Dance Business Asia: Big Music Co. wants to buy my little dance label...what should I do?

Welcome back to Dance Business Asia, Mixmag Asia’s monthly column focusing on the business of dance music in the region. Dance Business Asia dives deep into the business issues confronted by artists, managers and promoters. We look at the economics of dance music in Asia to see what’s working, what isn’t, and how issues can be addressed. The column also features interviews with movers and shakers on the business end of the industry in the region. Your guide, Otto Clubman, is a music industry executive with over twenty years of experience in the dance business.

Let’s play Mad Libs. Feel free to change anything in brackets, to fit your own circumstance.

Congratulations, you’ve started the hottest little record label in [Myanmar] focusing exclusively on [local trance DJs]. You’ve done a great job building a reputation in the region as a curator and opinion leader in the genre, and have amassed a catalogue of [94] master recordings over [16] albums. The UK-based international record company [Big Brother Records] has been keeping an eye on you, as they know [Myanmar] is growing fast, and want to get in on the action. To your surprise, they have now offered you [$3 million][your local currency], for a [X%] stake in your company. You think, [@xk, man!]. This seems like great news, but, it wasn’t really my plan. I just started this label because I wanted to support the local scene. You stall, unsure; but [Big Brother Records] are pushing you for an answer. What do you do?

What…do…you…do?

Seriously, this could happen to you (if it hasn’t already). As we’ve discussed in previous columns, Big Labels excel at amplifying an entrepreneur’s initial success, but aren’t terrific at spotting opportunities at the earliest stages and growing from the initial 0-1 phase (i.e. idea to proof of concept). Accordingly, they’d rather sit out from 0-1 to minimize their risk — as many of these start-ups fail — and then acquire/invest in those few that have made it past this uncertain incubation stage, even if it costs them a bit more at this point.

You, on the other hand, are a risk taker. You passed through Myanmar two years ago on your junior year abroad backpacking trip in college and had a feeling that this country of 80 million people would eventually have a thriving music scene. You came back four months after graduation (after realising you couldn’t find a job anywhere else), and started your little record label. And, to your surprise, it worked. Now, a few years later, you absolutely dominate your little niche in the dance music world (Myanmar trance, in this case). Now, the big guys have come knocking, as your company fits nicely as a little cog in their worldwide empire.

You are flattered. You are excited. But you are also confused and somewhat uncertain. This is your baby; it’s all you know. If you sell it, what will happen? And what does “selling” even mean? Big Brother Record’s lawyers contacted you to discuss potential deal structures, and this left you utterly confused. Understandably, you are not an expert in deal structuring — you are an A&R girl / guy at heart; what do you know about the intricacies of corporate finance?

Well, let me try to help a little. First, let’s look at the kind of deal structures that Big Brother Records may present to you, and explore the pros and cons of each. Second, let’s take a look at the personal side of things — i.e. how will your life change after the deal — so you can decide what’s right for you.

The potential deal structures that can be used in music label investments and acquisitions can actually stretch as far as the imagination can take you. Nothing is set in stone, and nothing “needs” to be a certain way (so, don’t listen to Big Brother Record’s lawyers, if they tell you so). Below are some typical structures, starting with the least intrusive and ending with giving away the keys to the shop. However, there are many hybrid solutions, and at the end of the day, there is significant flexibility for creative parties to find a structure that fits the needs of both your label and Big Brother Records.

Distribution Deal:

You’ve probably got one of these in place already and know how they work. I mean, your dance music must be reaching listeners somehow. You put your songs on a distribution platform — which may, or may not, provide some marketing services. Distributors can be specialised companies that focus mainly on this task — like Believe or CD Baby — or could be the bigger record labels, which have their own distribution arms. If you have a strong catalogue (and luckily you do), you should be able to finagle an upfront advance as part of your deal. This is a type of financing, as it gives you an immediate lump-sum payment that you can use for expansion, salaries, whatever you need it for.

Great, you got some upfront cash by committing to a multiyear partnership with a distribution partner. Any downsides to this? Here is the risk: The bigger upfront they pay you, the longer your tie-in, most likely. That’s fine — sometimes. But, keep in mind, a long-term tie-up may make you less attractive as an acquisition target. Why? Well, whoever is thinking of buying you (or investing in you) will want to pump your product through their own distribution channel. They make money this way. So, if they can’t get their hands on the distribution rights for your awesome trance catalogue for another three or four years, you suddenly become a much less attractive acquisition candidate, in the near term. So, weigh this carefully. Whatever you gain in upfront fees, you may lose even more in value as an acquisition candidate to a big label.

Sell a portion of the rights in your master recordings:

Everyone likes to own assets that appreciate in value. Beachfront property. Classic cars. Diamond rings (as promised by Tiffany, but now I’m not so sure of this). And, of course, master recordings. Bet you wish you had purchased 10% of the master rights for 'Baby Shark' back when it only had 5,000 YouTube views.

Big Brother Records may feel that your label’s masters have a lot of value. Maybe they are spitting off annual cash flow. Or maybe Big Brother sees them as under-appreciated assets, thinking they can help enhance the visibility of tracks and cause the assets to appreciate (like upgrading a dilapidated beachside property by adding a new Guest House that you can rent on Airbnb and earn some extra cash flow). For either reason, they may be willing to purchase a portion of your master rights.

Why wouldn’t they just want to purchase your company? Well, maybe you seem a bit shady and they suspect you have gobs of hidden debt or unrecorded liabilities (you know what you did!). Or, maybe they think you are bit young and inexperienced and that your corporate governance has been somewhat lax — they have no way to figure out what’s going on in the company. However, they really like your songs. Those are discrete assets; little gems. It’s easy to track the cash flow. So, this may be a safer way for them to achieve their goals; invest in the songs rather than your company. And, to be honest, maybe it’s your preference too. You love being your own boss. You don’t want to sell the company. But you are happy to “cash in”, a bit, by selling a portion of your master rights to Big Brother.

This is a pure banking calculation. The buyer looks at the cash flow from the masters, projects future earnings, discounts that amount to the present day, and makes you an offer based on the computation. You get to bring in some “free cash” without having to sell off a part of your company.

But, what’s the risk to you, Indie Label Owner? Like in Las Vegas, it’s a kind of zero-sum game. Whoever bets correctly, wins. (You know the flip side of that). Look at it this way: Remember a few paragraphs above when you sold 90% of your Baby Shark master recording for $100 because you didn’t think it would go anywhere? You were waiting and waiting, and nothing was happening with the song. At the time, you were happy to have pocked that $100. Then, one week later (Murphy’s Law is always in overdrive when it comes to these kinds of rights), the song goes viral for some random reason and absolutely takes off. Suddenly, the song is spitting out US$5 million a year, and you are only getting 10% of that. You’ve sold the other 90% for US$100. So, try to bet right, if you can.

Sell a minority equity stake:

Now let’s look at some more “intrusive” types of deals, where you give up equity stake and a degree of control. What do you get in return? Cash, baby.

Big Brother Records may say, Hi there, I’d like to purchase a 30% stake in your company. Why would they do this, and not just buy it all? Potential answers may include: (i) the price tag for 100% of the shares may just be too steep for them; (ii) they are happy to be a minority investor, and gain from the capital appreciation of the shares over time as the company continues to grow – and probably pick up distribution rights as part of the deal, which will generate cash flow for them along the way; and /or (to their credit, if they consider this): (iii) they realize you are not cut out to be an employee; you are an ENTREPRENEUR, damnit. You were responsible for growing the company to where it is today. If they bought it all, they may lose you entirely, or at the very least, it may likely diminish your motivation to bring the company to the “next level”, as you don’t own it anymore. (Your cash is sitting in a Cayman Island account by now). True, there are structures that could mitigate this risk to the buyer — vesting periods, claw —backs, targets and adjustments, etc., but…they don’t really work that well, to be honest. You’ll think you can stay motivated. But, psychologically, you are just human. Once you are out, you are out. Both sides should factor this in, if they are smart.

So, should you sell that 30% minority share? Well, if you need the money, or if want to diversify your personal holdings, or if you believe that Big Brother Records adds so much strategic value that you will generate even more wealth with your remaining 70% over time: Go for it. Just remember: Once it’s gone, you can’t get it back. Also, be aware of the motivational toll. It may sound strange, but owning 70% (still quite a lot) is not the same as owning 100%. I can’t explain it, but trust me.

The Full Monty – Sell it all:

When it’s time to go, it’s time to go. Maybe you’ve built the label to the point where it makes sense to integrate it into the “machine”. Maybe you are just exhausted. There is no shame in just taking the money and walking away. Let it be someone else’s headache. Of course, it’s easier said than done. It’s still your baby, and separation is painful. But, for the right price, here are my two cents: Go for it. Bank it, and start something new.

But Otto, you ask, which structure is right for me?

Know thyself, Entrepreneur. Different strokes for different folks; different structures for different personalities. Of course, you need to look at the value the investor brings to your business and /or the flat-out price. But, just as importantly, you need to look closely at how your life will change. Because it will.

You may have a new boss (in the case of a full buyout where you stay on); this may be your first boss ever. Or you may have a minority investor who thinks they are your boss (most of them do). If you are used to autonomy and need this freedom to thrive and create, you really need to be honest with yourself and factor this into your decision-making. Frankly, Big Brother Records should also do a psychological assessment of you. If they are counting on you to add value after a purchase / investment. If you lose your motivation because working on a team just doesn’t “fit your personality”, everyone loses.

Here is a quick checklist to consider:

1. Know yourself. Will you still be highly motivated under the new ownership structure?
2. What are you giving up? What are you getting? What can you never get back and are you willing to let it go?
3. Is the money enough so that none of this matters in the slightest? (See you Tahiti, suckers).

The last one is easy. The first two may take some more reflection. Good luck.