How an independent filmmaker chooses to make a movie is often dictated by access to money more than any aesthetic sensibilities. Without the proper funding, a feature film never gets made or made the way the filmmaker wants to. Which strategy the filmmaker uses to access funding will depend on the type of film, the story or subject matter, the budget, genre, the filmmaker’s reputation, the talent attached and the amount of creative control the filmmaker wants over the production.
There are a number of strategies to use to finance a movie. They include, state tax incentives and grants (soft money), donations-based crowdfunding, equity crowdfunding, debt, private equity and pre-sales financing. Obviously, the filmmaker has no choice if the only way she can finance the film is to license some or all of the rights to a distributor. In that regard, as part of understanding the entire process of production and distribution, it is important to understand how film distribution and film financing are linked.
In order to sell the right to distribute a film, a production company must enter into one or more acquisition and distribution agreements with a distributor. There are a number of different forms such distribution deals can take. These include (1) Foreign Pre-Sales or Territorial Distribution Agreements, (2) Negative Pickup, (3) Television Syndication, (4) Domestic Co-production, (5) New Media/ Video-On-Demand (VOD) Distribution, (6) Foreign Co-production, (7) First-Look Deals, (8) Output Deals, and (9) Production-Financing-Distribution Agreements.
Before a distributor agrees to a distribution contract, the distributor usually performs a due diligence analysis of the film project and the production team behind it in order to assess the project’s viability and the film’s overall box office and VOD potential. As part of this due diligence, the distributor would ask to see the script (distributors read screenplays) and for information about the producer, director, cast and other key members of the production team.
Before or during production, a producer may go to various distributors for commitments to distribute the film after it is made. To work effectively, such commitments must include advances or minimum guarantees which may cover all or some of the film’s production and post-production costs. This is known as “pre-sale financing.” The distributor either (1) pays a cash advance upon signing of the agreement or in multiple installments over the course of production, (2) guarantees to pay that advance upon completion and delivery of the film (and the minimum guarantee is used as collateral for a production loan), (3) pays a share of the distribution revenues, or (4) in limited cases, pays a flat buy-out fee.
A “minimum guarantee” is a flat fee that the distributor agrees to pay a producer for the right to distribute the completed film, whether the film turns out to be successful or not. In the ideal situation, the distributor pays the filmmaker a decent advance plus overages, that is, the producer gets a minimum guarantee and a split in the revenues after the distributor has recouped its costs (this is known as a Gross Adjusted Deal).
Obviously, the producer prefers to negotiate as large an advance as possible, since the money can be used to finance the production of the film, pay down production loans, repay investors, pay deferred fees to talent (such as director and cast) and pay any sales agent’s fees and expenses.
Foreign pre-sale is a license to distribute the film in certain foreign territory or media (outside of the USA and Canada) before the film is completed. Foreign pre-sale is a key source of revenue for independent films, and can serve as the primary source of collateral for production loans.
Foreign distributors will often commit to pre-buying the territorial distribution rights of a film based upon the strength of the script, story, genre, budget, director, and star attachments.
After making a number of foreign pre-sale deals, the independent producer might have raised enough money to produce the film, while leaving open a number of unsold territories to sell to once the film is completed (usually at higher fees). This arrangement ensures the production company makes a profit on the film.
A good international sales agent is the conduit to the distribution of an indie film outside of its country of origin. An international sales agent will brand the film to the foreign markets, territories and all media (including theatrical, home video, VOD, cable, TV and other ancillary media).
Pre-selling territorial distribution rights typically involves the producer or a sales agent attending the major international film markets, such as the Marché du Film (Cannes, France), MIPTV and MIPCOM (Cannes), MIFED (Italy), European Film Market (Berlin), Hong Kong Film and Television Market, Toronto Film Festival (TIFF) (Canada) and the American Film Market (AFM) (Los Angeles), which is organized by the Independent Film and Television Alliance (IFTA), with additional business being done at regional markets, such as Ventana Sur, Hot Docs and IDFA. Of course, licensing activities happen year-round and are not limited to these events.
Producers must be careful when attempting to do pre-sales themselves. Unless the producer is thoroughly knowledgeable about the distributors in each territory, she will be much better served by contracting a good international sales agent.
An international sales agent will seek distribution commitments for particular territories for a film that is in development or pre-production, usually with the right package of script and attachments. If a producer is fortunate enough to have a strong script, bankable cast, director and a marketable genre, the sales agent will send the script along with preliminary market materials or footage of scenes to his or her distribution partners.
Since sales agents usually make their offers based on the value they believe they can realize for the film, a sales agent should be able to provide a producer with some sense of the estimated value of the film before they bring it to the marketplace. Whether the producer is trying to get an all rights deal or sell on a territory-by-territory basis, a good sales agent will guide the producer through the film market and festival process. The sales agent will know when to pre-sell and when to wait to screen the completed film.
Many films with budgets in the $3-$5 million range have had major talent attachments, and were able to get pre-sale. However, at lower budgets ($1-$3 million range), it is less common to see financing plans consisting of pre-sales. The added fees and finance costs of a pre-sale deal make it impractical for such lower budget films. In most cases, a producer should forget about pre-sales at budgets under $1 million. In addition to the finance costs, it is almost impossible to get star attachments at such lower budgets.
Many sales agents are also distributors. Others are also involved in production financing. Some have lines of credit for development funding and P&A. Such an agent may co-finance an indie film or offer an advance.
A producer will choose a sales agent based on the sales agent’s reputation, experience and relationships with reputable distributors. The producer does a market study to find similar or “comparable” titles in the marketplace, and then learn which sales agents sold those films. How many films has the agent sold? How well did their films do? How reliable are their estimates – in terms of what they have stated (ask price), what they have sold and what they have received in terms of payments (sell price)? What is the reputation of the distributors the sales agent works with in each territory? Other variables include, whether or not the sales agent will offer any advance, and the level of confidence the agent has in the film as demonstrated by her sales projections. Above all else, when choosing a sales agent, a producer begins by looking for the sales agent who believes in his film and whose company is a good fit.
How much should a sales agent or independent producer try to sell a film for at the script stage? How are they able to assess the film’s market viability on reading the script and viewing the package? Sales agents and producers are using data analytics and modeling to project which scripts are the safest bets for investors and distributors and how much to pre-sell for.
Data analytics and modeling, in the context of the past performance of motion pictures with certain characteristics, such as the same stars and director, are used by sales agents and producers to negotiate the amount of the minimum guarantee that they should ask for a particular territory. Sales agents and producers will base their valuation and timing of pre-sale agreements on an evaluation of the script, the track records of the producer, screenwriters, director and actors, and on analysis of actual market demand prior to the film’s production as compared to anticipated demand when the film is available for release. Other considerations that will impact a film’s valuation include the specific territory’s size and population, number of movie theaters, theater admission fees, historical film attendance statistics, the historical experience of the sales agent regarding similar films in the territory, if the film is a commercial story or has broad audience appeal in the specific territory, and if the target country has a high incidence of piracy.
New media (such as Internet, mobile and over-the-top (OTT) devices), cable and satellite generate significant revenues. Due to the increasing penetration of smart phone subscriptions, availability of high-speed data connectivity, and the rise of the 4G connectivity across major developing markets, the VOD market is the fastest growing area of distribution around the world. As a result, the market for low budget films (with budget of $10 million or less) is relatively healthy because they can be potentially picked up for digital distribution with funding up-front.
Television syndication also provides a production company with pre-sale financing. If the distributor is a financially sound company, the production company can obtain a production loan using the syndication agreement as collateral. The amount of the advance will depend on several factors, such as the particular star attachments, genre, budget and whether the film will be given a wide theatrical release. Since a theatrical release (and the attendant advertising and promotional campaign) are important in creating public awareness of the film, which, in turn, translates into potential television viewers, the distributor will want the producer to make as serious a commitment as reasonably possible to the effort to obtain a theatrical release of the film.
U.S. independent filmmakers may find opportunities to collaborate or co-produce with foreign production companies (outside of the United States and Canada). These co-productions will provide financing in the form of cash, goods and/or production services (such as equipment, facilities and personnel) to the U.S. production company, for free or at a greatly reduced price, to produce a film, project or TV program. Most often, the foreign company provides these cash, goods and/or services in exchange for co-ownership of the project, and in return, it receives exclusive distribution rights to the film in its respective territories and may also receive a pro-rata share of the net profits of the film worldwide.
“Negative pickup” is a license of the distribution rights in a motion picture by a production company, usually to a film studio, in exchange for reimbursement of its production costs and some form of participation in the profits of the film. The amount of the participation will vary depending upon a number of factors, such as the amount of the advance, the amount committed by the distributor for P&A, the territories, the financial projections for the picture, and the perceived risks for the distributor.
Traditionally, no up-front funding (or relatively little) is paid to the producer. The production company must then use the negative pickup agreement as security for a production loan to provide the production financing for the film.
In a negative pickup deal, the distributor usually wants all rights, such as theatrical, cable, television, home video and VOD. If the distributor is fronting P&A money, it will argue (most times, successfully) that it is entitled to “all rights”, since theatrical advertising expenditures for the picture enhance the value of all other rights.
In a negative pickup deal, the filmmaker usually has complete control over the creative aspects of the production, since the distributor has few rights to watch the filmmaking process or interfere in the making of the film. That is why negative pickup deals will go only to producers who have a proven track record and established relationships with studios, distributors and lenders.
In a “first-look” deal, a movie studio, network, TV studio or production company may contract with an independent producer to get first dibs on the producer’s next projects. The first-look agreement gives the studio the first opportunity to become involved, or the right of first refusal to produce, finance and/or distribute any projects the producer develops. This provides the producer with a committed source of financing for the producer’s next film. If the studio rejects a project, the agreement usually provides that the producer is free to take the project elsewhere.
First-look deals are usually reserved for proven talent.
In an “output deal,” a studio or mini-major agrees to co-finance certain films produced by an independent producer. In exchange, the producer grants to the studio the exclusive rights to distribute the producer’s films, in certain media or territories for a specified term.
With an output deal, an indie filmmaker can retain her independence and thus, control over the creative elements of production, while enjoying worldwide studio distribution. It can also be helpful to have an output deal in place when a producer is trying to raise debt or private equity financing.
Output deals are usually reserved for producers who have a strong track record.
The Production-Financing-Distribution Agreement is used by a studio or mini-major to finance production of a film. In return for the financing, the studio acquires the distribution rights and substantial equity in the project.
The principal difference with this form of Hollywood studio financing and other forms of financing is that the studio or mini-major obtains substantial creative or other controls over the production, unless the producer has experience and reputation or has an established relationship with the studio. In most other distribution agreements, the distributor will not have any creative input in the production (but may negotiate for approval, at least consultation, rights, such as, approval of the principal cast and the budget).
Another essential difference between Production-Financing-Distribution Agreement and most other distribution agreements, is that with the Production-Financing-Distribution Agreement, the distributor pays the money up-front, so that it is used to finance the picture without any necessity for the production company to use the agreement as collateral for a production loan.
Since most distribution agreements do not immediately result in up-front cash to the filmmaker to pay for the costs of principal photography and post-production, the production company must use the distribution agreement as collateral to borrow money from a traditional bank, film finance company, an investment fund or other lender. The distributor will execute a guarantee agreement which provides that distributor serves as guarantor of the loan.
Since the lender is entitled to repayment regardless of the film’s revenue or success, the distributor’s guarantee of the loan puts the lender in a position of much greater security than if the filmmaker is solely responsible for the loan. When the completed film is delivered to the distributor, the distributor will pay-off the loan (directly to the lender).
In order for a pre-sale agreement to be an acceptable collateral, the distributor must be “bankable”, that is, it has a good reputation or creditworthiness. Obviously, that won’t be as important if the distributor is willing to make a sizeable cash advance upfront, making it unnecessary for a producer to seek a loan using the pre-sale agreement as collateral.
Typically, banks will lend up to 80% of the face value of the minimum guarantee being used as collateral. The actual amount of the loan, and any conditions attached, will depend on the distributor’s risk profile. Each minimum guarantee is individually discounted based on the perceived risks to the bank, such as the distributor’s reputation and the bank’s history with the specific distributor and territory.
That is why, prior to deciding whether to presell a film to a distributor, the producer or sales agent must gain knowledge of the distributor in each territory, their payment history and reputation in the market. The greater the reputation a distributor has, the more valuable will be its minimum guarantee to a lender, and the collateral will be discounted less.
As a prerequisite for a loan, a bank will require the production company or distributor to obtain a completion bond (“completion guarantee”) from a reputable bond company, to ensure that the project is completed on time, on budget and delivered to the distributor in accordance with the terms of the pre-sale agreement.
In addition to the completion guarantee, the bank may require that the production company provide certificates of insurance coverage, including general liability and errors and omissions (E&O) insurance, naming the bank as an additional insured, since, in the event of a litigation, the bank may be named as a defendant.
Pre-sale as a strategy to finance movies is risky business – to the producer on the one hand, and the distributor on the other (in particular, for independent foreign distributors who are worried about losing money). While pre-sale serves to reduce the risk of loss for the producer, it reduces the potential for future income. Meanwhile, a distributor only receives its money back or make a profit if the film is successful.
Independent films that are not of high quality content have a very hard time in the international marketplace, and having acclaimed actors attached to a bad film does not necessarily guarantee a film’s box office or VOD success. It really comes down to making a good movie. Thanks to social media, if a movie isn’t good, people find out quickly and lose interest. No one is going to watch a bad movie because it has a star actor in it. In addition, piracy, which is rampant in some countries, is making pre-sales buyers reluctant to bid for films without a clear audience. If the distributor can’t determine who that core audience is, they’re probably not going to get involved with the project.
Since a distributor is bearing the complete risk of loss, the price the distributor will be willing to pay to acquire the film at the script stage will be much less than if the film is completed (when the distributor can better evaluate the potential success of the film). However, if the film is completed and gets raving reviews, a distributor will be willing to pay much more money for it, since there will usually be competition and a bidding war among territorial distributors who are gambling on the fact that the film will be profitable when released and that the premium price they pay to get in early on the process will pay off.
If the film turns out to be a failure, having already essentially cashed out, this is no longer the producer’s problem. But with films that have gone to achieve breakout success, producers have found themselves shortchanged. If the film is a hit, the producer would be far better off if it were financed without pre-sales.
In most cases, no matter how well a film performs in a given territory, the only money the producer will get is the minimum guarantee. From the revenues of the film, the distributor recoups the payment of the minimum guarantee and deducts any P&A costs. The distributor also deducts a distribution fee, calculated as a percentage of box office revenues. The size of the distribution fee generally increases with the amount of the minimum guarantee, since the distributor’s risk of not recouping the advance is greater. The distributor will usually recoup all those costs before the filmmaker can see any overages, despite the movie reporting high grosses at the box office.
Before a film is produced, it is difficult to guess how it will perform in the market, no matter how good the script and execution or how attractively it is packaged and marketed. The arrival of better predictive tools, such as at Slated, may help solve this by providing both sides of the negotiating table with a more reliable yardstick by which they can value film rights at the script stage.
But how does a sales agent apply statistical (comp) data to an esoteric, unique project that a first-time filmmaker is trying to make with no names attached? It is hard. First-time filmmakers will usually find it difficult to finance their films through pre-sales. With no track record of successful films to their credit, a first-time filmmaker may not be able to persuade a distributor that he knows how to pull all the right elements together and make a good movie. Of course, if the other elements are strong, such as the story, acclaimed screenwriter and star actors, the distributor may be persuaded to take the risk.
As far as getting pre-sale, it is the strength of the production company’s reputation, and the package of director, actors and story that will determine whether or not the distributor is willing to take the risk and pre-buy. But above all, the most important consideration is having name actors attached. At the script stage, distributors prefer to make commitments for pictures with known elements so that when the film is completed and delivered, it will be ready for distribution and can more quickly provide for the distributor to recoup its payment of the minimum guarantee and/or the costs of P&A.
From a casting standpoint – certainly, for genre films and new media platforms – where a producer might not get a key star attached, but an emerging actor with an immense social media following, this will give a distributor a huge embedded marketing tool. The ability to organically leverage talent’s social followings continues to be an effective way to reach fans and drive sales. That is why, as with press interviews and promotional appearances, conducting social media for a project is often built into actors’ contracts.
Many independent films nowadays are already pre-sold by the time they have the actual festival premiere. Distributors are becoming more inclined to acquire movies at the script stage, because the competition for independent films is so fierce. This can be attributed to an increasing number of new players and platforms in the market – Netflix, Amazon Studios, Bleecker Street, and A24 – as well as the studios themselves. Distributors from New Regency to Sony to Paramount have been seen fiercely competing for high quality independent films.
The advent of digital distribution has created a more crowded marketplace. There are far more outlets for distribution nowadays than there have ever been. But the outlets are all different. This makes the indie film business for filmmakers much more complex than ever. It makes the process of figuring out how to get movies financed and released more challenging than it used to be.
Now more than ever, it makes good sense for filmmakers to consult with a sales agent who understands the nuances of international pre-sales and/or an international motion picture licensing attorney to help guide them through the process of raising financing through pre-sale deals. Contact us to learn more about film distribution strategies.
