Blogs

The Anatomy of a Film Business Plan

The Anatomy of a Film Business Plan

Making an independent film is like starting a company from the ground up: you’re creating a brand, operating a business and selling a product or service. You will address issues such as raising capital, hiring talent, marketing and distribution, including, States’ Blue Sky and Securities and Exchange Commission (SEC) laws, rules and regulations related to fundraising.

Generally, the first step to completing a film and exploiting it in the domestic and international markets is raising financing. Any movie proposal or investor deck that seeks to raise money from private investors, private equity groups and venture capitalists (VCs), will, in general, have to be supported by a good business plan. All the research and financial data involved in creating your business plan will be used to provide all the information you need in a pitch deck, film finance plan, prospectus and even in the private placement memorandum (PPM) (if you are using one).

The information that is usually included in a film business plan include:

1. Confidentiality Agreement:

Often a business plan may contain revelations or confidential information that the producer wishes to protect until the movie is completed and available to the public. In order to insure that potential investors or other third parties do not reveal the secrets, the business plan may include a confidentiality agreement, requiring that the potential recipient promise not to reveal any of the information given to them or contained in the plan.

2. Project Summary:

This is an overview of the project and the production company: the production company’s mission, the kind of project, the logline of the project, the production team, the target market, distribution strategy, etc.

3. Story Synopsis:

This provides an overview of the story, characters and plot.

4. Investment Opportunity:

This focuses on why the film project should be made: it has the best chance to make a profit, the filmmaker has a unique insight into the subject matter that no one has heard before, the different ways the project can earn revenues, any niche audiences the film can target, the size of the market and how the producer plans to access it.

5. Project Team:

This focuses on who is managing/producing the project and why the producer and his/her team are the ones to make the movie. It may list any “bankable” or “bondable” attachments that will bring credibility to the project. Sometimes money well spent, even before funding is in place, is to hire legal and creative representation, a line producer and a good casting director. Production counsel will draft or review contracts and advise you in both the creative and the business aspects of development, production, content licensing, distribution and ancillary exploitation transactions. A line producer creates the budget. A casting director is helpful so you can cast and raise funding simultaneously. This is helpful when you need a name actor to raise the money and the money to attach the actor.

6. Marketing Plan:

This shows how the producer plans to build an audience around the film and drive significant revenue. For example, use of social media (including twitter, Facebook, Instagram, snapchat, etc.), film festival, and promotional campaigns, can serve to position the film in front of an audience, create opportunities for press coverage, and hopefully obtain positive reviews, good word of mouth and potential distributors.

7. Distribution Strategy:

This clearly communicates a realistic distribution strategy for how you plan to generate revenue on your film. Avoid using template-like business plans. Say which distribution platforms work best for your film, which ones work best for your different audiences, what your strategy is for getting onto these platforms, and once you’re on these platforms, what your strategy is for maximizing your revenue on each of them.  It says if you will be going the route of traditional or non-traditional distribution, self-distribution, independent distributor, studio or network. It says what platforms you will use to land a good distribution deal, such as, aggregators, film festival premier, film market, big theatrical exhibitors, small art house cinemas, broadcasters or cable networks.

Traditional Distribution

Traditional distribution platforms include:

  •  Theatrical – In a traditional distribution deal, theatrical release              comes first. The producer should be aware that only a small percentage of the films shown at even the most prestigious film festivals get theatrical distribution, and that it’s incredibly difficult to get your film into one of the major festivals unless you are a producer or director with previous track record there.
  • Video on Demand – This is digital and OTT/VOD (over-the-top and video-on-demand). VOD is now considered traditional distribution. VOD rights include TVOD (transactional video on demand), SVOD (subscription video on demand) and Add-Sponsored-Video-On-Demand (AVOD). TVOD includes Electronic-Sell-Through (EST) which allows the consumer to permanently retain a copy of the work, and Pay-Per-View (PPV). SVOD is a service that offers its subscribers a monthly subscription package for a monthly fee. An AVOD platform streams its library of content to consumers for free but inserts advertising into the program.
  • Broadcast – pay TV, pay Cable, free TV
  • Home Video – This involves the rental or sale of the film on DVD or Blu-ray for use on home television sets and other playback devices.
  • Non-Theatrical – This involves the distribution of films for public screening to a gathered audience outside of traditional movie theaters. This includes airplanes, trains, ships, schools, colleges and other educational institutions, etc. A sub-set of Non-Theatrical rights are “Educational” and “Transportation”. Educational specifically refers to a film being shown in an educational setting (in a classroom or on a school campus). Some distributors will handle only a film’s educational rights. Transportation includes in-flight exhibition, ships at sea, oil rigs, military, etc. Some distributors will handle only the film’s transportation rights.

Non-Traditional Distribution – These are your DIY distribution options, also called self-distribution. The budget will dictate if a self-distribution route is right for your project. For example, if your budget is over $1 million, you may not make your money back, let alone make a profit. You’ll either need traditional distribution, or a hybrid approach, that is, both traditional and non-traditional methods.Obviously, self-distribution is not easy. You’re going to have to get creative with your marketing strategy and your budget. It helps if there’s a niche audience for the film that you can market to and promote the release, such as, a school club or community organization. For example, if your movie audience is faith-based, religious, LGBT, or a college campus, traditional theater exhibitors may not be able to promote within those communities as well as the filmmaker who has created a work geared toward that particular audience. Self-distribution includes:

Foreign – DIY international sales will be costlier and will require more time and effort than setting up a basic domestic self-distribution plan.

VOD – As film and digital are converging, there is increasingly more creative freedom for online content distribution. These includes “self-service” distribution platforms, where you pay no or a low upfront fee to access VOD and DVD distribution, but for a higher share of profits.

Home Video – This is also known as direct-to-consumer. It includes physical DVD sales or digital download on your website.

Theatrical self-releasing –  This is also known as “four-walling”. You may plan to do a limited theatrical run to help build a buzz around your film that will drive eventual digital and VOD sales.

Non-Theatrical – Generally, whenever this involves the exhibition of the film at hotels and airlines, this only works for star-driven narrative feature.

8. The Budget:

This says how much it will cost to take the project from inception through to release of the finished negative. The budget must reflect where you’re at in your career, the choices you will make regarding the level director, cast, locations, wardrobe, props, set design, stunts and special effects needed. The budget must reflect what the project should cost to make, not what you want it to cost. Making the film for what it should cost is particularly relevant to maintaining a long-term relationship with your equity investors. The size of the budget directly affects the amount of money that needs to be raised, the investment strategies to employ, the financial caps placed by securities laws and regulations, the completion bond company and the type of collective bargaining agreements between the industry unions and the producer. The budget costs include:

  • Negative Cost – This is how much it costs to produce and shoot the film. This is also called the direct production costs. This consists of:
  • Development – Getting from inception of the project through to a final script.
  • Pre-production – Building a team and planning the shoot.
  • Production – Shooting the movie, including fees for cast, director, producer, crew, locations, security, sets, costumes, makeup, transportation, permits, equipment rentals, labor union (e.g. SAG-AFTRA, IATSE).
  • Post-production – Editing, visual effects, titles, sound design, duplication and licensing fees (including music, artwork, brand names, stock footage, etc.).
  • Insurance – Liability insurance on the negative and videotape, sets, equipment, and property; workers’ compensation insurance; cast insurance; and errors and omissions (E&O) insurance to cover problems with the script such as defamation or copyright infringement.
  • Contingency Reserve – Typically 10% of the total budget. This is usually required by a completion bond company to be set aside in an escrow account to cover contingencies and “deliverables,” such as dupe negatives for foreign distributors.
  • Completion Bond – If you plan to borrow money for all or part of the budget, the lender, especially a bank, will demand that there is a completion bond in place. The completion bond company agrees to pay those fees in excess of the 10% contingency. The bonding company charges a fee, typically up to 6% of the budget (including the fee).
  • Deferred Compensation – This covers income earned but not paid to cast, crew or other parties. This expense must be separately identified in the budget since this reflects the cash needs of the project and any additional royalties and residuals that will be paid to the deferred income participants.
  • Legal Fees – This covers costs to hire a lawyer or production counsel to do all the legal work on the film.
  • Marketing and Promotion – The budget must have enough left over to do the festival circuit and launch the initial marketing campaign for your film. These include: costs of film festival submission fees, deliverables and travel to festival premiere; costs to hire a publicist; and costs to attend film markets (AFM, EFM, Cannes, MIPCOM, MIP, etc.) and meetings with sales agents, potential distributors and networks to try to sell the finished negative.
  • Distribution – Most distribution expenses, such as, the costs of advertising and preparing release prints (P&A), are generally not included in the budget. However, unless your picture comes within the rare case that a distributor pays you to distribute your movie, you should plan to spend some money for your distribution. Often the distributor doesn’t have the resources to do the grassroots marketing the filmmaking team can. Nevertheless, due to SAG-AFTRA budget caps, e.g., the Ultra Low Budget Agreement and Modified Low Budget Agreement, it can often be beneficial to raise your P&A budget at a later date, rather than including it in your budget.

9. Financing Plan:

This says what financing methods and investor risk-mitigating strategies are available to the producer that work best for the project. These factors will be influenced by the type of project: the budget, the genre, the level director and cast, type of story, and the relationships and track record of the production team. A typical film financing model can comprise any one or combination of the following:

  • Soft Money – These include refundable and transferable tax credits, sales tax immunities, lodging exemptions, fee-free locations tax credits, cash rebates, grants, film funds (including regional funds that only need to be paid back if and when the film is deemed sufficiently successful), and foreign subsidies. Producers can raise from 50%-80% of their film budgets from foreign subsidies. Productions which qualify for tax incentives can receive from 25%-35% of their qualified production and post-production expenses. In a previous article I shared some information about New York film tax credit incentives. Unlike grants, you can’t spend a tax credit or rebate. Producer will have to spend money in order to get them (usually after production is completed). Therefore, for those productions which qualify for tax credits, producer will have to raise equity or borrow money to cover the full cost of producing the film.
  • Pre-sales – These are financing in exchange for certain distribution rights within a particular foreign territory, usually in the form of minimum guarantees (MGs) or advance on future royalty income. Bank loans and gap/mezzanine financing are mechanisms usually used to cash flow pre-sales. Pre-sales may also be used as a tool in structuring foreign co-productions. The amount of MGs that the producer has the ability to negotiate depends on his (or her sales agent) negotiating strength (bargaining power) compared to the foreign distributor. That power can be based on any number of factors including whether there are multiple offers, the size of those offers, the projected commercial success of the film, the perceived value of the elements in the film, including, most notably the star-power of the actors. Nevertheless, the best a producer can hope for these days from the foreign markets is 80% of the budget. There are costs involved in putting pre-sales deals together. Packagers can take anywhere from 5%-15% of every sale. Foreign sales agents’ fees vary between 15%-25% for obtaining distribution contracts only — and as much as 30%-35% should they secure a cash advance or bank contract.
  • Negative Pickups – A negative pickup is a form of pre-sale deal, whereby the distributor (usually a studio) guarantees the producer that it will distribute the finished picture and reimburse the producer for an agreed amount for the negative costs, subject to the picture conforming to terms detailed in the negative pickup agreement. With distribution and reimbursement of production costs secured, the producer will then borrow money from a bank or other third-party lender using the negative pickup contract as collateral.
  • Production Loans –  In order to secure a loan from a bank, a producer has to enter into pre-sales or negative pickup agreement, which are acceptable collateral. In the case of a pre-sales agreement, banks will usually lend no more than 80% of the face value of the collateral. The maximum amount of the loan usually depends on the bank’s history with the distributor, country/territory, and/or producer. But from that sum, the bank will deduct its own fee. Once the loan is delivered, the producer must pay the foreign sales agent’s fee. On the other hand, unlike, pre-sales, the bank usually lends up to 100% of the negative pickup contract value, and the lender just takes a basic origination/setup fee.Outside of banks, there are private individuals and private companies that finance films on so-called “debt deals (usually at interest rates of 10%-%15) against pre-sales agreement. Using a private investor to cash flow pre-sales versus a bank loan will dictate if you need a completion bond or not. In addition, some private companies will lend against tax credits or bankable tax rebates.
  • Gap Financing – This covers shortfalls between the film’s budget and what the producer is able to accumulate in soft money, pre-sales and equity. With gap financing, a lender provides a loan of between 10%-30% of a film’s budget against the value of all the unsold foreign distribution markets. An experienced foreign sales agent/company makes an assessment of what these foreign markets are worth. With gap financing, the documentation and legal fees can be quite considerable, constituting another expense to be built into the budget. Some of these deals are structured as mezzanine financing.
  • Mezzanine Financing – This is often referred to as “super-gap” financing. It is a junior debt capital for a portion of the film’s budget against future revenue projections. It often gives the lender the rights to convert to an ownership or equity interest in the production company or underlying film project if the loan is not paid back in time and in full. This is a very risky form of capital investment and accordingly, usually carries interest rate of 15-20%. Mezzanine investment typically provides 65%-75% of the film’s budget.
  • Foreign Co-production – This include: (1) co-financing, where more than one party invests in a production to share both risk and upside; and (2) certain pre-sales. Some countries have co-production treaties with each other that provide tax benefits and/or subsidies when production companies from the two countries co-produce a film. These deals may also involve soft loans (i.e. at below-market rates of interest) and equity in form of services or equipment.
  • Donations and in-kind Contributions – This include crowdsourcing to solicit donations by offering perks in exchange for financing. In addition, the producer may partner with service-providers such as production facilities, who provide services or goods for free, including, stock footage or editing services.
  • Sponsorships and Product Placement – This include upfront funding via embedded product placements. Income from product placement can be used to supplement the budget of the film. Sponsors spend for placement in the film, based on the amount its brand is integrated into the storyline, including, the number of times its brand appears onscreen or is mentioned in the script. Product placement may also take the form of in-kind contributions to the film, such as free cars, watches or computers (as props or set-dressing). While no money changes hands, the films budget will be lowered by the amount that would have otherwise been spent on such items.
  • Ancillary Advances – These are other downstream revenues, such as from music and publishing, merchandising or video games. Because these downstream revenues are dependent on the success of the film (e.g., there will likely not be any spin-offs based on the film until it is a box office hit), these amounts are speculative. Accordingly, these are harder advances to obtain, and will usually be discounted given the uncertain value.
  • Producer’s Investments and Deferrals – An actor, producer and crew may invest or defer his/her own fee for producing the movie. Note any restrictions on producer and crew deferrals (e.g., for calculating qualified costs for state tax credits purposes).
  • Bank Credit Lines – If a producer has a sufficient track record and consistent volume of production, a direct bank credit line may be able to be secured. This will often take the form of a revolving credit facility. It is also possible to structure a bank line as “gap financing.”
  • Private Equity – The new and first-time producer usually has to go the private equity route. The other financing methods usually depend on relationships and track records the producer has, which, if you’re a first-time filmmaker, you may not have. In general, unless you’re a producer with a track record and strong connections, you may need to write a business plan (or a business-like plan) in order to get anyone to invest in your movie.With larger budgets, equity usually covers 25%-60%. For lower budget projects, equity usually covers 80%-100% of the budget. Generally, for the lower budget indie film, producer is unlikely to get pre-sales, mainly due to the inability to attract pre-sellable cast at lower budgets. Therefore, if your budget is $500,000 and you have pre-sales in your finance plan, it’s a dead giveaway to the savvy investor that you do not know what you’re doing.Private equity typically comes from wealthy or high net worth individuals (also called angels) and private companies. The producer can promise repayment from the domestic (USA and Canada) release and from unsold foreign territories and soft money not covered by production loans. If the producer manages to bring the movie in on budget, the funds that were held for contingencies can also be used to further repay the equity investor.

10. Risks:

Depending on the amount of money involved, the nature of the potential investors and if the producer elects to use a prospectus or PPM, this section is somewhat optional. Nevertheless, the key to properly structuring documents that describe the investment opportunity is that all the information is true, accurate and sufficient to help the investor to completely understand the risks involved with an investment in the film industry. The potential investor should be advised that the producer makes no guarantees that the film will get a theatrical release, or that the film will make any money at all. The film & TV industry is a hit-based business. No matter how good the script, cast and execution, the investors are exposed to risks.

11. Comparables:

Film Comps are previously released movies that are used to estimate sales projections for the current project. Do not use comps that are older than five years. Use comps within the project’s budget range, genre, sub-genre, subject matter (theme as opposed to story line) and potential audiences. Say where your comps were distributed, for how long, the number of screens and what those marketing strategies and logistics look like. Even better, if you can draw on your own experience with taking previous films to market and what your personal track record is. Show which of your comps did well domestically, yet flopped overseas, and vice versa.  You’re probably thinking, the territory-by-territory sales technique makes it difficult to establish how successful some films have been worldwide. That’s true. That doesn’t mean you should ignore it. If you can’t say how well films like yours do overseas, mention it, and say what will make your film marketable overseas, or why it will not. If you have answers, you’re going to instill confidence.

12. Sales Projections:

This says what your realistic sales estimates are. Remember you will be sending your business plan to savvy investors and people who work in the movie industry. Be careful not to show basic assumptions that are so erroneous that they show you do not know what’s going on. A common mistake in business plans is to equate box office success with massive returns for investors. For example, savvy investors tend to reject business plans which recite how “Paranormal Activity” cost $15 thousand to make and went on to earn $194 million in the box office to suggest that the investor will receive a big chunk of cash from the theatrical distribution of the film. This is because the advances or MGs paid for indie films are typically the only money the production company ever sees from theatrical rights.Show how your sales projections match with your planned distribution strategy. Explain any assumptions about your film, such as, it will be sold on a territory-by-territory basis or acquired in a worldwide all-rights deal. The prices distributors are willing to pay to exclusively acquire a film at any given time depends on several factors: does the film have A-list stars, is it considered commercial or have broad audience appeal in a specific region? You may even start with your projections as a baseline from which to build your financing plan.The type of information typically found in sales projections include:

Foreign Sales Revenue

  • Foreign Box Office – This is how much money the film is estimated to make in theaters in the foreign territories. Less foreign exhibitor share (usually 40%-65% of box office gross), distribution fee (10%–30% of what’s left from the box office after exhibitor takes its share), P&A, MGs, etc. Depending on what “back-end” agreements were or will be struck with the film’s stars, writers, and director, residual payments and talent participations might also kick in, usually within 60 days of the film’s release.
  • Foreign Sales – This include VOD, pay cable, TV revenues and Home Video and foreign ancillary revenues. Less distribution fee, P&A, interests (against P&A spend), dues (e.g., talent guilds and distributor’s association dues).

Domestic Sales Revenue

  • Domestic Box Office Gross – These are theatrical estimates for the United States and Canada. Less distribution fee (including, sales agent fees and expenses, producer’s rep fee), P&A, MGs, exhibitor share, etc.
  • Home Video, VOD, Streaming and Ancillary Revenues – These are estimates from DVD/ Blu-Ray sales, VOD, Non-Theatrical, pay cable sales, network television, TV syndication, soundtrack albums and music publishing, and merchandising (e.g., toys, games, etc.). Less distribution and licensing fee.
  • Soft Money – This lists the locale incentives and rebates on production.

13. Return on Investment (ROI ) / Anticipated Profits Over Time:

Most investors almost always skip to this. Therefore, it is very important that a good business plan set out exactly how a potential investor is going to get their money back and make a profit, how much time it’ll take and the order in which investor will recoup its investment. Whether or not day-and-date theatrical and streaming release is part of your distribution strategy, you should show how your planned release will affect your recoupment schedule. For example, in a typical sales cycles, it may take 18-24 months after completion of the film before you can start positive cash flow. Another thing to keep in mind is the turnaround time on getting the tax credit for the rebate. In New York, for example, it may take 16-18 months to receive a tax rebate.

  • Revenue Waterfall – This is the contractual order in which financial contributors to a film’s production are repaid. From the total income to producer from worldwide sales and government incentives, any tax obligations and bank loan are repaid first. Next, the costs associated with arranging distribution, including, sales agent’s fee and expenses, are paid. Next, you deduct investor’s first share (up to 120% of their investment). Next, the completion guarantor is repaid. Next, payment of any deferments to talent. Finally, you deduct investor’s share of profits (50%). Typically, any third-party talent participants (residuals/participation share) are paid from the producer’s share of profits, except for those participations that are deducted “off-the-top”, that is, before any division between producer and investor.The process of structuring the revenue waterfall is usually done when the producer negotiates the agreements between the parties. Therefore, in what order the monies are paid out – and to whom – will vary from one project to another. This is also why a well-structured business plan is so important.Since equity is customarily at the bottom of the revenue-sharing waterfall, one of the reasons why investors like to keep budgets low is that this accelerates the break-even point and improves the internal rate of return on that investment.

14. Project Schedule / Funding Release Schedule:

if funding source is already known and targetable, you have any talent attached, there are notable crew on board, and you are talking with sales agents, you will then provide an actual set of dates for pre-pro, principal, post, a few festival submissions, meetings with distributors and networks etc and theoretical release dates, usually anywhere from 6-to-12 months after film is completed, though sometimes sooner if going direct-to-digital or direct-to-video. National release dates of tent-poles and major studio releases must be carefully considered lest the indie film be forced out of theaters to make room. Depending on the genre, budget and type of film, producer must carefully consider the impact of a release of the film in foreign territories will have on domestic release, and vice versa.

1460 Broadway New York, NY 10036
Get Directions