Here are some recent company case studies. These case studies have names removed but are companies we have worked with and have close knowledge of.

Royalty Fraud

Posted on March 12, 2014 by in Band Jam, Blog, Case Studies

The article, “Royalty Fraud” by Cooper CPA Group member, David Acosta was published on Music Think Tank last week.

From cheating managers and promotors to IRS issues and straight up financial mismanagement, there are many reasons the list of music legends who have lost it all is a long one.  David Acosta, CPA is an expert in helping music artists navigate and protect themselves from the financial downside of the music industry. Here’s what he has to say regarding royalty fraud.

How does royalty fraud happen?

There are many variables when it comes to royalty distribution and the calculation of rates. It is an extremely complex and controversial process.  Not only do rates vary by type (CDs, digital, streaming, television and film, video games) but the calculation of royalties is different for songwriters, publishers and the recording artist. As Courtney Love pointed out in her letter to music artists, “Record companies also reduce royalties by “forgetting” to report sales figures, miscalculating royalties and by preventing artists from auditing record company books.”

How is royalty fraud detected?

It starts with the contract. Negotiate terms that lend themselves to accounting controls such as demanding payments and summaries at regular intervals with detailed backed up. Review the summaries immediately and carefully to ensure contract compliance.

How are royalties distributed?

Royalties are typically paid either monthly, quarterly, or annually.  Royalties are paid after all the deductions are calculated.  Some artists never see any royalties because of recoupment.

How do you calculate lost revenue? 

Most analyses use a combination of historical or past performance. In some instances, we have to project what income the artist could have made but for the actions of the record label.

How do you recover lost revenue? 

As accountants, we start by conducting an audit. If the numbers differ from the record label’s numbers, we make a demand for any money owed.  Unfortunately, this is when lawsuits arise.  If we have a solid case, it is likely to settle for an amount usually less than 100 percent of what is owed.

Who manages royalty compliance? 

Lawyers are usually involved during contract negotiations, but in terms of compliance, it is usually the business manager who keeps track of royalties owed.  Unfortunately, many business managers aren’t savvy when it comes to keeping up with complicated royalty formulas.  It’s best to have a CPA on the team. That’s why they call it royalty accounting.

David Acosta, CPA has more than 25 years of accounting experience and serves on the Board of Directors of the Texas State Society of Certified Public Accountants and the Board of Governors of the Texas Chapter of the National Academy of Recording Arts and Sciences (Grammy Awards©).

How to Lose it All

Posted on August 10, 2012 by in Blog, Case Studies

Close Calls, Near Misses, or Worse – How to Lose it All

It is much easier to avoid sensitive issues like failing health or the possibility of dying rather than face them head on. But what happens to your company, your family, and your legacy if something unexpected happens to you? Is it worth jeopardizing everything you’ve worked for?

Mike R. had worked hard all his life to create a successful manufacturing business that would ensure his wife and kids were well taken care of financially.  All was going according to plan until he was diagnosed with cancer, and even worse was the fact the disease was in its final stages. Mike was faced not only with dealing with his illness, but with having to scramble to save the value of what he had created. His wife certainly didn’t know how to run the business and without a succession plan or even insurance, everything he’d worked for over 25 years would evaporate within 48 hours after his death. The best case scenario would have been an equipment auction that would have netted about 10% of the total worth. Fortunately with the help of a broker, Mike was able to secure a buyer and closed the deal a mere five days before he died. It was a close call, but in the end his legacy was intact and his family ended up with a $10 million dollar nest egg to secure their future. 

Unfortunately, many owners have not had the time that was afforded to Mike.  Some have suffered an out of the blue event that left their family facing a bleak reality. At 48 years old, Ralph F. had a bright future ahead of him.  As the inventor of the first rocking theatre seat, Ralph had made a mint with his creativity and vision. He then capitalized on his initial success and established several other businesses which were in a rapid growth phase. As he was enjoying his success with nothing but blue skies on the horizon, he was unexpectedly struck down by a fatal heart attack.  Aside from the trauma of losing Ralph, his family had to suffer the financial consequences of having a fire sale for an otherwise thriving enterprise. 

Part of the planning process is to make sure you have adequate insurance to cover the tax burden if there is a catastrophic event. In addition, a solid succession plan ensures that if something unforeseen does happen, you have management in place that can control the operations until matters can be properly sorted out. While these measures will protect you from tragic misfortune, knowing upfront that buyers will expect you to comply with a rather rigid set of rules allows you take full control of the process and your future.

Patience Pays Off

Posted on March 2, 2012 by in Blog, Case Studies

The owner of a $20MM run rate energy related machine shop started thinking about selling his company in the middle of 2009. We met and discussed the state of the market. Seeing that his revenue was down 40% from the peak of 2007, we recommended patience. The energy market is very cyclical and we believed that we were in the trough. He already had a sophisticated financial accounting program.

The Transaction

We formally engaged this company in 2011 and started the process of taking in to market. With the energy market near the peak, or at least much improved over 2009, we found multiple interested parties. We found and negotiated a deal with a private equity group that already owned a significant company in this industry. The deal ended up as a fair deal and good multiple based on a record breaking year of earnings. The management team was well taken care of in the transaction.

The Moral of the Story

Patience paid off for this business owner. He had the foresight to get professionals involved in his company early in the process of his transition. The value created in the three years from when he first contemplated his exit was sizable (on the scale of $10MM). The systems he put in place made the company attractive to buyers and relatively easy to prove earnings and profitability.

A Near Miss

Posted on February 8, 2012 by in Case Studies

Owner of a manufacturing facility gets introduced to my firm and announces he has Stage 4 cancer and will not live much longer. Except for some personal life insurance, no real succession plan to speak of. We were engaged and conducted an accelerated sale process which resulted in three interested parties. Owner passed away two days before his wife signed a letter of intent. We closed the deal with the family getting a fair market price for the company.

Non-standard Aspects

We had to make an announcement to the employees and customers that the company was for sale before we had a final buyer. Both employees and customers knew the owner was dying and had pressing questions about the long term viability of the company. We (advisors) were open and honest about the state of the company to both parties. We told them we had three bidders and did not know which one was going to be the ultimate buyer. All bidders had the desire to grow the company and steps were being taken to ensure the long term continuity of the company (i.e. material was purchased, payroll was being processed, checks were going to cash.)

The Bottom Line

The owner of this business came within 48 hours of being too late to sell his company. If he would have passed away without being within striking distance of having a deal, customers would have sent their work elsewhere and employees would have followed. The widow would have had a used equipment liquidation auction and ended up with roughly 10% of the fair market value for her husband’s life’s work.