Understand
Before you Sign
I must have been wearing my CPA hat at a recent LF gathering, judging by some of the questions that I was asked. Although I have been calling myself a non-practicing CPA for some time, the inquiries all had to do with the business issues surrounding LF films.
My first questioner was a producer who asked me about participation statements, which are reports from distributors that account for a film’s revenues and expenses in accordance with the formula outlined in the distribution contract. According to these reports, this particular producer/director team had yet to earn any profits. Their salaries during the course of production have been their only compensation to date.
"How can this be?" he inquired in a somewhat irritated manner. "The film has been in release for quite some time and has secured a large number of leases, certainly more than my prior films. The museums showing the film have raved about the response from their communities about the subject and its presentation. Box office is excellent and yet I haven’t seen a dime!" he grumped, growing more irritated with each sentence.
"Not only am I irked, but the film's sponsor is not very pleased either. They were expecting a nice return on their investment and the lack of profits has caused them to reconsider investing in another project of mine, at least for the time being."
With out waiting for a response, he went to one of the panel discussion groups. We would resume the conversation later.
The second series of questions came the next day over lunch. In this case, a man who has been pitching some interesting project ideas for several years was asking about distribution deals. He peppered the conversation with references to the high-profile Art Buchwald/Paramount case, fretting that once he has gotten his project funded and found a distributor, creative accounting will keep the film from making a profit on paper, and he'll never see a penny, except for his salary.
"A distributor sent me an agreement to read and sign before they will move forward," he stated. "It is so long and all seems to be legalese. If I don’t sign it, I’m back to square one. If I do, I will have put in a lot of effort over the past few years to get this film into production and will not see any kind of money for all that work."
While he was speaking, I couldn’t help but think of the earlier conversation and wondered if the first gentlemen had had the same level of concern at the beginning of his last project.
He sat staring at me anxiously. I replied, "Have you consulted with a trusted advisor, knowledgeable about such matters, and an attorney? Have you read the proposed contract and do you understand the terms? Are you willing to sign a deal just to get the film made? Have you talked with several distributors to see if there is a better deal available?"
He could answer "yes" to only one of these questions.
As more first-time producers enter the LF production arena, these issues will continue to come up. And although specific circumstances make each negotiation unique, the same principles generally apply to most distribution deals. In fact, many of the same issues prevail in the mainstream theatrical industry.
Although accounting is considered by many people to be a very boring subject, it gets a lot more interesting when you realize it’s your money at stake. It’s in your interest to understand how accounting works, and what the various terms of art actually mean. For instance, do you understand the difference between "box office" and "film rental"? Did you know that "distribution fees" and "distribution expenses" are not the same thing? Not even close.
The following suggestions are offered as generic guidelines. Naturally, you should consult your own advisors as needed:
- Read the proposed contract and understand all of the terms, especially those that relate to your profit participation and that of all other parties.
- Understand the differences between conventional accounting and contractual accounting for film participation. Be sure before you sign that the contract defines all terms adequately. For example, "distribution fees" is purely a contractual term, yet it is a substantial deduction from revenue, and is almost always first in priority.
- Since the distributor is essentially spending your money on distribution expenses, inquire as to whether bids for services are obtained, thus saving you money.
- Negotiate for a limitation on the amount and types of overhead charged to your picture.
- Keep in mind that most participation reports are prepared on a cash basis for revenue and on accrual basis for expenses. (Don’t know the difference? You’d better find out before you sign!)
- There is always a lag in reporting time from the various exhibitors to the distributor.
- There is always a lag in reporting time from the date funds are received and/or earned by the distributor until the information is assembled and reported to you. This should be well defined in the agreement.
- Some distributors will prepare a forecast of future revenue and may even offer a buyout, discounted to present value, for those projects expected to be in profits.
- Include a "right to audit" clause in the contract. There are several CPA firms, especially in the Los Angeles area, that specialize in this niche market. Sills & Adelmann and Hacker, Douglas & Company are two of the leaders.
- Seek business and legal advice in advance. You need both. One is not a substitute for the other.
- Do not sign unless you understand what you are signing, or you will pay the consequences.
- It is okay to ask questions.
A few weeks after the LF conference, the first producer called me on the telephone. He had asked his distributor many of these questions and had gotten answers. Although he hadn’t yet received a check, he better understood how to approach negotiations for his next film. And with the growing market, there will be another. Maybe that one will provide the big check!
