BMB 655 Module 6 Milestone Two Example

Catalog Acquisition Decision and Financing

[Student Name]

Southern New Hampshire University

BMB 655: Music Business Finance

Milestone Two

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Catalog Acquisition Decision and Financing

Introduction

Module Five valued the 600-song catalog at about $3.0 million on its own, after allowing for co-writers' termination rights, against an asking price of $3.6 million. This milestone decides whether the publisher should buy it and how to pay for it. It adds the value only this buyer can capture, measures the deal's NPV and IRR at a negotiated price, designs and stress-tests a loan, proposes protective terms and sets a walk-away price. The decision also responds to Milestone One's finding that too much of the publisher's income rests on a handful of titles and one writer; the catalog would ease that dependence by adding about 600 songs by other writers.

Value to This Buyer

Two benefits are specific to this buyer. First, administration savings: the seller paid an outside administrator 12 percent of collections, about $45,000 a year, while the publisher can administer the catalog with existing staff and systems at an added cost of about $20,000, saving about $25,000 a year. Second, sync income: the seller's catalog earned almost nothing from licensing because no one pitched it, while the publisher's licensing team places about 1 percent of its songs a year at an average net of about $6,500; applied conservatively to the new catalog, that suggests about $40,000 a year. Damodaran (2012) warns that buyers often overpay by paying the seller for value the buyer itself will create, so these benefits are estimated cautiously and the price will not reflect all of them.

Valued with the same 10 percent rate and minus 1 percent long-run growth as the catalog, the two benefits are worth about $590,000 together. The catalog's value to the publisher is therefore about $3.58 million: $2.99 million standalone, after the termination adjustment, plus $0.59 million in benefits.

Net Present Value and Return

The seller's asking price is $3.6 million. Given comparable sales and the age of the catalog, a price of $3.3 million is a realistic target. At that price, the net present value to the publisher is about $280,000. The internal rate of return, for a perpetuity declining at 1 percent with first-year cash of about $404,000 including both benefits, is about 11.2 percent, above the 10 percent required return. At the full asking price, the net present value would be slightly negative, about minus $25,000, with a return of about 10.2 percent before the termination losses, which leaves no margin for error. Brealey et al. (2020) treat a project as worth doing when the present value of what it returns exceeds what it costs; this one passes that test, but only modestly, and only at prices well below the asking figure.

Financing

The publisher has $1.15 million in cash and an existing $600,000 term loan. It proposes paying $900,000 in cash and borrowing $2.4 million from a specialist music-rights lender against the security of both the new and existing catalogs, at about 7.75 percent over twelve years. Annual payments of principal and interest would be about $314,000.

Debt service coverage under three income cases, first year

Under expected income, the catalog covers its own loan with a modest margin. If its income fell 25 percent, the publisher's existing operating income of about $510,000 would cover the shortfall. A ten-year loan would raise payments to about $354,000 and leave coverage near 1.14, so the longer term is preferred.

Deal Terms

Passman (2023) notes that catalog purchases depend on clean chain of title: proof that the seller owns what he is selling. The publisher will require representations that the seller owns the stated shares of each song, a schedule of every co-writer and their agreements, and indemnification for title claims. Ten percent of the price, $330,000, will be held back for three years to cover any claims. The seller will also be asked to provide notices of any termination already served. If the seller rejects the holdback, the publisher should reduce its price by a similar amount. Due diligence before signing will include a registration audit, checking that every song is registered with the performing rights organizations and the Mechanical Licensing Collective under the correct shares, because unregistered or misregistered songs are a common source of uncollected income and can be a quick gain for a new owner.

Integration

Closing is the start of the work. In the first ninety days the publisher will transfer administration from the seller's administrator, notify collecting organizations and licensees of the new ownership, load the catalog into its royalty system and tag the songs for its licensing team. Income will dip for one or two quarters as statements catch up with the change of ownership, which the cash budget in Module Eight will need to reflect. The seller has agreed to remain available as a consultant for a year to help locate contracts and answer questions about co-writers, at a modest fee that is included in the price.

Recommendation

The publisher should buy the catalog at $3.3 million and walk away above $3.4 million, financing it with $900,000 in cash and a twelve-year $2.4 million loan, with a 10 percent holdback. The purchase earns a return modestly above the required rate, reduces income concentration and uses the publisher's strengths in administration and licensing. The recommendation rests on the conservative benefit estimates; if the licensing team fails to place any of the new songs, the purchase at $3.3 million gives up only about $85,000 of value, an acceptable downside for an investment that also diversifies the company and adds 600 songs the licensing team can keep pitching for years.

Conclusion

Valued on its own, the catalog does not justify the asking price. Valued with the benefits this buyer can create, and bought at a negotiated price with protective terms, it adds value, diversifies the company's income and can carry most of its own financing. Milestone Three will examine the company's overall funding plan with this purchase included, alongside the other demands on its cash over the next three years.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.

Passman, D. S. (2023). All you need to know about the music business (11th ed.). Simon & Schuster.