The film industry has long been a treacherous landscape for investors, with countless stories of well-meaning individuals losing their shirts. To navigate these risky waters, film investors must arm themselves with the right questions. And remember, it’s not just about asking the questions—it’s about verifying the answers.
As President Reagan famously advised, “Trust, but verify.”
1. Assess the Producers’ Track Record
Key Question: What is the track record of the producers?
Verify their history of selling films for a profit. Check if agents and industry professionals readily take their calls. At a bare minimum, conduct an internet search to ensure they aren’t frauds.
2. Confirm A-List Attachments
Key Question: Are the “A-list” actors genuinely attached to the project?
Don’t just take the producers’ word for it. Contact the agents or lawyers of these actors to understand what “attached” means in the context of this film.
3. Evaluate the Production Status
Key Question: What is the current status of the production?
Is the project genuinely moving forward, or is it still in a hopeful “development” phase? Understand that many films never make it from development to production.
4. Investigate the Director’s Experience
Key Question: What is the experience of the director?
Research whether their previous films stayed on budget and if they were successful. The director’s track record can significantly impact the project’s outcome.
5. Ensure a Strong Line Producer is in Place
Key Question: Is there a competent line producer on set?
A strong line producer ensures adult supervision on set, keeping the film on budget and on schedule. This role is crucial yet often overlooked.
6. Understand the Distribution Plan
Key Question: What is the plan for the film’s distribution?
Are there any pre-sales, or is the strategy to produce the film first and aim for a high sale on the festival circuit? Knowing how the film will reach audiences is essential for gauging potential success.
7. Scrutinize the Budget
Key Question: What is the budget, and who has vetted it?
Ensure the budget is realistic and verified by an independent party. Avoid estimates made with “rose-colored glasses.”
8. Plan for Budget Overruns
Key Question: What is the contingency plan if the film goes over budget?
Don’t rely solely on completion bonds; understand the precise measures in place to handle potential budget overruns.
9. Inspect Producer Compensation
Key Question: How much of the budget is going into the producer’s pocket?
Investigate both direct and indirect compensation. Excessive payouts to producers can jeopardize the film’s financial health.
10. Verify Other Financing
Key Question: Is the other financing locked in?
Ensure that the rest of the financing is secure and not dependent on unreliable sources. This verification is critical to avoid last-minute financial shortfalls.
11. Determine Funding Timeline
Key Question: When does the investor need to provide funds?
The later, the better. Ideally, funds should not be required before the commencement of principal photography.
12. Ensure Collection Account Management
Key Question: Will distributors pay directly to a third-party collection account?
Confirm that a collection account management agreement will govern payments, ensuring transparency and protecting the investor’s interests.
13. Identify Guild Involvement
Key Question: How many guilds are involved, and what percentage of gross receipts will they claim?
Understand the financial obligations to guilds such as SAG-AFTRA, DGA, and WGA before any investor payments.
14. Check for Talent Deferments and Bonuses
Key Question: Are there any deferments, bonuses, or gross participations to talent that take precedence over investor payments?
Identify any financial commitments to talent that might reduce the returns available to investors.
15. Assess Investor Position in the Financing Stack
Key Question: Where does the investor stand in the financing hierarchy?
Determine if there are loans or senior equity positions ahead of the investor. This ranking impacts the priority of recoupment.
16. Clarify Recoupment Terms
Key Question: What are the precise terms for recoupment and profit sharing?
Ensure clarity in the terms to avoid falling prey to “Hollywood Accounting” tricks that can obscure true financial outcomes.
17. Evaluate Additional Perks
Key Question: Are there any additional perks for the investor, like an “Executive Producer” credit or tickets to the premiere?
While not financially impactful, these perks can add value to your investment experience.
Issues That Matter Less Than You Think
- Screenplay Quality: Surprisingly, it’s often not worth scrutinizing the screenplay. As one film mogul put it, “No one knows anything,” and investors don’t have a better crystal ball than the film’s creators.
- Completion Bonds: The absence of a completion bond isn’t a deal-breaker. These bonds are often useless for equity investors because the guarantor might take drastic measures to finish the film, potentially harming its quality.
Conclusion
Investing in films can be incredibly rewarding, but it comes with significant risks. By asking the right questions and verifying the answers, investors can make more informed decisions and improve their chances of success. Remember, thorough due diligence is your best ally in navigating the complex world of film finance.