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Building a repeatable catalog deal process w/ Cliff Fluet | Music Fastball — Transcript

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0:09Welcome back to Music Fastball. We've
0:12got the second in our two-part series
0:14with Cliff Fluet this week.
0:17Last time Cliff, we were talking about
0:19the importance of sellers being well
0:21educated when they come to sell their
0:24catalog, their portfolio, the
0:26body of work that they've
0:29accrued through the years and how
0:30important that is for them making sure
0:32that they
0:33get the right value for all of the
0:36effort they've put in. Now, this week
0:38Cliff, we're going to be talking a bit
0:40more practical about how to systematize
0:43the process, how we can advise people
0:45who are buying those catalogs to prepare
0:49a process that will allow them to get
0:51through more of these
0:53deals both obviously the ones that
0:55transact and the ones that don't. So,
0:58let's start here, shall we?
1:00There is sometimes cynicism about
1:03lawyers being included in deals. Is that
1:06fair or unfair?
1:08Well, I'm not going to say it's unfair
1:09and look, some of it is earned. Let's be
1:12honest. And the truth is different firms
1:14have different models. Different
1:16incentives produce different behaviors.
1:18Some lawyers benefit benefit from
1:21complexity, from deals that take longer.
1:23I know there's an inherent suspicion
1:25about any business that charge in time
1:27rather than satisfaction. You know,
1:29look, I've seen it, you've seen it. But
1:31this is what I believe and this is how
1:32we've built our practice. We think that
1:35deals die from delay. Momentum is the
1:37deal killer. Efficiency is in absolutely
1:40everyone's interest. The faster you get
1:42to certainty more deals close. The more
1:45deals close, the more relationships you
1:46build and frankly the more value that
1:48you create. So, I'm a big fan in saying
1:51complexity doesn't serve clients, it's
1:54clarity. So, look, it's not universally
1:57fair either. We do need to do a lot of
2:00the work, a lot of it hasn't been done
2:01and the front loading is what really
2:03makes it longer. So, you know, the way
2:06I've built the practice is that we
2:07absolutely don't like to monetize
2:09complexity. We embrace the
2:11sophistication and get the deals done.
2:14And I think that's really important as
2:16well, particularly
2:17more and more we hear about the lower
2:19end of the market being very active,
2:22which means there's a higher volume,
2:24potentially lower value per transaction.
2:27And if those funds that doing those
2:29types of deals don't have a repeatable
2:32process, the overhead of doing them is
2:34huge, isn't it?
2:36Yeah, and most importantly unexpected
2:38because they haven't done that pre-work.
2:40They get the bill shock or they blame
2:42the lawyers or again, it erodes trust.
2:46Yeah, and just from a deployment of
2:48capital point of view, if you're going
2:50to spend a significant amount of time on
2:53every single deal and every single one
2:56is white gloved unless you're buying
2:59huge catalogs for massive sums of money,
3:02you're just never going to get it
3:04deployed. So, you really have to have a
3:06machine set up to do it, don't you?
3:09You don't, but you know
3:11what I'm really big on is front loading
3:13the work and if you can do the legal
3:14work early or even not to the same
3:16degree, not necessarily a white glove,
3:18maybe a builder's glove. You know, but
3:20you do that stuff up front. If you can
3:22do some hard work before anyone's fallen
3:24in love with the number
3:26we think it can really help. We're doing
3:28for a lot of clients now. We're doing a
3:30pre-invest investment committee review.
3:33So, these will be short structured legal
3:35assessments that happen before the
3:36modeling, before the LOI, before any
3:39commercial commitment and that allows
3:41the people deciding at the investment
3:43committee what the big issues are. So,
3:44you can think about those titles and
3:46encumbrances and missing documents long
3:48before they become deal breakers or
3:50become these horrible surprises.
3:52The work's going to have to get done
3:54either way, whether you do it on your
3:56terms when you've got leverage or late
3:58when you're fire fighting. So we really
4:01believe that if you work early, you get
4:03the options and when you get late
4:05you don't. Uh the work is the same, but
4:08the leverage just isn't.
4:10Yeah, and I think historically, you
4:11know, this has always felt legal
4:13diligence has felt like a pretty bespoke
4:16approach, pretty bespoke practice. How
4:19much room do you think there is to
4:20actually standardize it?
4:23Look, the thing that yeah, we talk about
4:25music being an asset class and things
4:26like that, but it's a a genuine
4:28non-fungible asset class. Every
4:32different. I had one, you know, new
4:34colleague who was new to the industry
4:36come to me and said, "It is it's almost
4:37like someone's spent weeks or months
4:39negotiating this document."
4:42Yes, that's exactly right.
4:44Every asset is different, every catalog
4:46is different, every artist's story is
4:48different. These contracts they're
4:50complicated, sophisticated,
4:52idiosyncratic.
4:53But the process doesn't have to always
4:56be bespoke. The questions you're asking
4:58are largely the same. Documents you need
5:01are largely the same. The issues that
5:02kill deals are largely the same. So, the
5:06way we approach it is that we
5:07standardize the intake, the amount of
5:09facts, the gates, the workflow and then
5:12you preserve the judgment for things
5:14that actually require it. For one
5:16client, we have a bronze, silver, gold
5:18approach where they ask us what kind of
5:20pre-deal assessment they'd like us to do
5:22and that's how we think you can scale
5:24without losing the quality. There's
5:26always an element of senior judgment,
5:28there's always an eye of someone who's
5:30done these deals for many, many years,
5:32in my case decades. But what we try and
5:34do is standardize it and systematize it.
5:37Yeah, and I again, I think that that's
5:39so important, right? If you've got 20
5:41deals to look at in a given month, then
5:43you're going to have to decide which
5:45ones you're going to invest the time in,
5:47which ones you're going to, you know,
5:48plan to do due diligence on
5:51give them a probability of success
5:53before getting right into the details
5:55and investing a lot of time, effort and
5:57money. Going deep into every single one,
6:00I think makes total sense. And what
6:02about when you know, these things are
6:04skipped? Where do they fall apart?
6:07It's when that pre-assessment hasn't
6:09been done and unfortunately it's
6:11boringly predictable. There's rights
6:13issues that are found too late, long
6:15after the LOI or when the exclusivity is
6:17just about to run out or sometimes after
6:20the investment committee's approved in
6:21principle and by then you're not
6:23negotiating, you really are fire
6:25fighting. So, as we've discussed before,
6:27sellers that aren't ready, no idea where
6:29the documents are, who owns the legal
6:31position. Every question takes a week
6:33and you get this internal chaos on both
6:36sides and everything goes through email
6:38and a bunch of heroics.
6:40There's no muscle memory, there's no
6:41templates and you finish the transaction
6:44and 6 months later you find yourself
6:46starting from scratch and Back to the
6:48same old story, yeah.
6:50It These deals don't go down in flames,
6:52they often just take so long that people
6:54lose the will to live. So, really the
6:56question is prepare, prepare, prepare.
6:59Yeah, and we talk about kind of deal
7:01fatigue and that's okay if you're the
7:03one person selling, but if you're
7:05acquiring many catalogs, then you really
7:09want to make sure that you've got
7:11something in place that isn't going to
7:14drain you every single time because you
7:16just lose the appetite to keep going.
7:19And I I think, you know, a lot of times
7:23given there's two parties, there's a bit
7:25of finger pointing that goes on. Oh,
7:27it's slow because of X, Y and Z. Is that
7:29tend to be internal or external through
7:32your experience?
7:34The honest answer is that most of it is
7:36internal, but on both sides. You know,
7:38there's unclear threshold, there's
7:40unclear ownership. There's no one
7:43empowered enough to say, "Look, this is
7:44good enough, let's move." And that's on
7:46both sides.
7:48But the reason for that is because if
7:49you don't know what ready looks like,
7:51you can't ever get there. You keep
7:53circling, you keep asking the same
7:55questions, you keep waiting for
7:56permission, you keep waiting for someone
7:58say it's okay.
8:00And that's why one of the things we
8:01think is by having standardizations, by
8:03having deal matrices, it gives people a
8:06framework for decision making. It gives
8:08them position to move either way.
8:10And you know, half of the deal delay is
8:12waiting for someone to decide what they
8:14already know. But what they need is the
8:16confidence to do that.
8:18Yeah, and
8:20there are some examples out there of
8:21people doing a really good job. You
8:23know, obviously there's always room for
8:25improvement, but those people who are
8:28who have industrialized the process,
8:30like what are they doing differently?
8:33Look, they've got standard positions
8:35with standard artifacts. They understand
8:37the go, the no go. They've got NDAs with
8:39teeth. They've got LOIs that actually
8:41say something
8:43have a range of prices and a range of
8:45outcomes allowing people to find
8:47somewhere to land. They've got
8:48encumbrance registers. They're thinking
8:50about consent triggers. They've got
8:52issues logs. You're just not reinventing
8:54it every single time. And what's really
8:57important is clear ownership. You get a
8:59deal lead proper virtual data room.
9:03You've got something that means that
9:05it's something's ready to go or ready to
9:07model or ready to build or secondary
9:09ready. And you know, again back to these
9:12playbooks, seller ready the seller
9:13readiness where they know what's coming.
9:16Everyone's speaking the same language.
9:17That's what muscle memory looks like.
9:19That's what scales. You know, so the
9:21funds that close, they're just not
9:22smarter, they're more systematic and
9:24they start earlier.
9:26Yeah, and I mean that makes obvious
9:29sense, right? Like any process, the more
9:31you do it, the better you become. The,
9:34you know,
9:35the better you become, you know, the
9:36more you stand out in the marketplace. I
9:39think obviously we look at this all the
9:42time from a technology standpoint,
9:44whether it be the legal process or any
9:46other process indeed inside one of these
9:48funds.
9:49Um but I think technology now
9:51specifically really is bringing
9:53significant advantages. Where have you
9:56seen it well applied?
9:59Well, look. I mean, I've got some
10:00clients with some very wizzy valuation
10:02technology and we use technology, proper
10:05technology, to handle the first sweep,
10:07for document extraction, for rights
10:09mapping, for gap analysis. Stuff that
10:11used to take junior lawyers ages. You
10:13know, we do it with the right tools and
10:15teams. And then, what it does is it
10:18frees up the senior people who've got
10:19decades of pattern recognition to focus
10:22on the puzzles, the real brainers, as a
10:24launch, the French client of Martin
10:26called them. You know, that's a not a
10:28no-brainer. You know, the judgment
10:30things that require expertise.
10:33And we're not replacing lawyers with
10:35machines. We're deploying lawyers where
10:37they have the most value. And that's
10:40really about making legal not more
10:41expensive and but making more efficient.
10:44And I think, you know, there's push and
10:46pull factors within that, aren't there?
10:48You have to design a process that feels
10:50like it's significantly advantageous to
10:53the fund because otherwise, if it's
10:56extremely cumbersome, they just won't do
10:58it. And actually, technology is a
11:00massive bridge to that, isn't it? Being
11:02able to get done a lot of the basic
11:05stuff, a lot of the table stakes stuff,
11:07so you can justify paying, you know, the
11:10money for your lawyers so they can bring
11:13in the expertise, they can really look
11:15at the nuances of of where they need to
11:17without having to charge an absolute
11:19fortune for kind of doing what now is
11:23should be at least relatively
11:25repeatable. Is that fair?
11:27>> I think that's fair, but they've got to
11:28be specialists. You know,
11:30it's got to be lawyers who really
11:32understand the asset class. And none of
11:34the people that we're acting for,
11:35they're corporate lawyers, they're fund
11:37lawyers. Fantastic, they're great and
11:39they do the things that they're great
11:40at. But understanding this asset class,
11:42not so much. So really, it's about
11:44working with the experts, not just a
11:46lawyer.
11:47And Cliff, I think as you very well
11:50rightly schooled me on, um,
11:52that
11:53music is not complex, but it is
11:56sophisticated. And having people on your
12:00team who understand the sophistication
12:02is wildly important in any asset class.
12:06But I think from the experience we've
12:08had with this one, very particularly
12:10with this one, there are lots and lots
12:12of challenges along the way.
12:15And I think that that kind of
12:17that kind of leads on to, um,
12:20the the the change in the way that
12:23people are financing these assets and
12:26the requirement of those different
12:27financing methods and the rigor that
12:30they require. Uh, what do you think
12:34changes day one depending on how you're
12:36looking to finance a given asset?
12:39Well, look, you know, now we've got
12:40different buyers. You know, if it's a
12:42big label, you're not necessarily
12:44looking to sell it or finance it in
12:46another way. But for institutional
12:48investors and funds and VCs and other
12:50people who are in the place as well,
12:52you're going to want to do something
12:54with that asset. So you have to bake in
12:56those secondary standards from the
12:58start.
12:59If you ever want to lever or lever the
13:01catalog or securitize it or bring in a
13:03credit partner, partner, their standards
13:06are going to be higher. Secondary
13:08buyers, lenders, securitization desks,
13:10they're more demanding than most primary
13:12buyers. So my view is you just don't
13:15meet the minimum transaction minimum for
13:17this transaction. You've got to meet the
13:19standard for the next one. It's not that
13:22much more work, but it keeps your
13:23options open. So it's really, really
13:26important to do that. And of course,
13:27we've got brilliant insurers out there
13:29in the market looking at contingent
13:31sorry, contingent risk or warranties and
13:33indemnities. They're very useful tools
13:36and help transfer some of the risk, but
13:37they're not substitute for doing the
13:39work. The underwriters ask the same
13:41questions as the lawyers do. We act for
13:43some underwriters and insurers as well.
13:47I think, you know, that's a really
13:48important point there, Cliff.
13:51Buying a catalog as a point-in-time
13:54acquisition is one thing, but there's a
13:56lot, if not all of the funds that we've
13:59spoken to, there is a bigger brother.
14:02There's a a hierarchy. And many of the
14:06strategies that we come across, people
14:08are acquiring the these assets to
14:10aggregate them to create greater value
14:13in the whole,
14:15um, but in preparation to sell it on to
14:17somebody else with bigger budgets, more
14:19capital. And actually thinking about
14:22that day one is so critical because
14:25there's it's kind of nuanced, right? You
14:27have to leave something on the table so
14:28they have some value to extract in the
14:30future if you're going to hand over a
14:31catalog um, or a portfolio which is
14:35absolutely all pips squeezed, there's
14:38not a lot for the next person.
14:40And
14:42but you also have to make sure that
14:43there aren't too many black holes or too
14:46many red flags that it's going to be
14:47impossible to sell the thing onto the
14:49next person. And it's a bit of a fine
14:52balance that. And I think that the legal
14:54side actually has a significant impact
14:58in which camp you fall in, doesn't it?
15:01Absolutely right.
15:02Absolutely right. And if you, um, so
15:06before we wrap up, one final question,
15:09uh, what would your advice be to
15:12somebody who is looking to systematize
15:15their process for diligence and
15:18acquisition of new catalogs at higher
15:22volume?
15:24What would that be? What would be your
15:25recommendation?
15:27First thing to do next.
15:28>> First thing to do next is adopt this
15:30idea of a pre-assessment rather than a
15:33post-deal assessment. You know, and make
15:35it a genuine gate, maybe two or three
15:37pages. What rights, what encumbrances,
15:39what consent, what documents, what
15:41issues. All of those things being built
15:43into the tolerances and before the model
15:46and most importantly before you've done
15:47a letter of intent. People can say it's
15:50binding or non-binding, but human beings
15:52anchor on those prices. And then that
15:55opportunity to be able to then realize
15:57that if you measure inside the time and
16:00retrade it, I think you'll see the
16:01difference inside a quarter. And you
16:04know, it's that whole
16:05sporting analogy. If you make the first
16:0710 yards more disciplined, then you
16:09don't have to the 10 yards to be heroic
16:11and limp over the line.
16:13Yeah. I like that. Cliff, this has been
16:16amazing. We've really covered a lot of
16:19ground here over these two episodes. And
16:21I just want to do a very, very quick
16:22recap. Uh, I will try to condense it
16:25down into a couple of sentences which
16:27will obviously mean I miss lots of
16:29detail. If you want the detail, please
16:31go back and listen to the episodes. But
16:33I think the key pieces of advice are, if
16:36you're a seller, make sure that you are
16:39well educated ahead of going to market.
16:41Make sure that you've consulted
16:43somebody. Make sure that you're aware of
16:45the expectations that will be placed on
16:47you. Make sure you know what you need
16:51before going to market. And that way
16:54you're going to have better,
16:56um, matched expectations with the
16:59buyers. And there should be less shocks,
17:02which will mean a smoother, slicker, and
17:04hopefully
17:05happier process. And importantly, a
17:08completed process. And then on the other
17:10side, if you're a fund acquiring
17:13catalogs uh, on a regular basis, try to
17:17systematize the process. Try to create,
17:20um, a structure that will allow you to
17:22go through these deals
17:24regularly, repeatedly, and as quickly as
17:28possible so you can get down to the
17:30nitty-gritty without kind of getting
17:32stuck in the weeds.
17:33Is there anything else that you would
17:35add, Cliff?
17:36Oh, well, apart from hiring the right
17:38lawyer. Hashtag ad. Hire the right
17:40lawyer. Yes, hint, hint.
17:43Amazing. Cliff, thank you so much.
17:46Cliff, thank you so much. It's been an
17:49absolute pleasure having you on. And
17:51thank you everybody for tuning in. And
17:53we'll see you next time on the next
17:55music fastball.
17:56Thank you.
18:10Yeah.

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