What They'll Never Tell You About the Music Business

by Peter M Thall

  You may also choose to pay with sliding-scale commissions, as described in the above paragraph, but they can be calculated differently from those provided in your agreement with your manager. For example, your manager may have agreed to “stand behind” your recording costs up to a certain amount, but not more; you can modify the base on which the commission is being applied by doing away with the cap (see this page).

  BREACH OF CONTRACT IN ARTIST-MANAGER AGREEMENTS

  There are number of ways in which a contract between an artist and manager can be breached. Managers are in breach of contract if they

  • steal the artist’s funds;

  • mix funds among the manager’s and the artist’s bank accounts and, perhaps, with those of other artists as well, making them hard to trace;

  • make themselves totally unavailable during key moments in the artist’s career development;

  • participate in activities that clearly constitute conflicts of interest;

  • are so totally inept as to render impossible the ability to perform the functions outlined in the standard management agreement.

     An artist is in breach of contract if he or she

  • refuses to take the manager’s reasonable guidance in such a pervasive manner as to be “unmanageable”;

  • violates the exclusivity clause by utilizing others to provide the services for which the manager is exclusively selected to perform;

  • fails to pay the manager commissions or expenses when due and to account to the manager in accordance with the accounting provisions (in cases in which the artist controls the receipt and disbursement of his or her earnings);

  • violates the “morals” clauses of the contract (see chapter 7, this page);

  • chooses to leave the band (when the agreement is between an agent and a group) and pursue a career outside of the parameters of the manager’s right to expand the management role from the band to the individuals within the band, including the artist.

  Redefining “Commissionable”

  You can pay your manager according to a revised version of what constitutes “commissionable contracts” as defined in your management agreement. For example, your agreement may provide that your manager is entitled to commission all record contracts entered into during the term of the manager-artist agreement plus all modifications, extensions, and renewals of such contracts.

  The word renewals is extremely dangerous and will drag along your former manager’s entitlements well into what are actually new deals that you and future managers may make. For example, let’s say you had a record agreement that expired after the delivery of six albums. Your original manager would have been entitled, by contract, to commission all six of them. Now that you have terminated your agreement with the manager (after, say, two albums), and have been able, through negotiation, to substantially reduce the original manager’s commission on the four remaining albums to be delivered after termination, what happens if you subsequently renegotiate and extend the original record agreement? Let’s say there are four more album delivery requirements added by the amendment, for a total of eight that remain. The original manager may be entitled to a commission on the additional albums. Even if you terminate the original record agreement, or it expires on its own terms after you have recorded the originally required six albums, if you subsequently renew it, the renewal may be commissionable as well. When negotiating termination settlements, it is important for you and your attorney to catch and change those things that you may not have had the leverage to change during the initial negotiation of the agreement.

  Variations on Standard Settlements

  When contemplating what an artist can achieve in a negotiated settlement with a manager, there are other things that an artist’s attorney can pursue beyond just seeking a reduction or termination of commissions. In situations in which the artist’s manager is also his or her production company, the artist can seek to acquire control over the master recordings produced during the period of the agreement, agreeing to pay over to the production company a larger share of income derived from the exploitation of these master recordings. The value of doing this is immense, because you then have the opportunity to keep your catalogue in one place; to use the masters in negotiating a more favorable deal with a subsequent record company; and to utilize, or to authorize your new record company to utilize, the early master recordings for, say, greatest-hits recordings.

  Even if you are not able to acquire control over your master recordings, you may be able to eliminate or shorten the period during which you would traditionally be prohibited from rerecording songs contained on those master recordings. As noted earlier, this rerecording restriction is universal in production and recording agreements, but if you are able to reduce or eliminate it, you will be freer to plan your future—in particular, even if a greatest-hits album is not a viable option, you will now be able to record a “live” album containing the songs embodied on your earlier master recordings—or rerecord a song for a film or TV commercial and keep all of the money generated from it.

  —

  In negotiating a settlement with a terminated manager, you can agree to pay the manager in a way that permits you to continue your career or in a way that jeopardizes your career. Don’t be precipitous and seek to rid yourself of old problems just to strap yourself with new ones. Fortunately, your manager’s interests and yours, perhaps for the first time, coincide, at least in the sense that what is good for you (an ability to pay a new manager without bankrupting yourself) is good for the former manager as well (a percentage of something is better than a percentage of nothing). Any commission you still owe your former manager will be meaningless unless you have a career that generates income, so the best thing your now-terminated manager can do is to facilitate the transition to a new manager.

  6 • MANAGING YOUR BUSINESS AND YOUR FINANCIAL FUTURE

  When “Show Me the Money” Isn’t Enough

  Charles Robertson is an accountant.

  If they come any greyer than that they’re squirrels

  —NANCY BANKS-SMITH

  Money is better than poverty, if only for financial reasons.

  —WOODY ALLEN

  How nice it would be to sit back and have one completely trusted person take care of everything but writing the songs or playing the music—maybe not grapes and champagne by the poolside, but a slew of far less appealing challenges and obligations that come up at various stages of an artist’s career (like deciding what form of business organization is best, paying taxes, paying bills, auditing royalty statements, etc.). Finding a personal manager who has everything you are looking for is difficult enough. Finding one person who can handle all aspects of an artist’s business is not only practically impossible, but, as we shall see, possibly not even desirable. Financial planning is incredibly important, perhaps the most important time spent by artists, songwriters, and record producers other than their creative time. There is nothing wrong with accumulating well-earned wealth and I do not know any professionals who are reticent to claim the rewards of their artistic efforts, yet poor advice can easily rob them of their just rewards.

  This chapter will describe the choices, risks, consequences, and rewards derived from the multiple ways in which you—the creative one—may partner with others as you begin to develop a business and find the means to manage it. Whom do you look to for the kinds of services that you cannot expect from your personal manager or lawyer? Answer: A financial advisor. A financial advisor can have any one of a number of different titles: accountant, business manager, retirement counselor, or others. But before you start planning your retirement, you are first going to need a person—or more than one person—to assist you in taking charge of the myriad business and financial responsibilities you will face throughout your career. The accountant’s role is more limited than that of a business manager. The designation “business manager” incorporates many functions, including those of tax preparer, personal assistant, bill p
ayer, accountant, and auditor. Business managers are not engaged to perform these functions as distinct jobs, with separate fees negotiated for each one as would be the case with an accountant. Their very reason for being is to assume responsibility for all of these functions all of the time. Most artists tend toward selecting a business manager as their financial advisor of choice. Here I explore the reasons why and the things you should look out for in choosing your business manager.

  WHAT A BUSINESS MANAGER DOES

  Tax preparers, as their name suggests, prepare tax returns. They do not help you manage your finances or keep records for you. Personal accountants are, of course, able to prepare tax returns, but they can also provide assistance on day-to-day financial matters, help you maintain the records you need to best deal with federal and state tax authorities, and, depending on their training (see box, “Certified Public Accountants”) perform audits. The business manager’s role is something else entirely. Business managers can often provide the same services as a personal accountant, but they are also charged with responsibilities that touch every aspect of your business and life—for example, setting up the best form of business organization for you, obtaining and negotiating mortgages for your homes, protecting your profits through various savings techniques, paying your personal and business bills, monitoring and securing your insurance needs, and even working through the multitude of problems resulting from a divorce.

  FINDING THE RIGHT PERSON

  It is essential that your business manager be one who can and will agree to coordinate with the other professionals in your life: in particular, your personal manager and attorney.

  Because non-CPA business managers are not licensed, artists must go beyond the title of “business manager” and explore the backgrounds of the people they interview. Certainly, one need not be a CPA in order to be a competent business manager, and many business managers who are not licensed have licensed CPAs working for them. They can also outsource work that requires a kind of expertise they might not have themselves, for example, audits.

  CERTIFIED PUBLIC ACCOUNTANTS

  Under most state laws, one can hang out a shingle as a tax preparer or accountant without any particular education, degree, or certification. This is not true of certified public accountants (CPAs), who are highly trained professionals. No one lucks into being a CPA. They have to have a background of business law, financial courses, tax courses, auditing courses, and government theory courses, followed by several years of apprenticeship under other CPAs. Sounds like an old movie? It is. Everything but the green eye shade.

  The American Institute of Certified Public Accountants (AICPA) has recently authorized licensed professionals to receive fees and commissions from the sale of various financial products, including insurance, which means that a CPA who is also a AICPA member can now legally receive a percentage of the investments that he or she suggests that a client make. This is not necessarily a bad thing, but it is something that has in some cases caused clients to wonder whose side the CPA is on. (See this page, “Investing: Is Anyone in Charge Here?”)

  Audits

  An audit is an examination of a person’s or company’s books and records. When a royalty statement is received by an artist’s business manager or accountant (or lawyer, particularly if the lawyer administers the artist’s copyrights), it is customary for the recipient, or a accountant hired by the business manager, to perform what is known as a desk audit. Desk audits are distinct from formal audits, or certified audits that can only be performed by CPAs. Anyone who is responsible for collecting the artist’s (or writer’s) money should take the responsibility for knowing what the artist has done—songs written, albums recorded, synchronization licenses authorized, etc.—so that when a statement comes in, a quick glance can determine whether the statement is relatively accurate. Formal audits can come later, if necessary, but in many cases an error uncovered by a desk audit can be corrected immediately, often avoiding future duplications of the error. In addition, if resolved early, the irregularity will not be subject to the settlement (read: compromise) process years later, which is how most formal audits conclude.

  Keeping Track

  In most instances, your business manager will be working for other clients, and his or her staff, not the person you so carefully investigated and ultimately engaged, will handle the day-to-day activities of your “account.” It is crucial to have firsthand knowledge of these staff members, who can range from capable to disastrously incompetent. Unfortunately, you have no choice but to depend on other people to do for you what you would do for yourself if you had the time or the training. Therefore, it is essential that you, or your lawyer or manager, review your financial status regularly—preferably together—to keep a close eye on things.

  Many business managers provide to artists on a monthly basis a computer printout of monies received and deposited into their accounts, and monies spent; also identified are the source of the receipts and the destination of the outgoing monies. Absent is any regular tax planning or budgeting, and the client has no real awareness of the bottom line insofar as assets and liabilities are concerned or any true sense of the total financial picture.

  Other business managers do provide more—specifically: budgeting, profit-and-loss statements, and a monthly analysis of investment positions. What a business manager does may be, in part, a function of the ability of the average client to pay fees, since all time spent, and all documentation, costs money; but an artist who is generating fairly substantial sums of money is not only entitled to this level of service, but probably needs it.

  Some business managers (I would like to say all, but this is just not the case in the real world) meet with their clients and clients’ spouses regularly—at least twice each year and sometimes four times each year. These meetings should be inviolable. Only an emergency should keep them from taking place. For a touring artist, they can be held on the road. The artist’s lawyer, and sometimes the manager, should be at these meetings.

  Not all clients really want to know the truth about their financial health. They prefer to be “in denial,” despite the fact that avoiding financial reality can put them into the very position they were fearing: total collapse of security and a loss of everything they have built up over the years. So in whose hands is the responsibility for the psychological cure going to be placed? The business manager’s. In the best-case scenario, information will be freely exchanged among the artist and other business professionals, and this will benefit the client by allowing reality to sink in. Decisions based on reality will obviously be more sound than those based on ignorance or—worse—fantasy.

  Speaking of reality, here is an example in which an artist can be jolted into the truth. A good business manager will always give you the bad news as well as the good. When the IRS or state department of taxation examines a taxpayer’s books and records, if a deficiency is found, not only does it have to be paid; the final audit report is supposed to be signed by the taxpayer. If your business manager is not straightforward with you, he or she might sign the document on your behalf. The business manager will already have your power of attorney in order to sign checks, open bank accounts, and handle other financial arrangements. In such a case, you wouldn’t suspect anything was wrong unless you were diligently observing the ins and outs of your bank account. It is not only you, the artist, who benefits from openness and honesty. From the business manager’s point of view, there is value in the sign-off, as it gets him off the hook because it is a formal declaration that the client has examined and understood the result of the audit. Your understanding with your business manager or accountant should specifically reserve this right to yourself—and in writing.

  AUDITING THE AUDITOR

  If you believe your business manager (or accountant) is guilty of shady practices, or of not following generally accepted accounting procedures, you are perfectly within your rights to institute an audit of that person’s books. Sometimes such audits will turn up ill
egal practices. (One famous artist’s accountant who ultimately went off to jail actually paid his own taxes with his clients’ money, audited his own books—with predictable results—and even charged the artist with the costs of the audit!)

  When you secure the services of an independent CPA to audit your business manager’s books and records, the report that is issued will likely affirm that the business manager is (1) not stealing, (2) not doing things that are ridiculous (for example, putting all of your assets into a checking account earning 2% interest), (3) complying with federal and state tax laws, and (4) maintaining orderly and complete files in anticipation of a future IRS audit. Sometimes it is comforting to know that all is in fact well. That will have positive resonance for both of you.

  WHAT KIND OF BUSINESS IS BEING MANAGED?

  If you are a sole proprietorship and rent a van to go to a gig or if you are a corporation and rent a van to go to a gig, which rental car expense is more likely to be deductible as a business expense? Trick question. The answer is both are equally deductible. Many people going into business for themselves—and artists are no exception—are motivated to incorporate simply because they believe that unless you have a corporation, you cannot deduct certain business expenses. This is a myth. If you spend money for business purposes, it is deductible. Period. You do not need a corporation to do this. Despite this, many accountants will suggest that deductions taken by corporations are more likely to survive an auditor’s sharp eye, or that the IRS regards a corporation as somehow more “legitimate” than a sole proprietorship (a so-called dba, which stands for “doing business as”) or a partnership.