The financial projections for “Stone Soup” assume a conservative level of success. Many factors affect the success of any film project, including the following:
:: Innate commercial appeal
:: Timing of Release
:: Marketing angle
:: Distribution Patterns
A film’s commercial appeal is undoubtedly the single most significant factor in determining its financial success. This is closely followed in importance by the agreement the production company has with its distributors. However, all of these factors affect the eventual bottom line.
For the purposes of this business plan, we have used current industry results for independent films of comparable size and genre.
Any film that is a “breakout” - that is, a critical and box office hit - will be over and above the financials we will show. We have not factored the blockbuster low budget films into our numbers as they would skew our results to the high side, causing unrealistic expectations. Should any of our projects earn above-average dollars, it will increase the projected revenues, putting us ahead of our anticipated profit levels. Although the print and advertising expenditures may increase at the same time, their amount is expected to be minimal compared to the additional revenues.
To help protect investors from losses, we will endeavor to secure pre-sale, distribution, and other financing agreements. Given that this company is new, an agreement will be entered into only if it is perceived to benefit all equity investors. In a pre-sale agreement, a foreign organization or person buys the ancillary rights (domestic or foreign) in advance. The filmmaker takes this commitment, which includes a guarantee to pay a specific amount upon delivery of the completed film, to one of several specialized entertainment banks and, if the bank accepts the commitment, is able to raise money to finance production. In exchange for the presale contract, the US or foreign buyer obtains the right to keep the revenue (rentals) from a particular territory and may also seek equity participation. The agreement can be for a certain length of time, a revenue cap, or both.
FINANCING PLAN ::
This section contains our sales projections and income statements for the five years beginning with production financing. The projections are based on the history of other films as well as current trends in the industry. The following are significant elements of our forecast:
1: SML seeks capitalization of $2 million in minimum shares of $250 thousand to cover the production budget of “Stone Soup”. At this point, our intention is to pay back this investment plus 9% then share in the profits 50/50. All development and production data start from the date of capitalization with funds in the bank.
2: The Box Office reflects gross dollars of ticket sales before the exhibitor splits the total with the distributor. Domestic Rentals reflect the distributor’s share of the box office split with the exhibitor. Domestic Other includes home video, DVD, cable, network television, and television syndication. Foreign Revenue includes all monies returned to distributors from all venues outside the U.S. and Canada.
3: All funds flow from each revenue source to the distributor, who deducts his prints and ads expense and, generally, pays back the production cost before any money goes to the producer/investor line. The gross profit, therefore, is shown as the Distributor’s Gross Profit. The distributor’s fees are not shown in the two tables, as we have no way of knowing the details of their contracts.
4: We assume between 10 and 12 months from start of principal photography to the end of post-production for “Stone Soup”.
5: The Budget, also known as the film’s “negative costs”, covers only the expenses needed to create the master print of the film. All marketing costs are included under P&A (Prints and Advertising), often referred to as “releasing costs” or “distribution expenses”. These expenses also include the costs of making copies of the print from the master, advertising, video duplication, and other marketing costs.
6: The films shown in Table 1.1 have been used as the basis for projections in Table 1.2. The rationale for the projections is explained below.
7: The three profit scenarios shown in Table 1.2 are based on moderate results. Whereas, revenues are projected on a conservative basis, production costs are considered to be on the high side to avoid any possibility of financial shortfall.
8: Distribution Fees (the distributor’s share of the revenues as compared to his expenses, which represent out-of-pocket costs) are based on 35% of all distributor gross revenue, both domestic and foreign, a generally accepted estimate by industry analysts and trade papers. (Note: The exhibitor’s portion has been removed before this calculation.) Distribution deals are based on negotiation and vary greatly. There is no “typical” deal. The estimate takes into account that filmmakers with moderate experience have little leverage with distributors; nevertheless, we will seek to negotiate the most advantageous deal possible.
9: Advances from pre-sales to foreign territories, video, cable, and free and syndicated television will be accepted when it is in the investors’ and producers’ best interest.
10: Net Producer/Investor Income represents the projected profit after the distributor’s expenses and fees have been deducted.
11: Completion bonds, which provide an insurance policy for the film, are not always available for low-budget films. We will make every attempt to secure one.
12: Risk Factors: The business of producing and exploiting low-cost theatrical release films is highly speculative, with many risks uncommon to other businesses. No assurances can be given of the economic success of any motion picture. The revenues derived from the production and distribution of a motion picture depend primarily upon its acceptance by the public, which cannot be predicted. In addition, the competitive nature of the film industry, the possible box office failure of a motion picture being distributed, and the potential inability of a distributor to distribute the motion picture properly, collect distribution revenues, or remit funds properly to the producers, make the successful distribution of any motion picture subject to substantial risk. The commercial success of a motion picture also depends on general economic factors and other tangible and intangible factors, all of which can change our forecasts and cannot be predicted with any certainty.
The entertainment industry in general, and the motion picture industry in particular, are continuing to undergo significant changes, primarily due to technological developments. Although these developments have resulted in the availability of alternative and competing forms of leisure time entertainment, such technological developments have also resulted in the creation of additional revenue sources through licensing of rights to such new media, and potentially could lead to future reductions in the costs of producing and distributing motion pictures. In addition, the theatrical success of a motion picture remains a crucial factor in generating revenues in other media such as home video and television. Because of the rapid growth of technology, shifting consumer tastes, and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors will have on the potential revenue from and profitability of feature-length motion pictures.