Inside Mavin's $175 Million Sale: Exploring the Intricacies of Acquiring a Record Label (pt.3)

Catch up from pt.1 and pt.2 here

So, after these examinations, there are certain formulas or methods that may be considered to be able to value the worth of the investment. Like every other business, there’s no one-size-fits-all approach to valuing a record label. In some cases, the valuation of a company is arrived at using a mix of multiple formulas, and in other cases, just one formula might suffice.

While Mavin (with an assist from her investment bank, Shot Tower Capital) has done her homework to arrive at a $150 million - $200 million ($175 million) valuation, a potential investor/buyer will also do theirs and a myriad of formulas & factors can be applied to reach the final figure. For the sake of this piece, however, let’s explore some low-hanging methods for valuing the company.

1. The Market Multiple Approach

The Market Multiple Approach is used to value a record label by comparing it to similar companies that have been recently sold or valued. Before potential investors or buyers finalize such a transaction with Mavin, they may want to identify comparable companies in the music industry. These could be labels that are similar to Mavin in terms of size, financial performance, genre focus, market share, etc.

Once a good set of comparable companies has been identified, they look into key financial metrics such as revenue, profit margin, growth rates, market share to serve as benchmarks for determining the valuation multiple that will be applied to Mavin.

Let’s do this!

Imagine the potential investors/buyers find three comparable companies; say:

1. Kraks Records: A label similar to Mavin in terms of genre focus and market share that recently sold for $100 million, at an annual revenue of $20 million.

2. Jungle Records: Another label comparable to Mavin for its strong growth that was recently sold for $150 million with an annual revenue of $25 million.

3. Kennis Record: A label with a relatively smaller market share but strong profitability that recently sold for $80 million, with an annual revenue of $15 million.

Now, calculate the valuation multiple by dividing the sale price of each company by its revenue:

• Valuation Multiple for 300 Records = $100 million ÷ $20 million = 5x

• Valuation Multiple for Jungle Records = $150 million ÷ $25 million = 6x

• Valuation Multiple for Kennis Records = $80 million ÷ $15 million = 5.33x

Now, calculate the Median to determine the appropriate valuation multiple for Mavin:

Average Valuation Multiple = (5x + 6x + 5.33x) ÷ 3 = 5.44x

Then apply this valuation multiple to Mavin’s annual revenue. Let’s imagine that across every revenue stream, Mavin generates $10 million yearly.

Estimated Value = Revenue x Valuation Multiple

Estimated Value = $10 million x 5.44x = approximately $54.4 million

Based on the Market Multiple Approach, Mavin’s valuation would be approximately $54.4 million.

Don’t forget that the accuracy of valuation depends on the selection of appropriate comparable companies and the reliability of the financial data used. In real instances, this exercise could get more complicated but this gives you an idea nonetheless.

2. The Discounted Cash Flow (DCF) Method

This method estimates the ‘present value of Mavin’s future cash flow’. We will calculate this in steps.

Step 1: Cash Flow Projections

You will project the future cash flow that Mavin is expected to generate. This involves estimating revenues, expenses, and Free Cash Flow (FCF) over a specific forecast period.

Let’s say Mavin is projected to generate the following annual free cash flows (FCF) for the next five years:

• Year 1: $3 million

• Year 2: $4 million

• Year 3: $5 million

• Year 4: $6 million

• Year 5: $7 million

Step 2: Determine the Discount Rate

Discount rate represents the cost of capital or required rate of return for investing in Mavin. It may encompass factors such as risks associated with the music industry, economic conditions, Mavin-specific circumstances, etc.

So, let’s assume an agreed discount rate of 10% per year between all parties.

Step 3: Calculate the Present Value

Now, you’ll discount each projected cash flow to its present value using the discount rate. This accounts for the time value of money - implying that the value of money decreases over time due to inflation and the opportunity cost of investing capital elsewhere. 

At this point, we’ll introduce the DCF formula which would be:

(CF₁ ÷ (1 + r)¹) + (CF₂ ÷ (1 + r)²) +  (CF₃ ÷ (1 + r)³) + (CF₄ ÷ (1 + r)⁴) + (CF₅ ÷(1 + r)⁵)

• CF₁ represents Mavin’s expected cash flows for each period (e.g., year or month)

• r represents the discount rate, i.e the required rate of return or the cost of capital

• ¹, ², ..., ⁿ represents the respective time periods for each cash flow

Let’s calculate for Year 1 first

So, the present value calculation for Year 1 using the formula CF₁ ÷ (1 + r)¹ will be:

  = $3 million ÷ (1 + 10%)¹

• Step 1: solve the Bracket (BODMAS, remember 🤗)

(1 + 10% or 0.1) equals 1.1

• Step 2: Exponent Calculation

(1 + 10%)¹ means raising 1.1 to the power of 1, which equals 1.1

• Step 3: Do the Division

$3 million divided by 1.1 is approximately $2.7 million

This means the present value of Mavin’s future cash flow for Year 1 is $2.7 million.

Now,  repeat this calculation for the remaining years and add up all the present values:

Present Value (Year 2) = $4 million ÷ (1 + 10% or 0.1)² = $3.3 million

Present Value (Year 3) = $5 million ÷ (1 + 10% or 0.1)³ = $3.8 million

Present Value (Year 4) = $6 million ÷ (1 + 10% or 0.1)⁴ = $4.2 million

Present Value (Year 5) = $7 million ÷ (1 +10% or  0.1)⁵ = $4.6 million

Total Present Value =  $2.7 million + $3.3 million + $3.8 million + $4.2 million + $4.6 million = $18.6 million

Step 4:  Determine Terminal Value

At the end of the forecast period (year 5, in our case), we will estimate the terminal value of Mavin. This represents the label’s value beyond the forecast period, and a commonly used approach is to apply a perpetual growth rate to the last projected cash flow and divide it by the discount rate.

Terminal Value =  (Cash Flow at the end of the projection period) × (1 + Growth Rate) ÷ (Discount Rate - Growth Rate)

A growth rate will be agreed upon by all parties involved. So, let’s imagine that in 5 years, Mavin will have about a 2% growth rate.

Terminal Value = ($7 million) × (1 + 2%) ÷ (10% - 2%)

Use BODMAS

• Step 1:  (1 + 2%) = 1.02

• Step 2:  (10% - 2%) = 0.08

• Step 2: ($7 million) × (1.02) ÷ (0.08) = $89.25 million

Step 5:  Sum Up ‘Present Value’ and ‘Terminal Value’

Now, we will add up the Total Present Value ($18.6 million) and the Terminal Value ($89.25 million) to arrive at Mavin’s estimated value.

Estimated Value = $18.6 million + $89.25 million = $107.85 million

I really hope you understand this and if you don’t, feel free to write back. I’m happy to explain better.

Before I forget - when valuing a record label, it's important to consider unpredictable factors that can greatly influence its worth. While the music industry tends to be less swayed by traditional economic fluctuations, recent years have taught us that unforeseen events can reshape the trajectory of some records.

A popular TV show or TikTok can breathe new life into old records and expose them to a fresh audience. We must’ve observed something of this nature with the recent virality of Problem by Reekado Banks, a former signee of Mavin. This record, however, remains in Mavin’s custody.

I mean, even scandals, the unfortunate passing of an artist, or advancements in technology can all have profound impact on a record label's valuation. That’s why this exercise might be more complicated than a regular business’. It is also why I’m convinced that Mavin’s management, being fully aware of these possibilities, is unlikely to let go completely. At best, potential investors/buyers gets majority stake in the company.

They (Mavin) are seasoned enough to consider the music industry’s dynamic nature and the importance of certain opportunities that can arise with Afrobeats - as we’ve seen in recent years.

Now, let's dive into an intriguing part regarding potential partners for Mavin, taking into consideration the reported interests from HYBE and Universal Music Group (UMG) as highlighted in the Billboard piece.

Adding to these two, the possibility of other interests that may surface include Warner and Sony, the other two prominent majors in the music industry.

Why do I think so? Because apart from UMG, these other majors (Warner & Sony) have also been making some interesting acquisition moves lately.

• Warner’s Acquisition of 300 Entertainment for $400m:In 2021, Warner acquired 300 Entertainment, label to Megan Thee Stallion, Young Thug, Gunna, Fetty Wap, Mary J. Blige, and more. Despite the acquisition, 300 Entertainment will maintain its independent identity, and the entire team will continue to operate from their separate headquarters in New York.

• Warner’s Acquisition of 10k Projects for an Undisclosed Sum:Recently, Warner acquired majority stake in 10K Projects, an emerging record company best known for representing rapper Ice Spice. As part of this agreement, 10K Projects will continue to operate as its own label under the Warner Music umbrella, joining the ranks of Atlantic Records, Elektra etc. According to the CEO of 10K Projects, Elliot Grainge, “the acquisition provides us with the support, collective expertise, and long-term vision needed to empower our artists and employees in the next chapter of our journey”. This about how I imagine the deal between Mavin and its future partner will be shaped.

• Sony’s Acquisition of AWAL for $430mThe list is endless!

In such instances, as Mavin evaluates potential interests and offers, its final decision will be guided by certain factors beyond fund injection such as shared vision, global reach and network, expertise, alignment of values, and bandwidth to support Mavin's growth and artists' development etc.

With all these in consideration, I’m biased towards one of the aforementioned interested companies and we’ll talk about it in the next and final one - same time tomorrow.

Updated: Read pt.4 here