Multiples and Other Hillbilly Math (Part II) Share Thisi
The Multiple Problem(s) with “Multiples”
First Problem: Average of What?
I routinely see professional looking solicitations trying to imply I should pay an arbitrary multiple of their historical “average” income.
The question becomes “Average of What??”
Shall I use the past 10 years, 5 years, 3 years? All income? Some income? Old Songs? New Songs? What types of income? The list goes on.
For instance, I recently received a solicitation from a new hot songwriter whose income was mainly derived from a big hit song in 2010. The historical income looked like this:
2011 = $500k
2012 = $200k
Therefore the 3-year Average is $258k
The solicitation tried to put a “value” on the catalog, implying we should pay 10x this average. So in this case their ask price was…$2.58 Million ($258k x 10)
Frankly we laughed at it. Thanks but no thanks!! I didn’t even bid on the catalog as I knew they were clueless, and I didn’t want to be the first one to tell them.
In reality, I’m being asked to pay $2.5 million for something that is currently earning $75k… and is probably going to decline further.
So optimistically, if the catalog is going to earn about $70k/year from now on, and I paid $2.5 million, I would see my money back in about 36 years (not factoring the lost opportunities and interest on my money)!!
So on new songs that are still in rapid decline, you can throw traditional “multiples” out the window.
If instead you came to me and said: “this royalty stream is going to average about $70k/year over the next 7 years – and I think you’ll see your money back in about 7-10 years, I’d gladly talk to you. That sounds like a reasonable business deal.
In other words, if you must speak in this antiquated language, apply your multiple to the projected averages – not the past!
Second Problem: What multiple to use?
At the height of the market 7 years ago, the rumored multiples kinda, sorta, maybe, went like this… I think!
4-5x Niche music like Gospel, Blues, Jazz etc
6-8x For Mainstream Country or R&B
8-9x for Mainstream Pop
10-12x for Evergreen Classic Songs and “Trophy” Copyrights
But in case you didn’t notice, in 2008 we experienced the worst economic crash since the Great Depression.
The perfect storm re-valued everything whether we like it or not – including our catalogs. It’s simply because the amount of royalties has gone down.
With the crash, many buyers also got hurt and disappeared from the market. Many of them were highly leveraged with bank money. When the royalties didn’t appear as planned, the banks called their notes – and presto – these buyers were gone or couldn’t buy any more catalogs.
Now there is a more sober environment. If I had to guess, everything is about 10-20% lower now.
Third Problem: The times they are a changing…
There is also a fundamental shift in the types of revenue that are being earned. These days, many types of past revenue have very little to do with the future income.
Let me give you an example: One of the major publishers recently overhauled their administration software. Where they once used about 5 different income categories, they now use about 30.
The digital world has created many, many types of income that didn’t exist even 5 years ago. So to use older statements as a basis for my projection is not relevant anymore. A statement several years ago probably didn’t include Pandora or Spotify income, while it did include mechanical incomes from now defunct Tower Records.
Similarly, before the meltdown, Advertisers were buying radio ads, and that was the income that eventually fueled your ASCAP, BMI or SESAC statement. Now advertising has been decimated. Therefore, there are less Performance monies to go around.
Fourth Problem: The Rumors Flying…
Part of the problem also lies in re-educating sellers. This includes some of my friends who are brokering the catalogs. I feel a few of these folks unintentionally use these inflated multiples to raise the seller’s expectation in order to gain the exclusive rights to sell the catalog. I’ve got really good friends who broker catalogs and we’ve discussed this. Most reputable brokers have moved away from this practice and are educating their clients better.
The moral of the story is, don’t always go with the broker who says their going to get you the highest price…go with the one who will tell you the truth.
These rumored multiples also get inflated as the stories get passed between songwriters. Yes, your buddy may have gotten a 10x for his catalog 10 years ago, but he also probably gave up 3 years of his future songs and firstborn children in the process!! Be sure you are comparing apples to apples.