How to start up a record label

A band recording a single in a orange recording studio

A band recording a single in a orange recording studioIndependent labels have benefited from the resurgence in sales of vinyl records in recent years, although some cut costs by releasing only digital music. Our practical guide will help you start up and run your own record label business.

Research your target market

Finding artists for your roster

You need to find out if you'll have access to enough talented artists to make your label a success. It is likely that you and your employees already have a good knowledge of the local music scene but if you don't, there are some obvious starting points, including:

  • local independent record shops
  • local promoters
  • recording studios and local gig venues
  • music journalists from your local newspaper
  • social networking websites with a music focus which unsigned bands and independent record labels use for promotion. These include SoundCloud, LastFM and Myspace. Bands may also use general social networking websites like Facebook and Twitter for promotion purposes, as well as maintaining their own blogs

Of course, thanks to the internet it's now much easier to connect with unsigned artists from all over the UK and not just from within your local area.

Estimating demand

It is also important that you find out whether there will be demand for the music that your artists produce, particularly if you aim to specialise in a particular genre of music. Again, you could talk to record shop owners to find out what people are buying as well as club DJs and promoters. As a small record label, you will always be looking for artists that other labels have overlooked but that will be successful with some promotion.

Why will artists choose your label

When you do find an artist that you want to sign to your label, you need to make sure that the feeling is mutual! While some artists will just be happy to be signed, others may require more persuading that yours is the best label for them. Artists may choose you because of some or all of the following:

  • you are prepared to offer a larger advance than your competitors
  • you offer a more favourable royalty split
  • you have strong ideas on how your relationship with the artist will grow and a clear goal for the future
  • your promotional and networking skills are better than your competitors'
  • you offer more artistic freedom to your artists

Research current trends, plus legal and tax issues

Establish your customer profile

Who will you be selling your records to?

Ultimately, your label's records will be bought by individuals for the most part, so you need to decide how they will end up in their hands. There are a number of ways of achieving this, including:

Dealing directly with record shops

Dealing directly with record shops may be the only way that you can supply to a wider audience if you are unable to secure a distribution deal. In almost all cases, the record shop will operate on a sale-or-return basis, meaning they won't pay anything up front for the records you supply. The benefits of dealing directly with a record shop are that you may have a better chance than anyone else of persuading the shop to take your records as you are likely to be very passionate about your artists. Also, you do not need to pay anyone a percentage to do your distribution for you. The downside is that it will be time consuming and you are unlikely to be able to cover as much ground as a specialist distributor. Bear in mind though that there is not a great number of independent record shops so you may find it difficult to find a large enough local market for your records

Using a distributor

If you use a distributor, you will enter into an agreement to pay them a percentage of the income from every record that you sell. However, a skilled distributor is likely to be able to get your products placed in more shops than you could hope to achieve yourself and your relationship with the distributor is likely to be beneficial to your business. The distributor does not buy your records from you but will get record shops to stock them, generally on a sale-or-return basis. At the end of the agreed sale-or-return period, the record shop pays the distributor for all the records that they have sold and the distributor, after deducting their percentage, passes the balance on to you.

Selling direct

You may choose to make some direct sales of physical format music as well as selling through record shops by:

  • selling through your website
  • operating a mail order scheme
  • selling records at gigs and club nights

Make sure that your prices do not significantly undercut the prices charged by the record shops that carry your stock or you run the risk of souring relationships.

Selling digital music

If you're planning to sell your music in digital format, you'll need to give some thought to how you'll achieve this. The options include:

  • selling through your own website or digital shop
  • setting up a direct deal with digital service providers like iTunes or a streaming service like Spotify. While this will mean that you don't have to pay anyone else to distribute your digital music for you, managing your relationships with these providers can be difficult and time consuming and you'll be required to meet all the content delivery requirements. (Spotify doesn't actually deal directly with new labels but instead directs those that manage their own digital business and have the capability to deliver via a digital feed to join the Merlin network.) A more practical alternative may be to sell through a distributor or aggregator
  • using the services of digital distributors and aggregators. These provide a similar service to distributors of physical format music and will take responsibility for converting your music to the required format and dealing with digital service providers and streaming services in return for a percentage of your profits

Royalty payments and advances

You need to work out how much you will pay to the artists on your roster. These payments may include an advance as well as royalty payments.

The advance

If you can afford it, you may decide to offer an advance to some of your artists to help them cover the recording costs they will incur in producing a record. The advance is a loan to the artist which you will recoup from the artist's share of the profits from the sale of the record. You will have to decide if you will offer inclusive or exclusive advances. With an inclusive advance, it is intended that the artist will pay for all of the recording costs out of the money that you give them and with an exclusive advance, you would give the artist a certain amount to cover their living expenses then arrange and pay for the recording yourself.

Royalty payments

Before signing artists to your roster it's a good idea to give some thought to the level of royalty payments that you will offer them. It is common for a small record label to offer to split the profits of a record equally with the artist, once the costs of making the record have been recouped. Alternatively, you may decide to use the method used by the larger record labels which is to pay a percentage of the Published Price per Dealer for each record sold. The Published Price per Dealer is essentially the wholesale price of a record - ie the amount that a record shop would buy a record for before it adds its own mark-up. The percentage offered to an artist varies but may be around 15%.

Buy an existing business

You might decide to buy an existing label rather than start your own venture from scratch. Buying a going concern can mean that:

  • the premises and business equipment are already in place
  • there are established relationships with distributors, digital service providers, aggregators and record shops
  • there is already an artist roster
  • the business can generate income immediately
  • suppliers have been identified and relationships established with them
  • the business has a track record, which can help if you are looking for finance
  • staff are already in place
  • a business website has already been set up, possibly with the capability for selling music in physical and/or digital format

However, look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale - for example, is the owner keen to retire or is there another personal reason for selling up.

Your market research into the sector as a whole and the locality in particular will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high.

Other matters to consider include:

  • the state of the premises, fittings, equipment and so on. Will you have to spend money refurbishing or replacing assets
  • existing staff rights
  • how to retain key personnel and artists once you've taken over
  • does the business owe money that you will be responsible for
  • if you are paying for goodwill, to what extent does this depend on the skills and personality of the seller

Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees and valuation and survey costs.

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