Chapter 6 – Why Artists Sell Royalties
Why would musicians and other intellectual property holders want to sell their royalty streams? Musicians may need capital for any of the following reasons:
Fund a new album, tour, or other project
Buy a house or vehicle
Support a side project or charitable cause
Diversify away from music as their sole source of income
Make investments of their own
Pay off debt
The reasons can be professional, personal, or both. One of the most important things to help them accomplish their goals is the establishment of a more liquid market for royalties.
Selling Illiquid Assets
Given that music royalties are illiquid assets, it’s hard to sell them quickly. Also, the lack of a formal marketplace limited the number of reliable options to sell intellectual property.
The lack of a real market limited the number of potential buyers for these assets. Also, a lack of potential buyers made it difficult to establish a fair market price. Some artists have said that they didn’t know if they had received a fair offer for these assets.
That includes artist Bruce BecVar. BecVar had long relied on royalties as his primary source of his income. He wanted to diversify his assets and had an opportunity to invest in the futures markets. First, he needed access to capital to make a successful investment.
BecVar says he had limited options before the marketplace created by Royalty Exchange.
One option was through the BMI loan program. The other was to explore a deal with a private buyer. In the past, he had a bad experience with a private buyer, who undervalued his assets by a wide margin.
“Luckily, I read the agreement,” he said. “It would have been a disaster. He was taking me to the cleaners.”
Using Royalty Exchange, he secured a sale of his assets at a 7x multiple.
In the past, artists have also relied on label advances to secure capital for future projects.
Given that labels could recoup these advances against future earnings, artists faced greater financial instability and questions about how and when they could access additional capital.
Finally, it’s important to remember that some royalty streams are not vast annual payments. They might pay less than $10,000 per year, a small amount of money for someone to live on.
Selling royalty streams allows an intellectual property holder to receive an up- front lump sum based on the present value of future royalty streams.
An End to “All or Nothing.”
One of the unique benefits Royalty Exchange offers is that we allow musicians or rights holders to divest only a small share of their royalties. In the past, their options were far more limited.
For most musicians and songwriters, third parties want to buy their entire portfolio. To get money, they had to make a decision to sell everything or sell nothing. Not every intellectual property holder seeks to sell the full rights to a song or their entire portfolio.
That’s the case of songwriter James Thomas. When a family emergency hit Thomas, he scrambled to find a way to raise money. Thomas’ family in Detroit needed to move across the city. A songwriter of the Kanye West platinum hit “Mercy,” Thomas explored his options. An administrative company made an offer for the royalty stream to this song.
But there was an unfortunate catch. They also wanted his entire portfolio of songs in the deal. This was an “All or Nothing” offer.
Thomas found Royalty Exchange online after searching Google. Within weeks, he was able to secure a deal for the rights to this song alone.
He was able to keep the royalty rights to his other songs as well. He will still generate money from his previous work. Now, his family has been able to move, and he has extra money. Thomas plans to finish sound engineering school and launch a few projects on iTunes.
Selling Portions of Royalty Streams
Royalty Exchange allows artists to sell a percentage of the royalty streams from one song or a collection of songs.
This partial sale means that the musician doesn’t have to sell the entire asset stream or the copyrights if they need money to fund future projects. They can sell 10%, 25%, 50% or any other percentage of future royalties.
Alicia Angel is a songwriter for the popular animated show Dora the Explorer. Angel needed money to fund a music video and to raise awareness for a social cause in Africa.
However, the nature of her payment agreement meant that Angel would have to wait for her royalty payments to arrive. When Angel writes a song, it doesn’t appear on television for quite some time. In some cases, songs don’t appear for more than a year on television or in sing-along toys.
Angel analyzed the value of time and money and decided that she would sell a part of her future royalty income for a lump sum today. In exchange for that one- time payment, the investor now owns the rights to 33% of all future revenue from her songs.