consistent earnings, but its lack of diversification made it a risky bet and sold for a 2.5x multiple.
  • Meanwhile, a large publishing catalog of songs with more than 10 years of consistent earnings and from multiple artists like the Eurythmics and the BeeGees sold for an 11x multiple.

Music As An Asset

Now that you know how investors evaluate your royalties before buying, it’s time to start thinking like an investor before you put your royalty up for auction. That means viewing your royalties as an asset, and not a song.

It’s like selling the house you grew up in. To you, that home is a collection of memories. But to a buyer, it’s four walls and a collection of pipes.


SHOULD YOU SELL?

Selling is a personal decision, but we're happy to help you understand what your options are.

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