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February 18 at 8:15am

The New Model Of Indie Film Finance, v2011.1 Domestic Value & Funding

By Ted Hope

This was once going to be a single post.  Today is part three.  There will be at least two more to come.  I started it here. And then yesterday we tried to determine the factors for accessing foreign value.  Today, let’s look stateside.

Until the double whammy of Toronto 2010 & Sundance 2011, it looked like the US acquistion market for feature content had fully collapsed.  No reasonable P&L would have shown more than a modest six figures for US acquisitions.  Hybrid & DIY models have not been developed yet to consistently deliver returns in excess of this amount (or even at these figures).  Perhaps this is now changing, but it would still be foolish for any filmmaker or investor to expect this and we can’t budget for such expectation.

How many of the 7500 films produce in the US annually return 20% of their negative cost from US licenses?  Although it puts emerging filmmakers at a great disadvantage, I think the surest determining factor for predicting US acquisition potential is the filmmakers’ track record.  If you have found buyers previously, you are well suited to find them again — and even still exceeding that 20% is the exception and not the rule.

When the US market was depressed, I often had sales agents & finance experts challenge me with the claim that the market wasn’t down; it was just that there were no good films.  People like to think that good films sell for good prices.  If 7000 American films can raise money to fund their works and no films are selling, what are those investors thinking when they fork over their cash?  They can’t be thinking that are actually helping their children or nephews and nieces when they give them money only to recognize their failure?  They must be thinking that they are making good films, and all 7000 can not be 100% wrong.

Clearly we are at a point in US film culture where the infrastructure is not serving either the investors, the creators, or the audiences.  Good films are getting made but not being delivered to their audience.  Last year I went to a film investor conference. Several other producers were invited and we all asked to pitch projects.  None of us left with funding, but the investors said to me that I was the only one that addressed how we would deal with the reality of not just getting our film to market, but bringing it to the ultimate end-users — the audience.  As artists build communities around their projects in advance of actual production, they are developing a plan to give domestic value to their films.  It is hard to imagine that any artist will be able to do enough pre-orders to predict 20% of negative costs from the USA — unless they are working on microbudgets — but taking a step forward is still a better plan than surrender to the unknown.

So where are we now in the process of getting your films funded?  If you’ve gotten your foreign sales estimates, and you can somehow reasonably anticipate a 20% of Negative Cost US Acquisition License, you are in great shape.  That is, you are in great shape if you have foolish investors.  The wise ones will still be wondering about how they cover sales fees, sales expenses, and the opportunity costs on the money.  Those numbers are still routinely ignored in many business plans for indie film I find.  If you are working with semi-literate investors, you will still be scrambling to find another 25% or so of your negative costs.

How will you fund your film if you can not predict full recoupment from the combined US & foreign licenses?  Fortunately, if your film is set in America, you can pull in some tax credit relief.  Otherwise, I hope you carry a foreign passport, and qualify for foreign subsidies.  If you plan on cash flowing any of this soft money, don’t forget to discount them and budget for the additional legal expense.  From personal experience, I find it hard to justify the costs of cash flowing soft money on the type of budgets we are talking about  – but that’s good news.  In the NMOIFFv2011.1 you are wise to treat this soft money as revenue towards the project so that such aforementioned costs will be covered.

If you are fortunate enough to have all of these rare qualities (foreign value, US acquisition potential, strong team with a track record, soft money qualifications, and cash flow partners) inherent to your project, you probably are still wondering where’s the upside.  How do we get to profit?

I think we now have a subject for tomorrow’s post.  Stay tuned.

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14 Comments

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  1. Michael Walker / Feb 18 at 8:15am

    What's the budgets you are talking about? Sounds like 2-10 Million? Do you consider microbudget under 500K, or is it more like 20K?

  2. Razcunningham / Feb 18 at 8:15am

    Ted's posts continue to bring me satisfaction and hope for the future. This one starts off hopeful, but then seems to descend into “why bother making a film at all?” Obviously that is not his intent as I don't think he'd ever stop making films but I have to wonder what kind of projects this is talking about. From the reference to 7500, it seems as if it's all of them. In truth, what Ted seems to be doing here is asking a lot of questions, questions that have no easy answers, and when we do finally get an answer to that question, about how to recoup whatever investment your film required, that answer will only apply to that one particular film. Film sales are like snowflakes, no two are ever the same.

    One thing that was common with this year's Sundance and Slamdance is that several of the well reviewed films were low budget. Very low budget, as in five figures. Obviously a QUALITY film made for very little statistically has a better chance of making its money back in distribution negotiations (if the project reaches that point).

    I think that what we're still seeing right now though, and I just experienced two weeks of this myself, is the indie community's sensibilities. I just dealt with two producers on two different projects. “Project A” had a great script and was budgeted for 50k and “Project B” had a fairly decent script and was budgeted for a little over 85k. Both had business plans where DIY distribution was the back-up plan should a negative pick-up or shared/split deal not come their way. Their DIY plans were so identical that I wasn't sure if they two producers knew each other or not (they don't).

    The MASSIVE difference in the two project's business model was the producer. Project A's producer did not expect the project to surpass 1 Million in generate revenue in the DIY model over the course of 4 years. Modest. Honest. Project B's producer on the other hand had absolutely no idea what he was talking about. This Producer is a somewhat recognizable name and has a few successes under his belt. It seemed as if he's read a few blogs on the matter of microbudget filmmaking and just repeated everything he had read back to me, saying “we're going to do it this way” i.e. the way the blogs and other microbudget filmmakers had done it, but nothing else about his presentation suggested that was actually the case. His own overhead fee was 20% of the budget and the rest of the conversation continued in the tone of ignorance; as if he had decided that his project was the exception to the statistical date. Also, Project B's budget was, in my opinion, severely under budgeted. Long story short, I declined the invite to work on Project B.

    My point in mentioning this is that, as some have theorized in these posts for a long time, and I find more and more these days, is that once you make a bigger budget film, its very hard for you to get out of that mentality and make a smaller budgeted film. I dare you to find me a moderately successful director or producer who earns more than 300k a year that signs on to make a microbudget indie film (say 100k) where his or her fee is either 5k or less, or a unified scale of 100 dollars a day with the rest of the crew and NOT have some back-end deal worked out.

    Am I demonizing back-end deals? HELL NO. Not at all. (Good) Producers earn that fee, but when all they do is lend their name and yell at PAs and Interns and not contribute to the sale in anyway, it is not deserved. A Good Producer will not only help in development, but also help bring you through to a sale, even if their experience with distribution isn't great, they'll at least be smart enough to approach someone who knows what they're doing.

    Is there a producer or director reading these posts that would take on one of those roles on a 100k film for 100 dollars a day and split a back-end deal at just a few points above the shared ratio of the entire crew (should there be a back-end deal in that regard)? Please, make yourself and your reasons known.

    Many of the filmmakers who read this blog and many others are filmmakers who are trying to make films for very low budgets, and without an advocate producer on their team, its going to be hard for them make those films happen successfully. DON'T BE AFRAID OF LOW BUDGET FILMMAKING. Yes, we need to make a living and earn a steady pay, but if we continually make quality projects at low costs we're creating a career for ourselves. It won't be easy, it never is, but it is possible, it's always possible. What I ask here, is for experienced Producers to take on a Producer role on a microbudget film for not only the benefit of the project they so liked, but because they themselves may need to relearn some of the low budget filmmaking methods and practices they have forgotten. They will need them in the future if the current trend of Toronto and Sundance continues.

  3. Jeffrey Goodman / Feb 18 at 8:15am

    Ted, I'm enjoying this recent series of posts. But I didn't totally understand this sentence and was wondering if you could clarify, “In the NMOIFFv2011.1 you are wise to treat this soft money as revenue towards the project so that such aforementioned costs will be covered.”

    Thanks, as always, for the invaluable perspective and guidance.

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  13. April / Feb 18 at 8:15am

    Hello there,

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