Negotiating Business Deals/selling rights

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QUESTION: I am a music arranger interested in selling the publishing rights of a classical piano transcription to a major publishing company. It is based on a major orchestral work, and I own the copyright. It is complete and just needs proper binding, printing, marketing, etc. I estimate that over the course of three years, approximately 2000 printed copies will be sold worldwide, at roughly $30-40 per copy, and I estimate it will cost the company roughly $2000 to produce the first 2000 copies. After the first three years, I estimate a few hundred copies will be produced and sold per year. If a company offers to purchase the rights from me, what do you think would be a reasonable upfront amount for them to offer? And how much would be reasonable to expect for each copy sold?  I'm just looking for a conservative, ball-park figure. Many thanks.

ANSWER: Hi David and thank you for your question.

Congrats on your copyright of your work. You've taken the most important step in securing your rights, however there is still a vast amount of plagiarism that goes on in spite of copyrights. Unfortunately, courts of law are really the only place where copyrighted work can be fully protected.

If your estimates are correct, your copyright would stand for several hundred thousand in profits over the years. That's great, but oftentimes an owner of a copyright chooses to sell his rights. Here are a few reasons:

1. He can't afford the cost of producing and advertising the work
2. A company "in the business" can bring his work to a higher level of exposure and prominence
3. A company can take much stronger measures to protect the work from infringement

If someone with the means of really promoting your work offers to pay for the rights, chances are they will demand most of the ownership, profits, and future benefits for a small amount of money. This is because they are the ones taking the risk (spending the $ to bring to market, etc). Most of the musician/writer/creator deals out there that involve distribution companies are heavily lopsided in favor of the company. Oftentimes, the original creator makes next to nothing, and considers it a stepping stone to bring other opportunities.

Some may offer a small sum of money up front, with a deal where a percentage of profits will be paid to the creator only if the piece reaches a certain level of profits. This is so they don't shell out a lot of cash and later find the piece didn't make much of anything.

I once wrote, directed, and produced a full two hour feature film. The offers made to me by a company wishing to "buy the rights" were ludicrous. I couldn't entertain anything they offered.

Do not make an offer to them. Let them make an offer to you first. Then when responding to their offer, I would consider asking them to make an upfront deposit of enough money to cover your initial costs such as time spent producing it, promoting it, getting the copyright, etc. Only you know what that is...$10,000, $30,000, $50,000? Then tell them that once the piece reaches a certain level of income (enough to cover their costs and compensate them well) you are to receive a percentage of all future profits.

Or you could simply demand a higher initial percentage of gross sales for life. However, DO NOT accept a percentage of profits; only deal with gross sales. A shrewd company can simply expense out all their profits and tell you they made nothing...so would end up getting nothing. Also, arrange to have a third party, completely neutral accountant to make quarterly assessments of their sales and revenue, so you know they are being honest with you.

Hate to sound pessimistic, but so many creators are taken advantage of in artistic endeavors.

Hope this info is helpful to you.

My best,

Rhett


---------- FOLLOW-UP ----------

QUESTION: Your answer is very well thought-out and reflects well on your knowledge and experience. I wonder if you could clarify a bit.

I'm not sure I understand the following: "Do not make an offer to them. Let them make an offer to you first. Then when responding to their offer, I would consider asking them to make an upfront deposit of enough money to cover your initial costs such as time spent producing it,...$10,000, $30,000, $50,000?"

If I understand you correctly, you mean I should let them make the first offer. OK, say they offer me 20K for the rights. Is that not the same as "an upfront deposit" of 20K?

"Or you could simply demand a higher initial percentage of gross sales for life." You mean I would relinquish any upfront payment, but instead I would insist on a higher percentage from sales. So instead of offering me 20K plus (say) 5% of sales, I would get zero upfront plus (say) 10% of sales. Do I have that correct?

"However, DO NOT accept a percentage of profits; only deal with gross sales."
Here, you mean the following: "We, the Company, made a profit of $10,000 on it this year after all our expenses, so here's your check for 5% of that ($500)." You are saying I should not agree to such an arrangement, but to the following: "We the Company sold X number of copies and the sales amounted to (say) $50,000. Here is your check for X (a percentage of our sales)." If I have all of this correct so far, it means I (or they) would have to agree upon a figure representing percentage of sales (as opposed to profits). I understand the concept of expensing out their profits. My question is, how does one figure out how much I should ask for as a percentage of sales? If I use the same percentage (say 5%), then I would get many times more money as a percentage of sales than as a percentage of profits. With the above calculation I would get $5000 as a percentage of sales rather than $500 as a percentage of profits. It cuts into their profit much more significantly. On what basis do I figure out a percentage that is win/win?

My last clarification question is regarding having "a third party, completely neutral accountant to make quarterly assessments of their sales..." Years ago I made music recordings, and I remember the company stated that its accounting books would be open to my inspection if I needed to, presumably if I felt they were not being honest in their accounts. It turned out, a few years after the recording was out, that I was dubious of their accounting (actually they may have been absolutely honest about it) and so to assuage me they had THEIR accountant go over their books and he assured me everything was OK. But wouldn't such a person be the same one who expenses out their profits? In other words can such an accountant be neutral? So, if there is doubt on my part, should I insist that they permit me to have MY accountant go over their books? (at my expense, yes?) Or, is any accountant they use OK? Keeping in mind that the key word which you used is "neutral." This I am not knowledgeable about. Is neutrality possible? I eagerly await your reply, and I am sure that it will be an excellent one.

Answer
Hello again.

My comment regarding not making an offer is merely a negotiation thing. You don't want to go to them and tell them what amount deposit you need or money up front or whatever name you choose for it. Just don't be the first one to start talking numbers.

An old Chinese proverb says: "He who speaks first has big foot in mouth." The point is if you tell them what you think they should bring to the table, you let them know how valuable (or non valuable) you think your piece is. This is a mistake because it gives them a negotiation advantage. They will start with your number and work down from there.

So if they offer 20K up front...YOU determine if that works or not, depending on what time and resources you have into the project. Not them. You could then make a response such as: "Sure 20K up front is good, plus X percentage over the course of Y years..."

Get $ up front for sure. If everything goes bad (which is unlikely, but possible) then at least you have been paid for all your time and trouble. If they have made no investment in you but have control over your work, they have nothing to lose. That's not good. They need to have some skin in the game.

Get $ up front and get a percentage of gross. Yes, that number is higher than profits but your cut can be less of a percentage too. Whatever you do, do not accept percentage of profits. Gross sales are easy to track and monitor...profits can be manipulated and hidden. If they are a sound company, they might treat you fairly, but how could you know for sure? It is better to get a percentage of gross sales. Basically with this scenario you are merely one of their operating expenses.  Your cut would be a line on the income statement. For example:

Gross revenue - 120k
Marketing - 15K
Sales personnel - 20k
Ink - 2500
David - 3600 (3%)

On the accountant: "neutral" is extremely important. Their accountant is not neutral. Yours might be. Most professionals in this situation hire an outside auditor; someone who comes as an independent accountant and makes a neutral assessment of the accounting. If they try to manipulate numbers, this accountant will find it. It has a way of keeping them honest.

To pay for it, simply include the accountant's expense in the up front deposit/down payment. Make sure there is enough to cover your time and expenses. It is a cost of doing business.

Hope this helps. If you feel these answers are helpful, do me a favor and rate my answers. I would sincerely appreciate it.

Best of luck with your endeavor,

Rhett  

Negotiating Business Deals

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Rhett Kniep, CBB

Expertise

There is a philosophy behind all negotiations, and having the right perspective and approach is vital to successful deals. I can answer questions regarding business and personal negotiation, and advise on successful strategies.

Experience

I have been a business and real estate broker for over 12 years and a building contractor for over 20. I have done numerous trainings in commercial real estate and real estate investment and have managed multi million dollar funds for real estate investment clients. I have counseled both buyers and sellers in high dollar real estate and business deals.

Organizations
Ca Association of Business Brokers, Contractor's State License Board, Better Business Bureau.

Publications
The Contractor Investor, Phi Logos Publishing, 2011

Education/Credentials
Certified Business Broker, California Association of Business Brokers, AA Communications, student at Lincoln Law School of Sacramento, dozens of real estate investment and negotiation trainings.

Awards and Honors
Stormy Seibring College Scholarship, Rescue Mission Service award, Film School Certificate

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