Striking the right chord when selling your music catalog
Once reserved for superstars like Bob Dylan, the selling of music catalogs has expanded from household-name hitmakers to include independent artists. Over the past several years, the rise of streaming and the pandemic-fueled cancellation of touring as a reliable revenue source have caused many artists to consider monetizing their creative assets.
“By selling your music catalog today, you could be removing the uncertainty of future royalty revenue and the vagaries of the marketplace for a lump sum payment now; otherwise known as monetization.”
Although live shows are back, selling one’s music catalog continues to grow in popularity. According to Music Business Worldwide, over $5 billion was spent on music catalogs and recorded music in 2021.1 While recent interest hikes have slowed the buying frenzy, music deals continue to make headlines in 2023.2
When you sell your music, you gain the advantage of receiving a specific dollar amount now rather than bet your royalties will exceed that amount in the future. “By selling your music catalog today, you could be removing the uncertainty of future royalty revenue and the vagaries of the marketplace for a lump sum payment now - otherwise known as monetization,” Merrill Senior Financial Advisor and former Capitol Records recording artist Jamie Block explains. If you are approached about selling your music, it's important to understand there are many factors that accompany a sale. From tax implications to long-term financial planning, here are five key things to consider so you can make the best decision for you now and in the future.
Consideration #1: Who owns the music?
“Selling your music catalog” can mean selling a complete catalog, a collection of songs or a single song. Regardless of what you sell, you must first determine who owns the music and controls the copyright. Publishing rights typically belong to songwriters, while performers and labels own recording rights. “Quite often, artists don't own the music they sing. The artist may have been hired by the record label to write the song, which generally means the record label, not the artist, owns it,” says Jean Kim, Co-Head of Merrill’s Strategic Wealth Advisory Group. All owners must first agree to the sale of the music. Ideally, these owners will join you in building a trusted team of legal professionals and financial advisors to determine the many details surrounding the sale, including the royalty structures and agreements you may have in place today.
Consideration #2: Do you have a plan for the money you receive from the sale?
“Musicians and artists are a rare breed. They’ve had the courage and fortitude to ‘risk it all’ and follow their dreams,” Block explains. “These personality traits, however, don’t always translate into prudent financial planning. That’s where the right advisor can help you think about the (financial) goals for you and your family, and what strategies to pursue to get there.” It’s important to think about your short- and long-term goals. If you receive a lump sum after selling your music, how will you use the money? Are you planning to launch a new venture? What portion will you save and invest for longer-range goals? When you bring these goals to a Merrill Sports & Entertainment Advisor, they can help you determine the financial aspects associated with each of them so you can develop of financial plan that addresses your unique goals.
“While many artists may own their music directly, they might instead choose to transfer the ownership of that music into an entity that the artist owns and controls.”
Consideration #3: What tax implications may accompany the sale of your music catalog?
The sale of your music catalog comes with many tax considerations, especially since the net profit you receive from the sale can vary greatly based on where you live. To some artists, the lower tax burden that accompanies selling a music catalog versus collecting royalties makes moving forward with a sale more appealing. For example, with the proper structuring in place, profits from selling your song/catalog are taxed federally as capital gains, which typically amounts to a one-time maximum tax of 20%. However, royalties from your music catalog are taxed annually as ordinary income at rates of up to 37%. State income tax is another consideration, as states like California have a considerably high marginal income tax rate of 13.3%. Fortunately, your tax advisor and attorney can help keep you compliant with tax regulations and can work with your financial advisor to help ensure your financial strategies are aligned. “While many artists may own their music directly, they might instead choose to transfer the ownership of that music into an entity that the artist owns and controls,” Kim explains.
One musician and California resident who regularly performs in Las Vegas, where she owns a second home, drastically reduced the tax burden that accompanied the sale of her music catalog by working with her Merrill financial advisor. Noting the substantial California tax rate, her advisor provided her with several recommendations for tax advisors specializing in moving clients out of California. The tax advisor the client chose to work with helped her to evaluate her situation. After careful consideration, the musician decided to become a permanent resident of Nevada, sold her catalog and paid lower long-term capital gains rates, reducing her tax exposure.
“For example, a young successful artist could sell their catalog today for millions of dollars and then 40 years from now terminate the seller’s right and then sell the catalog again, perhaps for a multiple of the original sale!”
Consideration #4: What conditions can be built into the sale?
“If you sell your catalog, it can be exploited in ways you might not approve of,” Block notes. “That's why you should work with your team to research the prospective buyer to see how they have leveraged catalogs they have purchased in the past. You may also be able to build stipulations into the contract that limit how your catalog can be used or allow you to buy back your catalog.” When selling the publishing rights to your songs, the new owner can choose how to license your songs, including partnering with brands and political organizations. If your catalog ends up in the hands of an investor who uses it for causes that are not aligned with your values, you may want to think about how it might impact your reputation.
Consideration #5: How will you manage your copyright termination rights?
Under the 1976 Copyright Act, when a musician sells a copyright to a song, they can terminate the buyer’s rights and claw back the copyright into their own name 40 years after selling it. The law requires the artist who sold the copyright to file a notice of termination between years 35 and 40 after the sale. “This means that younger artists could have a second bite of the apple,” explains Michael Duffy, Managing Director, Wealth Strategist, Merrill Wealth Management. “For example, a young successful artist could sell their catalog today for $200MM and then 40 years from now terminate the seller’s right and then sell the catalog again, perhaps for a multiple of the original sale! Many musicians who have sold their copyrights don’t know that they have a termination right and if even when they do, many haven’t considered how to properly pass these rights to heirs,” says Duffy. The statute is very specific and requires that an artist pass their termination rights through a traditional last will and testament and not through a trust structure. Failure to properly pass termination rights to heirs will result in those rights passing to default heirs that are laid out in the Copyright Act, which could end up passing a right to an heir that you intended to disinherit.
Consideration #6: Who will be a part of your financial “group”?
Just as your band is made up of professionals with skilled talent, the group you form to sell your music catalog should be composed of professionals in every aspect of the sale. Your group should include a financial advisor, tax advisor, attorney, and all parties who can claim ownership over the publishing and recording rights of the music. Members of this group can help you collect revenue history and projected revenue that prospective buyers will want to review, draft a contract that includes your stipulations, determine the allocation of profits from the sale, and maximize your earnings with smart tax strategies. A Merrill Sports & Entertainment Advisor can help you make informed financial decisions, helping you understand the potential results of each decision.
Amp up your group with a Merrill Lynch Sports & Entertainment Advisor
Selling your music catalog involves more than receiving a lump sum from the sale of your creative assets. This opportunity comes with several financial considerations that are best explored with a financial advisor who understands the nuances of the sale. To continue the conversation, reach out to a Merrill Sports & Entertainment Advisor.
1 Music Business Worldwide. “At Least $5 Billion Was Spent on Music Rights Acquisitions in 2021. Could 2022 Be Even Bigger?” https://musicbusinessworldwide.com/at-least-5-billion-was-spent-on-music-catalog-acquisitions-in-2021-could-2022-be-even-bigger/
2 Music Business Worldwide. “Is the Slowdown in Big-Money Music Catalog Deals Officially Over?” https://www.musicbusinessworldwide.com/is-the-slowdown-in-big-money-music-catalog-deals-officially-over/ (February 21, 2023)