Motion Picture Financing
The sine qua non (Latin for “without which it could not be”) of deals within the entertainment industry is procuring and securing financial backing from investors. Without funding, a deal has no life, especially motion pictures. The project participants, including investors and producers, need to be extremely prudent in order to strike a firm deal. Below are some issues that may arise that the involved parties should be aware of.
Investor’s Concerns in a Motion Picture Deal:
- Dilution of investment: The investor should be aware of how contributions from fellow investors may dilute their return. The investor should seek representation and warranty and even indemnification from the production company so that they are protected in the case of dilution or loss.
- Control over Budget and Casting: the project budget is of high concern to the investor, as they may be called upon to fill in any gaps. The investor should demand Completion Bond and Errors and Omissions insurance to protect them from spending more money if the budget is inaccurate. The investor may have say in the principal casting to ensure it reflects the ethos of their
professional portfolio. If the principal cast cannot be relied on to draw ticket sales based on their celebrity status, the investor has the right to request casting changes or to walk away from their investment. To minimize such issues, the investment should be contingent on the investor’s approval of budget and principal casting. - Distribution: distribution of the motion picture is one of the most important things for an investor to consider before committing resources to a project. A lack of distribution or business plan may result in complete loss of the investment. Making a film and ensuring its distribution are two wholly separate processes. To protect their investment, a distribution and business plan for the motion picture should be confirmed at the time of investment. If the film lacks the draw of a prestige cast, director or producer, the investor should consider a condition precedent.
- Recoupment of Investment: the investor’s greatest concern is ensuring their investment will be recoupled. Their return will rely on some key details, such as when, how, and if the recoupment occurs. For example, depending on the number of investor’s and their negotiating power, the investor may secure different percentages of the profits from different media and territories. There are times in which the production company may define recoupment as the amount initially invested, plus more as an inducement for the investor. In these cases, the investor should be concerned about how and when they will receive their money. No matter how much the production company is offering, the investor must always focus on how, when, and if the initial investment is reasonably recouped.
- Profit Participation: the investor usually receives profit participation in addition to their recoupment. Profit participation means sharing in the profits obtained after payments of some investments. The rule of thumb is that investors are owed their recoupment first, after some deferments are paid out of the film’s profits, then any profit gained after is shared among the production company and other investors. In this case, profits usually refer to the profits made by the production company but not the distribution company.
- Completion of Picture: It is incumbent upon the investor to make sure that, even if the picture exceeds its budget, the completion of the picture will not require additional investments. As stated above, to avoid this the investor should include condition precedents and obtain a completion bond and Error’s and Omission’s insurance.
