Studentfilmmakers Magazine

Click here to get a copy of the December 2006 Edition, so you can read and enjoy all of the excellent articles inside. Check out this article in the December 2006 print edition of StudentFilmmakers magazine, page 44.

William F. Vartorella, Ph.D., C.B.C., has taught screenwriting, developed venture capital pro forma for independent Hollywood films, and offered advice for state and international tax incentive packages for motion picture production. He co-authored the book, “Funding Exploration,” and wrote articles and professional papers on college television studio construction, film production in Central Europe, and global motorsports sponsorships. He recently negotiated a TV deal for a team retrieving a rare WWII aircraft from beneath 150 feet of water for a one-hour documentary entitled, “The Lake Murray B-25 Rescue Project.”

In the arcane world of Hollywood film finance, the only absolute is there is none; and “deal”, far too often, is just another fourletter word. To paraphrase an immortal Hollywood maven, “an oral contract isn’t worth the paper it’s written on.” Yet, successful deals are about people skills, not just ideas. The goal for any young producer is to educate a potential investor in the financial nuances of the “cottage industry” that is independent film and how the risk is manageable. Think of presenting a deal as a “reading script,” with crisp dialogue. The formal contract itself is analogous to a “shooting script,” with the entertainment attorney filling the function of director. In other words, before you fork over the legalese, nurture your potential investor with some informal written Q&A that makes her feel comfortable in the brave new world of film finance.

Remember: the landscape is strewn with nay-sayers who can recount horror stories about movie deals and, worse, are clueless about deal memos, who gets paid and when, distribution, and whether your labor of love and their money will ever grace the silver screen. In short, they may be “qualified investors” (net worth of U.S. $1 million or more), but mention “Prints and Advertising” – well, you get the picture.

Remember: the landscape is strewn with nay-sayers who can recount horror stories about movie deals and, worse, are clueless about deal memos, who gets paid and when, distribution, and whether your labor of love and their money will ever grace the silver screen. In short, they may be “qualified investors” (net worth of U.S. $1 million or more), but mention “Prints and Advertising” – well, you get the picture.

The best approach is to address the risks as with any other investment: transparency in business practices. Plus, an easy-tounderstand short take on how film finance works. All of this is prelude to necessary investor discussions with an entertainment attorney (ouch!) and the proverbial deal memo (a one-page summary plus, say, 72 pages or so of legalese). At the risk of oversimplification, the following synopsis in Q & A format finetuned for your specific film project may get you and potential investors (“associate producers”) on the same page for serious discussions ideally moving your “reading script” to a “shooting script.” We make some assumptions below such as shared profits from all revenue streams, but you can improvise as you see fit, particularly in the bracketed [comments] sections. This discussion and format is meant for illustrative purposes only. Consult your attorney before presenting anything to a qualified investor. For capitalists, “it’s not the principle of the thing, it’s the money.”

1) What is an “independent film”?

The difference is in production, rather than in distribution. Independent film costs roughly 1/3rd of what a major studio would spend. Why? 1. studios have expensive overhead; 2. studios cross-collateralize successful productions against box office fiascoes; and 3. what independents raise is what they spend. This means indie films break even much more quickly and the profit potential is greater.

[Since time immemorial, the major studios have structured the deals. This, despite large independent production companies (read: Miramax or New Line) that are increasingly taking on the mantle of studios. A film that grosses U.S. $100 million is hardly an independent by conventional definitions. Consider “The Blair Witch Project” was made for less than U.S. $500,000. It grossed U.S $140.5 million domestic theatrical, despite baffled critics.]

2) How does my financial participation differ from a studio film?

As an investor, your proportional profits will be the same whether the film is made entirely independently or in association with a major studio.

3) What are the potential profit streams for your film?

[Some producers paint a pretty picture, but investors need to know the pitfalls.]

First is Domestic Theatrical Distribution (U.S. & Canada); second is Foreign Theatrical Distribution. [Note: foreign distribution is not monolithic. Hopefully, international sales for indie films have bottomed out. France, Germany, and Italy until recently have been struggling media markets and Latin America is a morass. The weakness of the U.S. dollar makes U.S. content a “bargain” overseas. Distributors tend to chase trends, rather than set them. Get good advice and strong data.]

Third is Home Video, which includes cassette, DVD, laser disk, etc., and is a major growth segment. Next is Cable TV. [Another pothole, as Cable networks have their own inhouse divisions creating content. Sci-Fi is a bright spot for coproduction.] Then there is Network TV and Syndication. Finally, there is Merchandising and Product Placement, including Internet Marketing. Prisons, Armed Forces, Airlines are other avenues. Remember: 60% of film revenues today are offshore. And, the big chill within the industry – and the opportunity – is on smaller and smaller screens: wearable technologies.

4) Does my investment ensure participation in the entire profit stream?

Yes, pro rata based upon your investment level.

[Once the “10-foot dilemma” is solved (spanning the distance between the broadband connection on your computer and the television sitting in your den), companies such as Amazon.com and Apple will explode with movies on demand. The investor needs to know that s/he is on the cusp of an entertainment revolution, with distribution a function of bandwidth and connection speed.]

5) How do we know if our film is making $$$?

We have formed a Limited Liability Company (LLC) [or other legal structure] specifically for this project. We shall send a certified copy of formal accounting from distributors to investors, along with any profits check.

6) Realistically, what are my chances, considering that film is a very risky business?

One study of 338 films disclosed that nearly 1 in 2 (48%) made a profit. However, the really telling result emerged when 67 films (part of the larger sample) were divided into “mainstream” and “art-house” films. Result: overall profitability of the “mainstream” sample exceeded 70%. “Art-house” films fared worse. Stated differently, 3 in 5 “mainstream” films were at least marginally profitable, while only 1 in 5 “art-house” films made the cut. As ours is not an art-house film, we already are better positioned to make money.

Production costs and profits are usually returned mainly in two to three years from initial release. Few risky projects have this kind of pay-out, so quickly, if successful. Big plus, as traditional investments often face long horizons (several years) for profits, plus time for an “exit strategy” (going public, going under, whatever). Then there are inherent advantages. 1. a growing international demand for good quality mainstream movies even during recessions. 2. American films suitable for “family-viewing” are hot items globally. 3. even a theatrically-unsuccessful film can prove profitable in video and television markets. Exceptions: comedy generally and romantic comedy specifically can be hard sells internationally as laughter is culturally-based. Action films are a much easier sell.

[Contact your State and sometimes Local Film Commission to check out the film tax incentive package(s) offered.]

Finally, since we have pre-qualified the film with our State’s Film Commission (e.g., certified that we are making a legitimate film, disclosed budget, screenplay, etc.), you may be eligible for film investor tax credits. That further reduces your risk by [xyz %], once you submit the necessary forms and documentation.

7) In business, we talk about market niches. There seem to be a “gazillion” different kind of films out there. What’s going on?

[Here is where you insert some brief audience numbers, re: your film’s niche. Generally speaking, the most profitable categories of film are 1. Family, 2. Sci-Fi/Fantasy, and 3. Animated. Moreover, with very few exceptions it is difficult to get foreign distribution for black-and-white releases. “Color” is the color of money offshore. That black-and-white romantic comedy set in the Sahara might be a tough sell to potential investors.]

Teenagers have the highest disposable incomes and spend the most money at the box office. According to the Los Angeles Times about 1/2 of those aged 12 to17 identify themselves as “frequent movie-goers” compared to less than 3 in 10 above the age of 18. Excellent timing, as the major studios are scrambling to produce films suitable for family-viewing. Plus, advertisers are desperate for the “tween” and teen market segments.

8) What protects me from the Byzantine Hollywood accounting system that seems to ordain that “all-movies-lose-money-on-paper”?

An on-line accounting system. You get a password and can monitor expenditures in near-real-time. Every dollar we save can go to increased “Prints & Advertising” which mean more buzz and potentially greater exposure and profits.

9) How do I know if this film will actually be made in case an actor gets sick or war breaks out in Timbuktu?

Insurance: 1. General Policy covers principal actor(s) and director, liability, equipment damage, and other misadventures; 2. Completion Bond – insurance kicks in if production starts exceeding budget and schedule; 3. Errors & Omissions – protects against lawsuits and, e.g., the annoying inadvertent contract expiration. [Even The Export-Import Bank of the U.S. has its own “Film Production Guarantee Program.” Look around. Call your U.S. Congressman and explore the funding landscape.]

10) If you have already raised [x %] of the film’s cost, why not go to a major studio and finish it? What happens if I invest, then you decide to go to a big studio? How is my investment protected?

Our goal is to control the production and to negotiate a more favorable studio distribution deal. Full financing and committed “talent” are key to getting better terms (creative control, theaters, opening dates, etc.), and we don’t have them yet. Plan is to deliver a low-risk, bankable project to the highest studio bidder. The investor deal does not change. Your money is in a secure escrow account.

11) What happens to my money if the film is not made?

You get it back, plus interest. Your money sits in a safe escrow account until we engage talent and production commences.

[Let’s say you are planning to secure talent capable of opening wide or at least in key selected theaters. Then, ]

The time of greatest risk is at the point of securing “Star-Quality Talent.”

Their agents will demand an upfront “Play or Pay” deposit (guarantee) against the risk of passing up other film projects during a stipulated period. Each new investor shares in the Talent Guarantee risk and our LLC risks spent development dollars. No other investor dollars shall be tapped until our film is fully financed and production begins.

12) What’s the timeline for this film from investment to profits – if there are any?

Again, no promises, re: profits. Film is a risky business. But it’s a lot less risky than getting an invention patented and licensed. Your chance with a patent making money is only 2% and the timeline for that is years. Lot better odds with independent film. Here, we anticipate [three] months of pre-production, [three] months of shooting, [six] months of post-production. Most pictures return 90% of their potential revenue stream in the first two years after initial film release.

13) Why approach me for money, rather than asking your Hollywood cronies?

The competition for funding in Hollywood is extreme. Ask any cab driver in L.A. S/he’s an aspiring actor or writer with a script under the seat.

14) When shall we know who is starring in our film? When can I read the finished screenplay?

[If you are using an actor capable of “opening” a film, you need to explain the Star System vs. the old studio contract players model. If it is an ensemble cast, ditto. Non-entertainment industry investors may be a bit “star-struck,” but then so are the industry insiders. “Talent” drives projects. Moreover, everyone is a film critic. Explain the difference between a “reading” and “shooting” script. Scripts change once talent is selected. That means the script may be meaningless at the moment, although the screenwriter’s credits (if any) are of some importance. Give the investor a two-minute written “pitch”. If it’s a Western, good luck, as the dialogue tends to be sparse. Also, not every investor is visual. The best screenplays have few “directions” other than the dialogue. If in doubt, review V.I. Pudovkin’s classic, Film Technique, especially his remarks on “constructive editing.”]

Producers hate providing a script. The reality is investors require prototypes of “widgets” and mind-boggling business plans for other kinds of projects. In your case, you are peddling an intellectual property with the glamour of Hollywood.

Once additional investor dollars are infused sufficiently to cover the 10% salary deposit, we shall approach “Star-Quality Talent” identified by the director and producers. Yes, we have a list, but we don’t necessarily know who is available.

15) How much are you asking me to invest? What is the total film budget? How much have you raised? What kind of Return on Investment (ROI) do you predict?

U.S. $ [xyz] is the minimal investment. You may choose to make two payments in $ [abc] allotments, with escrow of the entire U.S. $ [xyz] by [date].

[Nobody likes to ask for money. Be short, specific.]

Our budget is U.S. $ [def]. We have raised U.S. $ [ghi]. Return on Investment is a function of a myriad of market forces. Each film is a unique project. [In short, seasoned producers do not like to predict profits.]

16) When may I meet with the producers to discuss just how this all works?

First, we’ll schedule a conference call to answer initial questions and set the groundwork for proof of investment capacity. Then, we shall invite serious investors to a meeting that explains the deal fully, plus “Prints & Advertising” and a host of other arcane topics in simple language. Due diligence is a joint responsibility and we want to establish an open dialogue.

17) Can you provide an informal overview of the deal for my CPA and tax attorney to examine?

Let’s start with an historical model. First, the major studio ultimately involved in distribution to theaters takes its share “right-off-the-top, with “talent/actors” in close pursuit. Second, if the film is profitable, investors recoup their investment. Third is the sharing of any profits from the multiple revenue streams (U.S. and foreign distributions, video rentals, prisons, etc.). Investors take % of remaining net profits and the producers/ ”Limited Liability Company” split their % among themselves, director, writers, etc. No profits are taken by the Limited Liability Company until investors’ principal is recouped.

Our deal works like this: [simple paragraph written by or vetted by your attorney. There are variations that provide investors film tax incentives and early recoupment of investment as a budgetary lineitem, thereby further limiting the risks. Essentially, these involve an early investor coming in on the “development” side of the equation. S/he gets “reimbursed” once the higher-risk “production” investors infuse cash and production begins. The development investor gets tax advantages, early cash-back, plus a negotiated back-end if the film is profitable in any medium. Your entertainment attorney will guide you through this. Also, make absolutely certain that the State where the film tax incentives reside and where you intend to shoot your picture has enough in its reserves to provide you the rebates. E.g., you finish shooting, turn in the final paperwork and the State’s Film Commission says, “Sorry, we spent all the money.” It happens. Plus, meet with the County’s or Parish’s economic development office to see if a couple of additional “points” can be added locally to the State’s incentives. Again, the goal in the Q&A is for the potential investor to get a sense of the deal, pro and con.]

While we shall use a simplified on-line surveillance strategy for accounting and auditing, there is a learning curve. We will not make a distribution deal without full audit rights at least once per year. 1st audit occurs after initial release. Audits are investments in keeping budgets on track and another way of protecting money – yours and ours.

In summary, what is advocated here is a dialogue device that defines the risk and rewards in simple language, plus provides a framework for an introduction to film finance. It would be accompanied by a one-paragraph Executive Summary, synopsis, team bios, one-page budget, and a “reel” of past projects. A key point to remember throughout is that the producers are responsible for paying any/all third party profit participants aside from acting talent which is taken “off-the-top.” Add to this an independent, online audit procedure to protect investors, plus the various forms of completion bonds & insurance, plus leveraging of film tax incentives and the investor “risk” becomes manageable. This is important to communicate to the new film investor – early and often.

There’s an old saying in the magazine publishing business that applies here: “Publish for the rich, live with the masses. Publish for the masses, live with the rich.”

Make whatever satisfies your creative urge, but give an investor a fighting chance with a movie destined to be shown somewhere other than a film festival and your buddy’s den.

This article may not be reprinted in print or internet publications without express permission of StudentFilmmakers.com.

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