Over the years, film financing has become one the most complex and risky investments. This article gives an overview of the fundamental elements of film financing.
The Business Plan
Once you choose a script or story idea, you must immediately decide upon adistribution platform (i.e. theatrical, straight to video or cable). This decision impacts every element of your production from your budget to the types of equipment you need to use and your casting decisions. After you determine a distribution platform, it’s time to do some research.
Remember, 5-10 films that are similar to your own that have been released within the past 5 years. Determine the distributor for each film, their success or failure with films similar to yours and their requirements for distributing films. This research is imperative. Showing a potential investor a clear, detailed business plan along with enthusiasm, you will make them feel more comfortable in investing in your project.
Advantages and Disadvantages of Industry Financing
The most obvious choice for film funding is industry financing. For example, there are studio development production deals, independent distributor financing, talent agency financing, end-user financing, and completion funds.
Studio Development Production Deals
An in-house studio production will usually start as a development deal. As a filmmaker, you will first have to pitch the concept to a studio creative executive and then submit a synopsis of the project to the creative department. If the studio decides to finance the development, production, and the distribution of your project, then the studio will ultimately own most of the rights associated with your film.
When a studio gets involved in your project, you can expect a tough road ahead of you. The first phase will be a “Development Deal Memo,” which is a short form written contract between you and the studio. The Development Deal Memo will simply outline the agreement, salary, time schedules, screen credit, and percentage points. Most studios will give points of the net profit to unknown talent. By doing so, this gives you a false sense of security while ensuring the studio to make as much money as possible. Typically, net profit deals do not pay-off. Studios tend to juggle financing for different projects and use creative financing so most films do not “make money” (at least, on paper). For example, a studio will put the advertising budget of your film and that of another film in your budget creating an inflated advertising cost for your film. This means that the studio not only recoups their 30 percent distribution fee, but also recoups the extra money spent on the advertising that was not associated with your
film. Therefore, the film’s break-even point will be in flux enabling the studio to continue to generate money from your film. At the same time, their bookkeeping reveals a deficit to eliminate virtually any chance of the studio having to pay net profit participants their due.
The studio will make Development Deal Memo’s contingent on a “Step Deal.” A Step Deal is when the people working on the development of your project are paid incrementally as the project develops. In addition, the development work is reviewed and evaluated at each stage. This may sound great on the surface, but the real deal is that the studio has the right to stop development of your project at any given point.
However, a Step Deal offers you a few key advantages. You will be able to use the studio’s money, as well as the studio’s development companies. Because you are using these resources along with their professional script developer, you can ultimately make a bigger picture.
On the other hand, Step Deals offer many disadvantages. First, having Paramount actually pick up an unknown filmmaker’s project is very slim. Second, there is the “Hollywood System,” which is a relationship driven business. Third, there is theft! It is not uncommon for the studio steal your concept and have their development team work your idea in a new way. Therefore, you have to be careful with whom you share your ideas and to remember that scripts and treatments are copyrightable, but ideas are not copyrightable. Fourth, there is also the potential to lose your material to the studio if your project is delayed by the studio. Fifth, with Step Deals you can be fired at any stage, namely if you are not meeting the studio’s schedule or if your work is not up to their standards. Once you are fired, you lose the rights to your project unless you negotiated properly before-hand. You must also protect yourself and your ideas against slipping into “Studio Limbo” (i.e. having the studio purchase a perpetual option on your project). Finally, you may run into a situation of not having your film adequately developed. Most studios tend to overbook the number of release pictures in a given year. If a studio picks up your film to meet their quota, then you can expect very quick development, production, and post-production time.
If you are seriously considering studio financing it is highly recommended that you hire an experienced entertainment lawyer. A seasoned studio executive will have more leverage than you and having a good lawyer on your side will only improve your situation.
Independent Distributor Financing
An Independent Distributor is a distributor who is not regularly or substantially affiliated with a major studio. They specialize in foreign distribution and most are members of AFMA (American Film Marketing Association). Although some have production divisions, they do not have the financial resources of a major studio. When submitting a project to an Independent Distributor, you must have some financing in place and be ready for principle photography. The reason being is that Independent Distributors do not have the resources to develop, produce, and distribute your project.
The advantages of Independent Distributors are few. First, they can distribute smaller films. Second, you can negotiate a better deal, because you and the distributor are on the same level. Third, they will offer more personal attention to you, as well as, support the film. Finally, you have a better chance of receiving net profits.
The disadvantages of Independent Distributors are that they have limited financial resources to put into your picture. This will impact the number of theaters in which your film will be screened. Also, you will have less collection clout with theater owners and overall smaller revenues. Lastly, Independent Distributors have a higher bankruptcy rate.
Talent Agency Financing
Occasionally, you can obtain assistance in financing through talent agencies. A talent agency will package your film with two or more of their clients. They will do this primarily to increase their fee and the possibility of having the film being made. To ensure the success of the film, it is important to have the right package.
Talent agencies will not fund the project outright. Some agencies will help arrange financing through their resources such as, below-the-line facilities deals, international co-production deals, foreign government subsidies and presale arrangements. Through talent agency financing, you have more financial choices, whereas with a studio, all financing is done through that one entity.
One stop shopping is one advantage to using talent agency financing. Through the agency you may acquire actors, directors, and possibly a distributor. From the agency’s point of view, this is not only good public relations, but it increases their chances of getting paid when the film is complete.
The disadvantage of talent agency financing is fierce – due to conflict of interest! First, the agency is attaching two or more clients to the same project. Second, the agency is arranging financing. Therefore, it seems like the agency is making the film for itself, rather than you, the filmmaker.
End-User financing is when a theater, cable or television station will put up money in exchange for equity percentage participation in the film’s revenue stream for specific markets. This method is very similar to presale financing. With presale financing, the end-user does not put up any money until after the film is delivered. The amount of money put up by an end-user will have been pre-decided. The actual production money will come from a lender (i.e. investor, bank, independent distributor). Obtaining end-user financing through video and cable companies is called ancillary end-user financing. Because video and cable companies rely on film product outside of the theatrical market, they are considered ancillary markets. The foreign market may be another possibility to acquire end-user financing. Foreign entities will purchase rights to films made in the United States.
The advantage of end-user financing is that you are in the best position to make money. Because the end-user is generating revenue in their own territory, they have the most control over this portion of the revenue stream. If you decide to go this route, you should ask yourself the following questions:
a) who are the end-users;
b) how much will they pay for specific rights; and
c) what form will the investment take?
The biggest disadvantage is piecemeal financing. You will have to obtain commitments from a number of end-users to cover production costs. Also, established producers will have a better chance of obtaining both foreign and domestic financing.
Completion funds are designed to provide partial production financing or post-production financing. These funds can be provided for films that meet the following requirements:
a) have completed principle photography;
b) are complete except for post-production; or
c) are complete through post-production, but can not be released from the lab due to unpaid lab fees.
If you are obtaining financing through a lender, they will require a completion bond which will ensure the project will be finished. These funds rarely put up all the money needed to produce a film. Basically, they are sharing the risk with other investors.
Completion financiers successfully negotiate a higher per dollar percentage in the film. The reasoning is that, without the completion financing, the development and production financing has little chance of being recouped.
With this type of financing, your only advantage is that the completion financier is sharing in the risk as opposed to lending you the money.
Your disadvantages are two-fold. First, you have a weak bargaining position. Because completion grantors are providing the completion financing, they are in a better bargaining position. Secondly, completion fund financiers will not invest large amounts of money in your film because funds are limited.
These are some of the basic ways you can obtain financing for your project using various industry resources. However, there are many other ways filmmakers fund their film — through grants from foundations (especially for documentaries and educational films/videos), individual and/or corporate investors, and, very often, out of their own meager pockets.