2.0 Advances

2.1 How Do They Work?

An advance is a prepayment of royalties and is recoupable from those royalties. However, the advance is nonreturnable. Royalties take a long time to work through the system and often longer to reach a level sufficient to achieve recoupment. The majority of recording contracts remain “unrecouped”, i.e. the artist never receives a royalty cheque. The safest approach for an artist (in terms of forward financial planning) is therefore always to approach a record deal on the basis that any income will be limited to the contractual advances (although beware of cynicism: see paragraph 4.0 below).

2.2 Costs Inclusive?

It is usually preferable for an artist’s advances to be exclusive of recording costs so that the record company pays recording costs (up to an agreed budget and on a recoupable basis) in addition to the advances stated in the contract. The advantage is that the artist can plan and budget for his general expenditure. In a long term record deal part of the advance for the first album is normally paid on signature and the balance on delivery (or perhaps release) of the album. The date on which the balance of the advance is paid is therefore uncertain. Nevertheless, under a costs exclusive deal the artist can more easily make sensible financial plans than if the advance includes recording costs. Even though a recording costs budget may be set, it is notoriously difficult to keep within it. A company will often insist on a costsinclusive deal even though when the deal is signed, and the advance agreed, neither party has a clear idea of the likely recording costs.

On the other hand, if the artist has control over the recording process and has developed a degree of skill in producing first rate recordings at a modest cost (perhaps he or she already has his or her own home recording studio) there may be an advantage in securing a costsinclusive deal. The costs inclusive advance may be greater than the aggregate of any personal advance he or she might have obtained, together with any actual recording costs. Against this, of course, if the artist does have his or her own recording facilities, the company may use this to its own advantage by depressing the level of the advances which might otherwise have been paid.

2.3 How Much?

Historically, UK record companies paid an advance to the artist and, separately, paid all of the record costs. Most deals are now costs inclusive. In the case of an album deal the advance for the first album might fall in the range of £50,000 to £150,000. This will obviously be affected by the nature of the music and how it is to be recorded. There is from time to time the exceptional case which would fall way outside this suggested range.

Usually, the size of any advance is determined at least in part by the artist’s actual financial requirements so that, for example, a solo artist might expect a lower advance than a group. However, if the artist’s negotiating position is strong, the level of the advance may be determined less by actual need and more by a combination of market forces and the record company’s perception of likely sales.

When negotiating an advance, figures preferably should not be plucked out of the air. The artist or the artist’s manager should at least attempt to justify what is asked for. A record company does not expect to support a life of luxury for a new artist but it does have to recognise that basic living costs must be covered. Likewise, the manager has to be paid since he also has a living to earn, so his commission entitlement should be factored into the equation. Beyond this, funds may be required for equipment and/or stage clothes and/or perhaps a van to carry the equipment. Lawyers and accountants also need to be paid. Perhaps the lead vocalist would benefit from singing lessons, which will also have to be paid for.

The record company will want to know the publishing situation. If the publishing deal is in place, the record company may suggest that it is unreasonable for the record company to underwrite all of the artist’s anticipated expenditure and that the artist should approach the publisher for part of the funding. If no publishing deal is in place, the record company will suggest to the artist that he or she finds one. In the case of a group with perhaps one principal songwriter there is the problem that the songwriter will (understandably) not wish to allow his or her publishing income to subsidise the group’s recording activities.

2.4 CrossRecoupment

Essentially, all royalties which accrue under an agreement will be used to recoup all advances. For example, if the first album is an expensive flop but the second album takes off, the company can use royalties from the second album to recoup the costs of the first album as well as the second album (and the third and later albums). This concept of cross-recoupment is sometimes referred to as crosscollateralisation. Sometimes (but rarely) the artist may be able to impose restrictions on the company’s crossrecoupment rights. For example, if the company has control over the artist’s back catalogue and a new deal is structured for future recordings, the company might agree that royalties from the back catalogue will be free flowing and will not be used to recoup advances paid for new recordings. As we have seen, a company may occasionally agree to recoup remix costs only from the remix in question. Sometimes, probably only after a renegotiation, royalties from a particular territory or territories may be free flowing. Alternatively, they might be available for recoupment only of advances which are paid specifically in relation to sales in that territory. For leaving members there should be limitations on the company’s crossrecoupment rights between the original agreement and any leaving member agreement (see paragraph 7.0 Part II).

2.5 Associated Agreements

None of the majors now insists that an artist must sign a publishing contract with its publishing affiliate, as a condition of entering into a recording contract. Even if by choice the artist does sign a publishing contract with an affiliated company, there would be no crossrecoupment other than in extraordinary circumstances. For example, perhaps in the context of tax planning arrangements, the record company and the publishing company might be persuaded to pay substantial advances during a particular financial year but only on condition that crossrecoupment will apply. Smaller companies still sometimes insist that an artist signs recording and publishing contracts with related companies. This should be resisted but if recording and publishing contracts are signed with the same company (or with affiliated companies) it should be made clear that there is to be no crossrecoupment between them.