Rock ’n’ roll merchandising is a tough business. So in an effort to drum up more profits, two locally run firms that had been competing have merged to create a higher-volume music merchandising company, BandMerch.

The Burbank company was created this month when concert promoter AEG Live on the Miracle Mile sold its BandMerch division to private equity firm Transom Capital Group in West Los Angeles. Transom then merged BandMerch with its own music merchandising firm, Cinder Block, and kept the BandMerch name. AEG Live retains a minority stake in the business.

BandMerch handles merchandising for about 200 artists including the Who and Death Cab for Cutie. Those names can make T-shirts fly off the shelves, but they can also command big advance payments and royalties. That’s just one challenge that can make profits elusive, as they were for BandMerch.

Now, Transom is hoping that combining the companies’ client lists and creating efficiencies of scale will boost profits.

“AEG and we believed BandMerch could generate more profitability if they merged it into what we were doing,” said Russ Roenick, managing director at Transom.

BandMerch and Cinder Block both designed and sold band merchandise – mostly T-shirts and hoodies – through arena vendors, retailers such as Hot Topic and e-commerce sites.

It’s a business that has peculiar challenges. There’s a lot of potential for sales but picking the right acts is tricky. Popular artists get big advances and merchandising deals typically last for a year and a half or two years even though it’s hard to predict how much of the merchandise will sell. The next album could be a hit or a flop.

BandMerch was not profitable at the time of the deal, although it had been in the past, while Cinder Block was breaking even, according to a source familiar with the merger. Artist Nation, a division of Beverly Hills live-music promoter Live Nation Entertainment that includes its merchandising and artist management businesses, also had an operating loss last year, according to Live Nation’s most recent annual report.

But after the merger, BandMerch Chief Executive Jason Greene said there are plans in place to improve the company’s performance.

“This is a very challenging business,” he said. “Not just the financials – but signing one artist at a time is a tough slog. Being able to do a deal like BandMerch is a game-changer.”

Reunion tour

This is Greene’s second spin with BandMerch. He was an executive at AEG Live years ago when the concert promotions company purchased BandMerch. The idea then was for AEG Live’s huge touring business, which promotes shows for the likes of Justin Bieber and Paul McCartney, to drive deals to BandMerch.

But that strategy proved more difficult to execute than thought. Competitors aggressively seek desirable clients and artists will take the best deal available, regardless of whether it’s with a business run by its promoter.

“Merchandise rights are very competitive,” said Gary Bongiovanni, president and editor at live-music trade publication Pollstar in Fresno. “Just because you’re doing the tour doesn’t mean you’re going to get the merch rights.”

Transom got into the music merchandising business shortly after closing its first fund in 2009. The firm used some of that money to purchase Cinder Block that year. Transom also looked into buying BandMerch but AEG wasn’t selling at the time.

Greene left AEG around that time to work as a consultant for two years. He was hired as chief executive of Cinder Block last year and was tasked with growing the company, which had previously been run from Oakland.

Meanwhile, AEG was undergoing a major restructuring. In March, owner Phil Anschutz, who had been trying to sell the company for a reported $10 billion, took it off the market and Chief Executive Tim Leiweke was ousted. AEG Live was also restructuring, and that division’s chief executive, Randy Phillips, left the company in November.

It was clear to Greene that AEG was refocusing its attention on venues and that the merchandising business wasn’t going to be a key focus for the company.

“I thought this would be a prime asset for them to sell off,” Greene said. “I made a call and it worked out.”

AEG declined to comment and directed all inquiries to Transom. Terms of last month’s deal weren’t disclosed. Transom typically invests between $10 million and $20 million of equity in a deal and focuses on companies with $50 million or more in annual revenue.

Going indie

Now, BandMerch is trying to get its costs in line by focusing its resources on its best-selling acts. Of the roughly 200 artists the company represents, Greene estimates that 60 of them generate the vast majority of revenue. He said he’s deciding what to do with the artists who aren’t performing as well.

Another opportunity is to merge some operations, such as warehousing, to reduce expenses. Also, becoming a bigger company can help the firm negotiate better terms with suppliers such as textile makers.

There were also layoffs, although neither Transom nor BandMerch would say how many jobs were cut or how many people work at BandMerch now.

The deal also narrowed the field of competitors.

“It’s pretty straightforward,” said Transom Managing Director Ken Firtel. “Cinder Block and BandMerch were direct competitors. The deal creates synergies in the companies and competitive advantages.”

There are still plenty of other competitors, such as Artist Nation and Firebrand, which has L.A. and London offices and has clients that include alt-rock band Pixies.

Both BandMerch and Cinder Block have had problems with sellers of unlicensed merchandise that undercut them on price – sellers of Billy Joel goods in the case of BandMerch, and Kid Rock goods in the case of Cinder Block.

Bongiovanni said ending the trade of unlicensed goods is like playing a game of whack-a-mole.

However, Greene said those vendors don’t hugely affect his business.

BandMerch is also making an effort to distinguish itself from larger competitors, such as Live Nation and Universal Music Group’s Bravado, by targeting artists who don’t require the highest advances. For example, Greene said BandMerch’s sweet spot is artists who are paid $250,000 or less in advances, and are at a level of fame on par with its client Weezer, while Live Nation might pay several million dollars in advances in some cases and go for the biggest names such as Katy Perry.

The merger with Cinder Block would appear to bolster that strategy. The company has worked with many clients who are up-and-coming but have also had a taste of mainstream success, such as indie rock outfit the National and former “Community” actor Donald Glover’s rapper persona, Childish Gambino.

The advance fees are often paid up front and artists begin to get a cut of merchandise sales once their royalty earnings equal the advance money. That split can range widely, with artists getting somewhere between 10 percent and 80 percent. The most in-demand artists charge the highest fees.

Firtel said he thinks his firm is well-positioned now, due partly to BandMerch’s ability to focus solely on merchandise.

“We’d like to describe ourselves as the largest independent merchandising company in the world,” he said. “We’re not bound by larger corporate agendas.”