MUSIC Catalog Acquisitions: Buyer’s Costs

💡 The "Hidden" Costs of Acquiring a Music Catalog
Congratulations! Your offer to buy a music catalog has been accepted, and you have now entered an exclusivity period during which you hope to finalize a purchase agreement. It is now crucial to consider not only the upfront purchase price but also the often-overlooked transaction costs as you race towards the finish line. These can encompass a range of fees, including legal and royalty due diligence expenses, not to mention broker fees and transaction-related taxes. While they may seem negligible compared to the acquisition price, they can significantly impact the overall investment thesis and return on investment.

⚖️ Navigating Legal Fees
Legal fees for drafting contracts, conducting due diligence, and ensuring compliance with regulatory requirements are essential in any acquisition process. Due diligence expenses, such as lien searches, verification of chain of titles, licensing audits and copyright assessments are all indispensable for mitigating risks and ensuring a smooth acquisition process.

🕵️‍♂️ Understanding Royalty Due Diligence
Royalty due diligence is another critical workstream for validating historical royalty streams used for projecting future earnings. By scrutinizing royalty statements, bank receipts, and tax returns, buyers gain insights into the accuracy and consistency of revenue streams. Moreover, royalty due diligence has the potential to unearth quality-of-earnings adjustments, which may lead to favorable adjustments to the purchase price.

👀 A Necessary Cost – Mitigating Transaction Risks
Although transaction costs may seem burdensome, conducting thorough due diligence and engaging experienced legal counsel and royalty diligence providers is necessary to identify potential risks, negotiate favorable terms, and bolster protective representations & warranties.

⚠️ Recognizing the Danger of Fixed Transaction Costs
Though purchase prices may scale based on royalty earnings, diligence fees do not necessarily behave the same way. While these costs may seem modest in larger transactions, they can significantly inflate the overall cost to the buyer in smaller deals. Buyers must carefully assess and plan for these fixed costs to ensure that they do not become trapped by elevated costs that damage their original investment thesis. Diligence fees should never be commissions, which means they should only correspond to the actual work delivered.

At Clarty, we specialize in guiding clients through the complexities of music catalog acquisitions, including navigating transaction costs effectively. Alongside our expertise and insight into the process, Clarty is proud to partner with best-in-class providers of legal and royalty diligence services across the entertainment industry, and facilitate successful and cost-effective transactions.