Topping the charts: starting a record label is risky business. But with the right mix of music, marketing, and manpower you can hear the sweet sound of success.

WHEN C. MICHAEL BRAE ENTERED THE doors of Oakland's Alien Temple Baptist Church in 1991, he didn't expect to find an opportunity to own his own record label. But as chance would have it, that's exactly what happened. "I played the organ on Sundays, but on this particular Sunday, a gospel artist named Grady Harris Jr. was playing," remembers Brae. "We met after service and I noticed that he had left a cassette on top of the organ marked 'Sounds of Soul Records' so I asked him about it and he said that it was his label. He could see that I was intrigued so he invited me over to his apartment, but when I got there he said 'this is my label.' He just had a keyboard and all these 24 tracks. That's it."

Excited by the chance to exercise his business chops, Brae, a former investment banker, offered to partner with Harris. The two drew up a partnership agreement: Brae would get 50% of record sales and 25% of publishing. Using a small portion of his $20,000 in savings, Brae leased a 1,800-square-foot office in downtown Oakland, built a small recording studio inside, and through consignment began distributing the label's sole artist--Grady Harris and Friends.

Delivering cassette tapes out of cardboard filing cabinets, Brae sold nearly 1,200 units in over 100 mom- and-pop stores throughout Oakland, San Francisco, San Jose, Sacramento, and Los Angeles. Still, Brae wanted more--more artists, more units, and more distribution. He realized quickly that he needed to go solo. "[Grady] was leaning more toward the production side and was focusing primarily on gospel music. I was leaning more toward the business, record label, and distribution side and wanted to focus on gospel, hip-hop, R&B, and everything else," he says. Later that year, Brae created Hitman Records.

Today, atop the 41st floor of an upscale office building in San Francisco's financial district, Hitman Becords is home to nine artists, including Young Mike, Elijah Henry, and Damaris. Brae, 42, now works with distributors such as Kansas City's Harvest Media Group and New York's Sumthing Distribution to distribute music to more than 9,000 U.S. retail accounts. Tower Records, Virgin Mega, Best Buy, FYE, Sam Goody, Wal-Mart, and Target are just a few stores that stock the label's tunes. Through its own distribution pipeline, Hitman Records also helps circulate the songs of over 30 other independent labels such as Roc Music, JazzyBoo Records, Tune Key Productions, and Jewel Thief Entertainment.

With nine employees, Brae's company earned approximately $900,000 in revenues this year. He's also working on a partnership with Audio Lunchbox, a Los Angeles-based digital download company that would put Hitman in charge of retail distribution for the company's 5,000 labels. In addition, Brae is also crunching numbers for a new project with R&B's Tony! Toni! Tone!

Brae is just one of many entrepreneurs reaping the benefits of the music business. According to the National Association of Record Industry Professionals, the record industry is a $38-billion-a-year business fed as much by the thousands of small independent labels operating out of the basements, car trunks, and studio apartments of music mogul hopefuls as it is by the four major multinational establishments. However, very few new record labels survive the startup phase due to of poor cash flow. They also succumb to the pressure of having to wear many hats and not truly understanding the business.

There's no doubt that this business is tough. Fewer than 2% of all songs released in the U.S. make a profit, and with Mp3 bootlegging eating into overall sales, the industry is in a crunch. However, those who plan properly, set realistic goals, and exercise patience and perseverance can find success. In this installment of the BLACK ENTERPRISE Dream Business series, we'll look at some of the pros and cons of starting a record label.

RECORDING THE COSTS

Whether you want to produce smooth jazz, soul-stirring gospel, or sultry R&B, starting a record label doesn't have to be a costly endeavor. Startup costs vary depending on a number of factors--location, the size of your staff, the budget for recording costs, promotions, manufacturing, and the amount and types of equipment used--but new label owners can begin mixing beats for as little as $5,000.

"I've seen record companies start with $5,000 and I've seen some people start with half a million dollars. But it doesn't really cost a lot of money to start a record label today because new technology and digital recording have made it possible to record with a lot less equipment than you needed in the old days," says Brian Lassiter, owner of World Premier Distribution and PowerPointe Publishing. "So basically, if you have a computer, the right software, a couple of speakers, sound modules, and dram machines, you're in business."

While the startup phase may be easy on your bank account, maintaining and growing a label requires much deeper pockets. Lassiter, whose company has distributed products for artists such as Twista, Young Jeezy, and Ghetto Mafia, says the biggest expense for new labels is marketing and promotions. This figure can sometimes account for nearly 50% of expenses. "In fact, it costs more to promote and market music than it costs to make music," he says.

Whether you start your label on a shoestring budget or break the bank trying to get into the biz, the costs can mount quickly. Record executives say typical startup costs for a label include:

Licenses and legal paperwork: In order to sell your CDs to the public you will need to obtain a retail license. Fees vary from state to state, so check with your state department of revenue for the exact cost. Also, secure a Universal Product Code (U.P.C.) from GS1 US (formerly known as the Uniform Code Council, www.uc-council.org). You must become a member of GS1 US to obtain a U.P.C. Bar Code. The membership fee is based on your gross sales revenues and the number of products that will be identified with the U.P.C. More than 85% of all retailers use Soundscan, the technology that monitors retail sales, so this bar code is required on the back of a product. If you plan to grow your label into a brand you may also want to consider trademarking your company name (www.uspto.gov). The trademark process can cost from $500 to $5,000. To protect against someone lifting your lyrics without your permission, register your songs with the U.S. Copyright Office (www.copyright.gov). The registration fee is $30 per submission.

Recording fees: This depends on whether you operate from home or rent studio time. Costs also vary according to the types of equipment used and whether outside musicians, producers, and engineers are hired. With an in-home studio, use of the popular software program Pro-Tools (the basic version), a computer with lots of memory, and a keyboard, you can spend less than $15,000 in recording fees. If you plan to rent studio time and bring in known musicians, producers, and engineers, the costs increase. Entry-level studios charge anywhere from $30 to $60 an hour, mid-level studios cost $60 to $125 an hour, and top-of-the-line studios command $250 to $300 an hour up to a few thousand dollars per day. As for top-level musicians and producers, they charge by the song, some making $50,000 for a single track. If the label owner builds a digital recording studio, it can cost upwards of $20,000.

Manufacturing: The cost varies depending on which pressing plant you use, but expect to spend at least $1 per CD. That includes the CD, jewel case, shrink wrapping, and cover insert. Lassiter says make sure the plant can handle the quantities you need and can turn around finished product quickly. Cost to manufacture a CD ranges from $1 to $1.30 per 5,000. Most independent labels manufacture about 5,000 to 20,000 units for the first round of pressing.

Marketing/promotions: Spreading the word about your label doesn't come cheap. There are flyers, posters, postcards, press kits, street teams, and other buzz-building materials. "Marketing and promotions should be between 25% and 50% of your budget," says Steve Lurie, who teaches a course called "Developing a Record Label" at New York University. When Brae signed his first artist, 16-year-old R&B singer Melody, to his label in 1992, he spent nearly $15,000 on radio advertising ($5,000), music video production ($5,500), photographs and postcards ($300), retail advertising ($1,500), and publicist fees ($2,000). It varies greatly, but Lassiter says promotion costs start at $50,000 and go up.

Artist advances: Some label owners provide an advance against royalties in the amount of several thousand dollars. Brae doesn't offer advances. Instead, he pays for full production without recouping the costs from his artists. These fees can range from $5,000 to $50,000 for new artists. If the independent label has major distribution, the artist advance can be $100,000 to $350,000.

Administration fees: Depending on how you outfit your office, these costs can vary, but set aside a couple thousand dollars for phone lines, computers, travel, and other incidentals. These costs should average between $3,000 and $6,000 per month.

Star search: A record label is only as good as its artists, so finding true talent is key. Lurie suggests going to live shows, getting recommendations from others in the business, and soliciting demos from prospective talent by placing an advertisement in the paper or on your company Website. Once you find your "American idol," sign the artist to a recording contract. Many contracts last five to six years, with most artists receiving about 6% to 8% of retail sales, but how the terms are outlined is strictly up to you. Brae signs his artists to two-year contracts with one-year options and gives his talent 16% to 16.5% in mechanical royalties from record sales.

Finding talent and negotiating a deal that creates a win-win for both label and artist can be tough, but promoting that artist can be even more difficult. "The average major label spends in excess of $1 million to get a new record to basic levels of consumer awareness," says Tess Taylor, president of NARIP. "But the average independent just doesn't have that kind of money to throw around."

As a new label your marketing push is not Likely to include MTV, BET or Vibe magazine, nor will it include commercial radio, since startup record companies don't have the financial resources or following required to promote their songs on mainstream television or the FM dial. Still, you must find cost-effective ways to spread the word about your music so people will buy it. Some label owners rely on the word-of-mouth generated behind an artist's live show. Others let their Websites and flyers do the talking for them.

Doing the distribution deal: Another challenge for start up Labels is obtaining distribution. Once Brae decided to form Hitman Records he headed for Los Angeles to secure a distribution deal. For an entire month, he pounded the Hollywood pavement, leaving press kits and demos at virtually every label, including A&M Records, Sony, and Capital Records. But it was to no avail. Although frustrated and ready to call it quits, he approached yet another company called SOLAR (Sounds of Los Angeles Records). The label had produced the music of big names such as The Deal, Jody Watley, The Whispers, and Howard Hewett.

Brae met with the vice president's assistant and was promised a call back in one week. Not only did Brae receive the call, he also landed a joint venture with SOLAR. It was a 60-40 split in which the company agreed to pay for the manufacturing, distribution. and promotions of artists signed to both Hitman Records and Sounds of Soul Records in exchange for 40% of record sales. The deal gave Brae's label national distribution with entry into stores such as Tower Records, Musicland, and 20th Century Music in Oakland.

Getting distribution can mean the difference between the success or failure of your label. But attracting distributors is not easy. It's not enough to have hot beats. Distributors want to know that you have a plan to market your music, the financing and manpower to carry it out, and a track record of making some sales on your own. In short, you have to prove to them that your music will sell.

"Too many labels fall into the habit of saying 'well you're the distributor. You're going to do everything,'" says Clay Pasternack, owner of Clay Pasternack Inc., an Ohio-based consulting firm that negotiates distribution deals. "The distributor is there to make sure the records are in the stores when there is demand. Creating that demand is incumbent upon the label," he says.

Start by building some awareness at home. Sell your music at flea markets, barbershops, beauty salons, birthday parties, car washes, and any place you think people will buy it.

Some experts say major distributors won't be interested in your label until you've sold 20,000 to 50,000 records, so consider no place off limits. "You can't say 'I'm going to press up 20,000 CDs and I'm going to sit here and wait for Sony Records to call me up.' It's not going to happen," Lassiter says. "You have to get out there and hustle. You have to have that Girl Scout mentality and sell your CDs like they are Girl Scout cookies."

Once you've built a modicum of success, research the distributors that handle the type of music you make. Also consider what stores you would like to carry your music and note the distributors that handle those accounts. Ask other labels they distribute for feedback on their experiences. Then, write up Distributor One Sheets, one-page reports that include your label's contact information, promotion and marketing plans for your artists, a brief description of your talent, and the CD list price, release date, catalog number, and U.P.C. Bar Code. Distributors will want to see these.

After locating a distributor, Pasternack says expect to pay a distribution fee between 20% and 35% of retail sales. These companies will also keep a reserve of at least 25% against monies due the label to offset any store returns.

"Starting a record label takes preparation and hard work. There is also a certain amount of luck involved because success in this industry is often about having the right artist, the right record, and the right promotion," Lassiter says. "But if you start small, build your business slowly, and are persistent and patient, you can make it."

10 Steps

To Putting Your Record Label on the Right Track

1. Know your motives: The record business is a tough industry to navigate. It will help to define the objectives of your company and manage your expectations for success.

2. Cover the business basics: Starting a record label requires legal formation, a business plan, employees, a location, and everything in-between. Choose a name for your label and begin the trademark process. Obtain the required business licenses so that you can sell your CDs. Also, retain a good accountant and entertainment attorney who specializes in music.

3. Learn the language: Many labels fail because they don't have a sound knowledge of copyright laws, royalties, music publishing, and distribution. To remedy the situation, Lurie says, "Do your homework. Take a class. Go intern with an independent label and see how it works from the inside." Also, join a performance rights organization like ASCAP (www.ascap.com) or BMI (www.brni.com).

4. Stack up some cash: To help ease your financial burden, Taylor says barter wherever possible. "Creativity doesn't happen only in the recording studio. Creativity happens in business. So if you're starting a label and need money for recording costs, find out who has a home studio, and in exchange for studio time, see if you can mow their lawn, wash their windows, or even babysit for them. That kind of thing happens all the time."

5. Find and sign true talent: There are artists everywhere just waiting to be discovered. To find your Mariah or Usher, comb the clubs as well as churches. Visit talent showcases, put a classified on your Website, check with college music departments, and get referrals from others in the business. Before signing artists to a contract, Lurie says, check out their live performance. Brae adds, "Make sure the artist has a fan base or the potential to develop a fan base. This will go a long way when trying to persuade a distributor to carry your music."

6. Locate manufacturing: Until you obtain major distribution you will have to manufacture CDs on your own. There are several pressing plants from which to choose, including DiscMakers (800-468-9353) and Universal Duplicating (510-430-1000). Check the classifieds section of Billboard magazine for others.

7. Get distribution: Label owners sell their music to distributors and distributors then sell it to retail stores. Apart from the four major record labels, there are three other resources for finding distribution: one-stop distributors, independent distributors, and rackjobbers. A one-stop distributor supplies independent and major label products to chains, morn-and-pop stores, and other retail outlets. Independent distributors carry only independent labels, providing products both regionally and nationally. A rackjobber gets a product from distributors for large discount department store chains. Distributors pay label owners about 50% of the retail list price for their CDs and typically settle invoices within 60 days. They will also require several promotional copies of your music, so be prepared to part with some freebies.

8. Form alliances: A savvy record label owner has a network of people he can contact for advice and help in the business. Build relationships before you need them by joining an industry organization and visiting clubs and radio stations to talk up your label.

9. Build a buzz: People can't buy your music unless they know it exists. But it's up to you to spread the word. Book your artists at conventions, charity organizations, shopping malls, and other venues where they may be able to perform live and attract a following. Also, use flyers, posters, and "street teams" to build awareness. Street teams pass out T-shirts, hats, and other promotional items at concerts, festivals, and other events.

10. Roll up your sleeves: Starting a record label is not for the faint of heart. There is a lot of hard work involved, and since most new labels can't afford to hire a huge staff, label owners often have to wear many hats. To ease the pressure of operations, consider setting up an internship program.

Resources for Breaking into the Biz

National Association of Recording Merchandisers (www.narm.com) is a trade organization that consists of music retailers, wholesalers, distributors, content suppliers, consultants, and many other industry players. Among other things, the organization maintains a distributor database, previews upcoming industry conferences, and lists the latest music news.

Music Distribution: Selling Music in the New Entertainment Marketplace by C. Michael Brae with Dameon V. Russell (Hitman Records; $14.99) is a guide to marketing, promotions, distribution, and other aspects of selling music.

National Association of Record Industry Professionals (www.narip.com) is a membership organization that provides educational programs, seminars, mentor networks, and other development opportunities for those working in the recording industry.

Billboard's international Buyers Guide (www.billboard.com) is an annual publication that lists contact information for more than 13,000 national and international record labels, music publishers, wholesalers, distributors, industry associations, entertainment attorneys, equipment manufacturers, and more. It costs about $200 and you can purchase it online.