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Sample Business Plan for a Fictional Company
The sample business plan in this chapter shows the forecasts and cash flows for a company planning to produce three films. Due to space considerations, it is not practical to include separate business plans for both a single film and a company plan. They both follow the same format. However, a one-film plan has only four tables, as the summary tables and overhead are not necessary. All of the costs for a one-film plan should be included in the budget. Of course, the reader also has to modify the text as shown in the book to relate to one film. For more information and detail on how to create the forecasts and cash flow, please refer to the “Financial Worksheet Instructions” on Focal's companion web site for the book.
The format for an overhead table is included (see Table 11.11). It is only meant to show some of the line items that you need to consider and has no data to match the Company Overhead numbers in Table 11.1. Not all companies will need all the line items, and some may have more. In addition, the place that the filmmaker lives and/or is filming will make a difference in the specifics for each expense. For example, rent in New York will not be the same as rent in Missoula or Berlin. One-film plans do not have an overhead table, as all your expenses are in the budget.
Tax incentives for films are not included in the sample business plan. Whether in the United States or other countries, incentives change on a regular basis. In some cases, they may be discontinued altogether or simply run out of funds to apply for a period of time. If you plan on accessing an incentive, include it after the section on Strategy but before Financial Assumptions. Be sure to state that investors need to check with their own tax advisors to see how a specific incentive would affect them. In addition, do not subtract potential incentives from your total budget. In the case of most U.S. state incentives and many of those in other countries, there is an accounting done by the governing body before the actual dollars are awarded.
CRAZED CONSULTANT PRODUCTIONS: THE BUSINESS PLAN
This document and the information contained herein is provided solely for the purpose of acquainting the reader with Crazed Consultant Productions and is proprietary to that company. This business plan does not constitute an offer to sell, or a solicitation of an offer to purchase, securities. This business plan has been submitted on a confidential basis solely for the benefit of selected, highly qualified investors and is not for use by any other persons. By accepting delivery of this business plan, the recipient acknowledges and agrees that: (i) in the event the recipient does not wish to pursue this matter, the recipient will return this copy to Business Strategies at the address listed below as soon as practical; (ii) the recipient will not copy, fax, reproduce, or distribute this confidential business plan, in whole or in part, without permission; and (iii) all of the information contained herein will be treated as confidential material.
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TABLE OF CONTENTS
1 / THE EXECUTIVE SUMMARY
Strategic Opportunity
• North American boxoffice revenues were $9.8 billion in 2008.
• The independent film share of the North American box office was $3.5 billion in 2008, or 36 percent of the total.
• Worldwide revenues from all sources for North American independent films were over $8 billion in 2008.
• Worldwide boxoffice revenues were $28.1 billion in 2008.
• The overall filmed entertainment market is projected to reach $44.0 billion in the United States in 2011 and $103.3 billion worldwide.
The Company
Crazed Consultant Productions (CCP) is a startup enterprise engaged in the development and production of motion picture films for theatrical release. CCP's goals are to make films that will raise the consciousness of the American public about the importance of household cats and that will be commercially exploitable to a mass audience. The Company plans to produce three films over the next five years, with budgets ranging from $500,000 to $10 million. At the core of CCP are the founders, who bring to the Company successful entrepreneurial experience and in-depth expertise in motion picture production. The management team includes President and Executive Producer Ms. Lotta Mogul, Vice President/CFO Mr. Gimme Bucks, and Producer Ms. Ladder Climber.
The Films
CCP owns options on Jane Lovable's first three Leonard the Wonder Cat books and has first refusal on the next three publications. Currently, one book is in print, another is about to be published, and a third is still in the writing stage. The first book has created an established audience for the films. The movies based on Lovable's series will star Leonard, a half-Siamese, half-American shorthair cat, whose adventures make for entertaining stories that incorporate a strong moral lesson. CCP expects each film to stand on its own and to produce profits to finance each successive film. The movies are designed to capture the interest of the entire family, building significantly on an already established base.
The Industry
The future for low-budget independent films continues to look impressive, as their commercial viability has increased steadily over the past decade. Recent films such as Juno, Napoleon Dynamite, and Eight Below are evidence of the strength of this market segment. The independent market as a whole has expanded dramatically in the past 15 years, while the total domestic box office has increased 80 percent. At the 2005 through 2009 Academy Awards, four of the five films nominated for the Best Picture Oscar were independently financed. Technology has dramatically changed the way films are made, allowing independently financed films to look and sound as good as those made by the Hollywood studios, while remaining free of the creative restraints placed upon an industry that is notorious for fearing risks. Widely recognized as a “recession-proof” business, the entertainment industry has historically prospered even during periods of decreased discretionary income.
The Markets
Family films appeal to the widest possible market. Films such as the Spy Kids series, Garfield, and the Stuart Little films have proved that the whole family will go to a movie that they can see together. For preschoolers, there are adorable animals, while tweens and teens get real-life situations and expertly choreographed action, and parents enjoy the insider humor. The independent market continues to prosper. As an independent company catering to the family market, CCP can distinguish itself by following a strategy of making films for this well-established and growing genre.
Distribution
The motion picture industry is highly competitive, with much of a film's success depending on the skill of its distribution strategy. As an independent producer, CCP aims to negotiate with major distributors for release of their films. The production team is committed to making the films attractive products in theatrical and other markets.
Investment Opportunity and Financial Highlights
Crazed Consultant Productions is seeking an equity investment of approximately $13.5 million for development and production of three films and an additional $2.0 million for overhead expenditures. Using a moderate revenue projection and an assumption of general industry distribution costs, we project (but do not guarantee) gross worldwide revenues of $244.9 million, with pretax producer/investor net profit of $93.6 million.
2 / THE COMPANY
Crazed Consultant Productions is a privately owned California corporation that was established in September 1999. Our principal purpose and business are to create theatrical motion pictures. The Company plans to develop and produce quality family-themed films portraying positive images of the household cat.
The public is ready for films with feline themes. Big-budget animal-themed films have opened in the market over the past five years. In addition, the changing balance of cat to dog owners in favor of the former is an allegory for changes in society overall. The objectives of CCP are as follows:
• To produce quality films that provide positive family entertainment with moral tales designed for both enjoyment and education.
• To make films that will celebrate the importance of the household cat and that will be exploitable to a mass audience.
• To produce three feature films in the first five years, with budgets ranging from $500,000 to $10 million.
• To develop scripts with outside writers.
There is a need and a hunger for more family films. We believe that we can make exciting films starting as low as $500,000 without sacrificing quality. Until recently, there was a dearth of cat films. We plan to change the emphasis of movies from penguins, pigs, and dogs to cats, while providing meaningful and wholesome entertainment that will attract the entire family. In view of the growth of the family market in the past few years, the cat theme is one that has been undervalued and, consequently, underexploited.
Management and Organization
The primary strength of any company is in its management team. CCP's principals, Ms. Lotta Mogul and Mr. Gimme Bucks, have extensive experience in business and in the entertainment industry. In addition, the Company has relationships with key consultants and advisers who will be available to fill important roles on an as-needed basis. The following individuals make up the current management team and key managers.
Ms. Lotta Mogul, President and Executive Producer
Lotta Mogul spent three years at Jeffcarl Studios as a producer. Among her many credits are Lord of the Litter Box, The Dog Who Came for Dinner, and Fluffy and Fido Go to College. These films all had budgets under $10 million and had combined grosses of more than $600 million worldwide. As President and Executive Producer, her considerable experience will be used to create our production slate, manage the CCP team, negotiate with distributors, and plan future strategies.
Mr. Gimme Bucks, Vice President and CFO
Gimme Bucks will oversee the long-term strategy and financial affairs of the company. A graduate of the University of California at Los Angeles, Mr. Bucks has an M.B.A. He worked in business affairs at XYZ Studios and has been a consultant to small, independent film companies.
Mr. Better Focus, Cinematographer
Better Focus is a member of the American Society of Cinematographers. He was Alpha Numerical's director of photography for several years. He won an Emmy Award for his work on Unusual Birds of Ottumwa, and he has been nominated twice for Academy Awards.
Ms. Ladder Climber, Producer
Ladder Climber will assist in the production of our films. She began her career as an assistant to the producer of the cult film Dogs That Bark and has worked her way up to production manager and line producer on several films. Most recently, she served as line producer onThe Paw and Thirty Miles to Azusa.
Consultants
Samuel Torts, Attorney-at-Law, Los Angeles, CA
Winners and Losers, Certified Public Accountants, Los Angeles, CA
3 / THE FILMS
CCP currently controls the rights to the first three Leonard the Wonder Cat books, which will be the basis for its film projects over the next five years. In March 2009, the Company paid $10,000 for three-year options on the first three books with first refusal on the next three. The author will receive additional payments over the next four years as production begins. The Leonard series, written by Jane Lovable, has been obtained at very inexpensive option prices due to the author 's respect for Ms. Mogul's devotion to charitable cat causes. Three film projects are scheduled.
Leonard's Love
The first film will be based on the novel Leonard's Love, which has sold 10 million copies. The story revolves around the friendship between a girl, Natasha, and her cat, Leonard. The two leave the big city to live in a small town, where they discover the true meaning of life. Furry Catman has written the screenplay. The projected budget for Leonard's Love is $500,000, with CCP producing and Ultra Virtuoso directing. Virtuoso's previous credits include a low-budget feature, My Life as a Ferret, and two rock videos, Feral Love and Hot Fluffy Rag. We are currently in the development stage with this project. The initial script has been written, but we have no commitments from actors. Casting will commence once financing is in place. As a marketing plus, the upcoming movie will be advertised on the cover of the new paperback edition of the book.
Len's Big Thrill
This film is based on the second Leonard book, which is currently in the prepublication stage. In the story, Leonard accompanies Natasha while she auditions for a movie role. When Len struts across the room, the director—Simon Sez—is captivated by Len's natural ease in front of a camera. Simon makes a deal for both Natasha and Leonard to be in the film, rewriting the script to feature Leonard as the cat who saves his mistress from a burning building. The film is a smash with audiences and two sequels are made. Finally realizing they are in love, Natasha and Simon marry, giving Len the biggest thrill of all.
Ultra Virtuoso is set to direct this feature also. Development on this project will start after we are in production on Leonard's Love. Current estimates place the budget at $2.5 million. We plan to interview screenwriters as soon as the shooting script for the first film is finalized.
Cat Follies
The third book in the series is currently being written by Ms. Lovable and will be published in late 2010. The story features a dejected Leonard, whose films aren't drawing the audiences they used to. No matter what Natasha and Simon, his human parents, do, they can't cheer up our cat. Desperate to find something to encourage Len, they take him for ice skating lessons. Amazed at Leonard's agility on skates, his teacher contacts the Wonderland Follies, who sign Leonard to a contract. He is an immediate hit with the audience, especially the young people. As luck would have it, one night film mogul Harvey Hoffenbrauer is in the audience. Seeing the reaction of both kids and adults to Leonard, he decides to make a film of the follies. Soon Leonard is back on top.
4 / THE INDUSTRY
The future for low-budget independent films continues to look impressive, as their commercial viability has increased steadily over the past decade. Recent films such as The Visitor, Hot Fuzz, and Under the Same Moon are evidence of the strength of this market segment. The independent market as a whole has expanded dramatically in the past 15 years, while the total domestic box office has increased 80 percent. At the Academy Awards from 2005 through 2009, four of the five films nominated for the Best Picture Oscar were independently financed, with Crash, No Country for Old Men, and Slumdog Millionaire winning in 2005, 2007, and 2008, respectively.
The total North American box office in 2008 was $9.8 billion. The share for independent films was $3.5 billion, or 36 percent. Revenues for independent films from all worldwide sources for 2008, from both box office and ancillary markets, are estimated at more than $8 billion. PricewaterhouseCoopers projects that the overall filmed entertainment market will reach $44.0 billion in the United States in 2011 and $103.3 billion worldwide. Once dominated by the studio system, movie production has shifted to reflect increasingly viable economic models for independent film. The success of independent films has been helped by the number of new production and smaller distribution companies emerging into the marketplace every day, as well as the growing interest of major U.S. studios in acting as distributors in this market. In addition, there has been a rise in the number of screens available for independent films.
Investment in film becomes an even more attractive prospect, as financial uncertainty mounts in the wake of Wall Street bail- outs and international stock market slides. Widely recognized as a “recession-proof” business, the entertainment industry has historically prospered even during periods of decreased discretionary income. In 1987, the year the stock market experienced one of the biggest crashes in history, the motion picture industry enjoyed its highest gross receipts ever. This trend is continuing in 2009. At the industry's annual ShoWest Convention at the end of March, Motion Picture Association of America (MPAA) Chair-CEO Daniel Glickman reported that the thriving worldwide box office makes the U.S. film business a powerful growth engine. For the first quarter, domestic boxoffice revenue was up 18 percent over the same period last year, according to industry analyst www.boxofficemojo.com.
Motion Picture Production
The structure of the U.S. motion picture business has been changing over the past few years at a faster pace as studios and independent companies have created varied methods of financing. Although studios historically funded production totally out of their own arrangements with banks, they now look to partner with other companies, both in the United States and abroad, that can assist in the overall financing of projects. The deals often take the form of the studio retaining the rights for distribution in all U.S. media, including theatrical, home video, television, cable, and other ancillary markets.
The studios, the largest companies in this business, are generally called the “Majors” and include NBC Universal (owned by General Electric), Warner Bros. (owned by Time Warner), Twentieth Century Fox Film Corporation (owned by Rupert Murdoch's News Corp.), Paramount Pictures (owned by Viacom), Sony Pictures Entertainment, and the Walt Disney Company. MGM, one of the original Majors, has been taken private by investors and currently functions as an independent distributor. In most cases, the Majors own their own production facilities and have a worldwide distribution organization. With a large corporate hierarchy making production decisions and a large amount of corporate debt to service, the studios aim most of their films at mass audiences.
Producers who can finance independent films by any source other than a major U.S. studio have more flexibility in their creative decisions, with the ability to hire production personnel and secure other elements required for preproduction, principal photography, and postproduction on a project-by-project basis. With substantially less overhead than the studios, independents are able to be more cost-effective in the filmmaking process. Their films can be directed at both mass and niche audiences, with the target markets for each film dictating the size of its budget. Typically, an independent producer 's goal is to acquire funds from equity partners, completing all financing of a film before commencement of principal photography.
How It Works
There are four typical steps in the production of a motion picture: development, preproduction, production, and postproduction. During development and preproduction, a writer may be engaged to write a screenplay or a screenplay may be acquired and rewritten. Certain creative personnel, including a director and various technical personnel, are hired, shooting schedules and locations are planned, and other steps necessary to prepare the motion picture for principal photography are completed. Production commences when principal photography begins, and generally continues for a period of not more than three months. In postproduction, the film is edited, which involves transferring the original filmed material to a digital media in order to work easily with the images. Additionally, a score is mixed with dialogue, and sound effects are synchronized into the final picture, and, in some cases, special effects are added. The expenses associated with this four-step process for creating and finishing a film are referred to as its “negative costs.” A master is then manufactured for duplication of release prints for theatrical distribution and exhibition, but expenses for prints and advertising for the film are categorized as P& A and are not part of the negative costs of the production.
Theatrical Exhibition
There were 40,194 theater screens (including drive-ins) in the United States out of approximately 150,000 theater screens worldwide in 2008, per the most recent report of the MPAA. Film revenues from all other sources are often driven by the U.S. domestic theatrical performance. The costs incurred with the distribution of a motion picture can vary significantly depending on the number of screens on which the film is exhibited. Although studios often open a film on 3,000 screens on opening weekends (depending on the budget of both the film and marketing campaign), independent distributors usually tend to open their films on fewer screens. Film revenues from all other sources usually are driven by theatrical distribution. Not only has entertainment product been recession-resistant domestically, but also the much stronger than expected domestic box office has continued to drive up ancillary sales, such as DVD and soundtracks, as well as raising the value of films in foreign markets.
Television
Television exhibition includes over-the-air reception for viewers either through a fee system (cable) or “free television” (national and independent broadcast stations). The proliferation of new cable networks since the early 1990s has made cable (both basic and premium stations) one of the most important outlets for feature films. Whereas network and independent television stations were a substantial part of the revenue picture in the 1970s and early 1980s, cable has become a far more important ancillary outlet. The pay-per-view (PPV) business has continued to grow thanks to continued DBS (direct broadcast satellite) growth and significant NVOD (near video on demand) rollouts by cable operators. Pay-per-view and pay television allow cable television subscribers to purchase individual films or special events or subscribe to premium cable channels for a fee. Both acquire their film programming by purchasing the distribution rights from motion picture distributors.
In addition to NVOD, video on demand (VOD) user growth is projected to grow at a healthy rate over the next several years. Total worldwide users are forecasted to reach 34 million by the end of 2009. In a recent report, Informa Telecoms & Media, a London-based market analysis firm, indicates that by 2012, 909 million homes will have access to true VOD or NVOD technology. That is equivalent to 78 percent of the world's television households. The report also indicates that North America and Europe will account for a combined 83 percent of global on demand revenue by 2012, and that North America will lead the way with close to 50 percent of the world's VOD revenue and 25 percent of the world's combined VOD/NVOD. While true VOD operators still use a free-content model to promote high customer awareness of the technology, there are now signs that these services are successfully converting users into revenue generators, according to report author Adam Thomas.
Home Video
Home video companies promote and sell DVDs to local, regional, and national video retailers, which then rent the discs to consumers for private viewing and also sell directly to consumers in what is termed the “sell-through” market. DVD sales and rentals totaled $21.6 billion in 2008, according to the Digital Entertainment Group (DEG). Adding in Blu-ray and near-negligible VHS sales, overall consumer spending totaled $22.4 billion. With game consoles that also use Blu-ray taken out of the comparison, the adoption rate of standalone Blu-ray players is similar to that of DVD players at the same point after their introduction. Between consumer confusion over formats and the effect of the economy on player sales, overall disc sales have been declining for two years in a row. Analysts feel that, although the growth of Internet downloads and movie-streaming services will be an additional factor in slow growth in sales, Blu-ray should manage to supplant DVD as the main disc format in the next couple of years. Industry analyst SNL Kagan projects that the high-definition (HD) piece of the pie will grow to almost 19 percent by 2011, when Blu-ray revenue is projected to reach $3.53 billion, and to reach $13.0 billion by 2014, when it expects HD to account for 60 percent of segment revenue.
International Theatrical Exhibition
Much of the projected growth in the worldwide film business comes from foreign markets, as distributors and exhibitors keep finding new ways to increase the boxoffice revenue pool. More screens in Asia, Latin America, and Africa have followed the increase in multiplexes in Europe, but this growth has slowed. The world screen count is predicted to remain stable over the next nine years. Other factors are the privatization of television stations overseas, the introduction of DBS services, and increased cable penetration. The synergy between international and local product in European and Asian markets is expected to lead to future growth in screens and box office.
Future Trends
Revolutionary changes in the manner in which motion pictures are produced and distributed are now sweeping the industry, especially for independent films. Companies like Movielink (owned by Blockbuster), Amazon's Video on Demand, CinemaNow, and Apple's iTunes Store are providing films and other entertainment programming for download on the Internet. New devices for personal viewing of films, including the PSP, Xbox, video iPod, and iPhone, are gaining ground in the marketplace, expanding the potential revenues from home video and other forms of selling programming for viewing. Although there may not be a significant impact of the new technologies at present, their influence is expected to grow significantly over the next five years.
5 / THE MARKET
The independent market continues to prosper. The strategy of making films in well-established genres has been shown time and time again to be an effective one. Although there is no boilerplate for making a successful film, the film's probability of success is increased with a strong story, and then the right elements—the right director and cast and other creative people involved. Being able to greenlight our own product, with the support of investors, allows the filmmakers to attract the appropriate talent to make the film a success and distinguish it in the marketplace.
CCP feels that its first film will create a new type of moviegoer for these theaters and a new type of commercial film for the mainstream theaters. Just as My Dog Skip found a home in both art houses and malls, so will Leonard's Love. Although we expect our film to have a universal enough appeal to play in the mainstream houses, at its projected budget it may begin in the specialty theaters. Because of the low budget, exhibitors may wait for our first film to prove itself before providing access to screens in the larger movie houses. In addition, smaller houses will give us a chance to expand the film on a slow basis and build awareness with the public.
Target Markets
Family-Friendly Films
Family-friendly films appeal to the widest possible market and have been among the most profitable. Crazed Consultant Productions’ projects have a multigenerational audience from tweens to grandparents. In December 2007, Variety and other trade and local papers announced in headlines that “family films boost the box office.” John Fithian, President of the National Association of Theater Owners (NATO), said, “Year after year, the box office tells an important story for our friends in the creative community. Family-friendly films sell.” Previously thought of only as kids’ films, family-friendly movies now offer a new paradigm of family entertainment. Production and distribution companies know that wholesome entertainment can be profitable. We feel that films that offer diversion and feature a strong cat storyline will draw a large audience. Heretofore, studios have made the majority of family films. We believe that the time is right to make cost-effective films on smaller budgets.
Cat Owners
Pet ownership is currently at its highest level since the first study in 1988 with 71.1 million households in the United States owning at least one pet (63 percent of the 113.7 million total U.S. households). The steady increase is up from 69 million households in 2004, 64 million households in 2002, and 51 million households in 1988. The two most popular pets in most Western countries have been cats and dogs. In the United States, 39 percent (44.3 million) of households own dogs compared to nearly the 34 percent (38.4 million) that own cats, according to the 2007 to 2008 survey of the American Pet Products Manufacturers Association. However, there are 83 million pet cats compared to 74.8 million pet dogs. The geographic location of pet owners closely matches that of the U.S. population, with pet owners living in both large cities and rural areas. Comparable numbers are not available for Europe, although an earlier study showed that households in Europe own approximately 50 million cats and those in Japan own 10 million.
The time has finally come for the cat genre film. Cats have been with us for 12 million years, but they have been underappreciated and underexploited, especially by Hollywood. Recent studies have shown that the cat has become the pet of choice. We plan to present cats in their true light, as regular, everyday heroes with all the lightness and gaiety of other current animal cinema favorites, including dogs, horses, pigs, and bears. In following the tradition of the dog film genre, we are also looking down the road to cable outlets.
We believe that cat programs will be the next trend in this medium. Animal films in general, and cat films in particular, have had increasing commercial success. Examples in recent years include Garfield: The Movie, Cats and Dogs, Stuart Little, Stuart Little 2, Dr. Dolittle, andDr. Dolittle 2. These films have opened the door for Crazed Consultant's films. As the pet that is owned by more individuals than any other animal in the United States, the cat will draw audiences from far and wide. There is even talk of a cat television channel.
CCP plans to begin with a $500,000 film that would benefit from exposure through the film festival circuit. The exposure of our films at festivals and limited runs in specialty theaters in target areas will create awareness for them with the general public. In addition, we plan to tie in sales of the Leonard books with the films. Although a major studio would be a natural place to go with these films, we want to remain independent.
6 / DISTRIBUTION
The motion picture industry is highly competitive, with much of a film's success often depending on the skill of its distribution strategy. The filmmakers’ goal is to negotiate with experienced distribution companies in order to seek to maximize their bargaining strength for a potentially significant release. There is an active market for completed motion pictures, with virtually all the studios and independent distributors seeking to acquire films. The management team feels that the Company's films will be attractive products in the marketplace.
Distribution terms between producers and distributors vary greatly. A distributor looks at several factors when evaluating a potential acquisition, such as the uniqueness of the story, theme, and the target market for the film. Since distribution terms are determined in part by the perceived potential of a motion picture and the relative bargaining strength of the parties, it is not possible to predict with certainty the nature of distribution arrangements. However, there are certain standard arrangements that form the basis for most distribution agreements. The distributor will generally license the film to theatrical exhibitors (i.e., theater owners) for domestic release and to specific, if not all, foreign territories for a percentage of the gross boxoffice dollars. The initial release for most feature films is U.S. theatrical (i.e., in movie theaters). For a picture in initial release, the exhibitor, depending on the demand for the movie, will split the revenue derived from ticket purchases (“gross box office”) with the distributor; revenue derived from the various theater concessions remains with the exhibitor. The percentage of boxoffice receipts remitted to the distributor is known as “film rentals” and customarily diminishes during the course of a picture's theatrical run. Although different formulas may be used to determine the splits from week to week, on average a distributor will be able to retain about 50 percent of total box office, again depending on the performance and demand for a particular movie. In turn, the distributor will pay to the motion picture producer a negotiated percentage of the film rentals less its costs for film prints and advertising.
Film rentals become part of the “distributor 's gross,” from which all other deals are computed. As the distributor often relicenses the picture to domestic ancillaries (i.e., cable, television, home video) and foreign theatrical and ancillaries, these monies all become part of the distributor 's gross and add to the total revenue for the film in the same way as the rentals. The distribution deal with the producer includes a negotiated percentage for each revenue source; for example, the producer 's share of foreign rentals may vary from the percentage of domestic theatrical rentals. The basic elements of a film distribution deal include the distributor 's commitment to advance funds for distribution expenses (including multiple prints of the film and advertising), and the percentage of the film's income the distributor will receive for its services. Theoretically, the distributor recoups his expenses for the cost of its print and advertising expenses first from the initial revenue of the film. Then the distributor will split the rest of the revenue monies with the producer/investor group. The first monies coming back to the producer/investor group generally repay the investor for the total production cost, after which the producers and investors split the money according to their agreement. However, the specifics of the distribution deal and the timing of all money disbursements depend on the agreement that is finally negotiated. In addition, the timing of the revenue and the percentage amount of the distributor 's fees differ depending on the revenue source.
Release Strategies
The typical method of releasing films begins with domestic theatrical, which gives value to the various film “windows” (the period that has to pass after a domestic theatrical release before a film can be released in other markets). Historically, the sequencing pattern has been to license to pay-cable program distributors, foreign theatrical, home video, television networks, foreign ancillary, and U.S. television syndication. As the rate of return varies from different windows, shifts in these sequencing strategies will occur.
Distributors plan their release schedules with certain target audiences in mind. Given the cost of prints ($1,200 to $1,500 each), this release method can create an initial marketing expense of over $1 million, accompanied by an equally high advertising program. Films with lower budgets will often get a “platform” release. In this case, the film is given a build-up by opening initially in a few regional or limited local theaters to build positive movie patron awareness throughout the country. The time between a limited opening and its release in the balance of the country may be several weeks.
7 / RISK FACTORS
Investment in the film industry is highly speculative and inherently risky. There can be no assurance of the economic success of any motion picture since the revenues derived from the production and distribution of a motion picture primarily depend on its acceptance by the public, which cannot be predicted. The commercial success of a motion picture also depends on the quality and acceptance of other competing films released into the marketplace at or near the same time, general economic factors, and other tangible and intangible factors, all of which can change and cannot be predicted with 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 videocassettes and television. Due to 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.
The Company itself is in the organizational stage and is subject to all the risks incident to the creation and development of a new business, including the absence of a history of operations and minimal net worth. In order to prosper, the success of the Company's films will depend partly upon the ability of management to produce a film of exceptional quality at a lower cost that can compete in appeal with higher-budgeted films of the same genre. In order to minimize this risk, management plans to participate as much as possible throughout the process and will aim to mitigate financial risks where possible. Fulfilling this goal depends on the timing of investor financing, the ability to obtain distribution contracts with satisfactory terms, and the continued participation of the current management.
8 / FINANCIAL PLAN
Strategy
The Company proposes to secure development and production film financing for the feature films in this business plan from equity investors, allowing it to maintain consistent control of the quality and production costs. As an independent, Crazed Consultant Productions can strike the best financial arrangements with various channels of distribution. This strategy allows for maximum flexibility in a rapidly changing marketplace, in which the availability of filmed entertainment is in constant flux.
Financial Assumptions
For the purposes of this business plan, several assumptions have been included in the financial scenarios and are noted accordingly. This discussion contains forward-looking statements that involve risks and uncertainties as detailed in the “Risk Factors” section.
1. Table 11.1, Summary Projected Income Statement, summarizes the income for the films to be produced. Domestic Rentals reflect the distributor 's share of the boxoffice split with the exhibitor in the United States and Canada, assuming the film has the same distributor in both countries. Domestic Other includes home video, pay TV, basic cable, network television, and television syndication. Foreign Revenueincludes all monies returned to distributors from all venues outside the United States and Canada.
2. The film's Budget, often known as the “production costs,” covers both “above-the-line” (producers, actors, and directors) and “below-the-line” (the rest of the crew) costs of producing a film. 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 release print from the master and advertising and vary depending on the distribution plan for each title.
3. Gross Income represents the projected pretax profit after distributor 's expenses have been deducted but before distributor 's fees and overhead expenses are deducted.
4. Distributor's Fees (the distributor 's share of the revenues as compared to his expenses, which represent out-of-pocket costs) are based on 35 percent of all distributor gross revenue, both domestic and foreign.
5. Net Producer/Investor Income represents the projected pretax profit prior to negotiated distributions to investors.
6. Table 11.2 shows the Summary Projected Cash Flow Based on Moderate Profit Cases, which have been brought forward from Table 11.10.
7. The films in Tables 11.3 and 11.4 are the basis for the projections shown in Tables 11.7 and 11.8. Likewise, the films in Tables 11.5 and 11.6 are the basis for the projections in Table 11.9. The rationale for the projections is explained in (8) below. The films chosen relate in either theme, style, feeling, or budget to the films we propose to produce. It should be noted that these groups do not include films of which the results are known but that have lost money. In addition, there are no databases that collect all films ever made, nor are budgets available for all films released. There is, therefore, a built-in bias in the data. Also, the fact that these films have garnered revenue does not constitute a guarantee of the success of this film.
8. The three revenue scenarios shown in Tables 11.7 and 11.8—low (breakeven), moderate, and high—are based on the data shown in Tables 11.3 and 11.4. Likewise, Table 11.9 is based on the comparative films in Tables 11.5 and 11.6. We have chosen films that relate in genre, theme, and/ or budget to the films we propose to produce. The low scenario indicates a case in which some production costs are covered but there is no profit. The moderate scenario represents the most likely result for each film and is used for the cash flows. The high scenarios are based on the results of extraordinarily successful films and presented for investor information only.
Due to the wide variance in the results of individual films, simple averages of actual data are not realistic. Therefore, to create the moderate forecast for Tables 11.7 through 11.9, the North American box office for each film in the respective comparative tables was divided by its budget to create a ratio that was used as a guide. The North American box office was used because it is a widely accepted film industry assumption that, in most cases, this result drives all the other revenue sources of a film. In order to avoid skewing the data, the films with the highest and lowest ratios in each year were deleted. The remaining revenues were added and then divided by the sum of the remaining budgets. This gave an average (or, more specifically, the mean variance) of the box office with the budgets. The ratios over the five years represented in the comparative tables showed whether the box office was trending up or down or remaining constant. The result was a number used to multiply times the budget of the proposed film in order to obtain a reasonable projection of the moderate boxoffice result.
In order to determine the expense value for the P& A, the P& A for each film in the comparative tables was divided by the budget. The ratios were determined in a similar fashion, taking out the high and low and arriving at a mean number. For the high forecast, the Company determined a likely “extraordinary” result for each film and its budget.
The remaining revenues and P& A for the high forecasts were calculated using ratios similar to those applied to the moderate columns.
In all the scenarios, and throughout these financials, “ancillary” revenues from product placement, merchandising, soundtrack, and other revenue opportunities are not included in projections.
9. Distributor's Fees are based on all the revenue exclusive of the exhibitor 's share of the box office (50 percent). These fees are calculated at 35 percent (general industry assumption) for the forecast, as the Company does not have a distribution contract at this time. Note that the fees are separate from distributor 's expenses (see P& A in (2) above), which are out-of-pocket costs and paid back in full.
10. The Cash Flow assumptions used for Table 11.10 are:
a. Film production should take approximately one year from development through postproduction, ending with the creation of a master print. The actual release date depends on finalization of distribution arrangements, which may occur either before or after the film has been completed and is an unknown variable at this time. For purposes of the cash flow, we have assumed distribution will start within six months after completion of the film.
b. The largest portion of print and advertising costs will be spent in the first quarter of the film's opening.
c. The majority of revenues generally will come back to the producers within two years after release of the film, although a smaller amount of ancillary revenues will take longer to occur and will be covered by the investor 's agreement for a breakdown of the timing for industry windows.
d. Following is a chart indicating estimated entertainment industry distribution windows based on historical data showing specific revenue-producing segments of the marketplace.
WINDOW |
MONTHS AFTER INITIAL |
ESTIMATED LENGTH |
Domestic theatrical |
— |
3–6 months |
Foreign theatrical |
Variable |
6–12 months |
Domestic home video (initial) |
3–5 months |
6–12 months |
Domestic pay-per-view |
3–5 months |
6 months |
Foreign video (initial) |
6–9 months |
9–12 months |
Domestic pay television |
12–15 months |
18 months |
Foreign television (pay or free) |
18–24 months |
12–36 months |
Domestic free television (network, barter, syndication, and cable) |
24–30 months |
1–4 years |
11. Company Overhead Expenses are shown in Table 11.11.
Crazed Consultant Productions Summary Projected Income Statement (Millions of Dollars)
Crazed Consultant Productions Summary Projected Cash Flow* Based on Moderate Profit Cases (Millions of Dollars)
* For reference only. How and when monies are actually distributed depends on contract with distributor. Prints and advertising, which the distributor spends, are paid back first, then the production budget.
Crazed Consultant Productions Gross Profits of Selected Comparative Films with Varied Genres For Two Films* with Budgets $0.5 to $7.0 Million Years 2005–2007 (Millions of Dollars)
* The amounts obtained by these comparable films do not constitute a guarantee that Leonard's Love and Len's Big Thrill will do as well.
(a) Rentals equal distributor 's share of U.S. box office.
(b) Domestic Revenue Other includes television, cable, DVD, and all other nontheatrical sources of revenue.
(c) Foreign Revenue includes both theatrical and ancillary revenues.
(d) Total Revenue equals Domestic Rentals, Domestic Other, and Foreign.
(e) Gross Profit before distributor 's fee is removed.
Source: Business Strategies.
Crazed Consultant Productions Selected Comparative
Films with Varied Genres for Two Films* with
Budgets $1.5 to $8.0 Million, U.S. Box Office and Budgets Only,
Years 2008–2009 (Millions of Dollars)
FILMS |
BOX OFFICE |
BUDGET |
900 Horses |
6.8 |
2.7 |
Chimps and Whales |
15.6 |
7.0 |
Cocaine Buffalo |
15.8 |
5.0 |
Ferret Visitor, The |
11.2 |
5.0 |
Ghost Sheep |
62.0 |
5.3 |
High School Collies |
59.8 |
8.0 |
The Mouse Diaries |
10.2 |
1.5 |
My Big Fat Siamese |
18.0 |
3.5 |
Other Lemur, The** |
20.0 |
2.0 |
* The amounts obtained by these comparable films do not constitute a guarantee that Leonard's Love and Len's Big Thrill will do as well.
** Still in distribution as of July 5, 2009.
Note: Domestic ancillary and all foreign data generally are not available until two years after a film's initial U.S. release; therefore, this table includes U.S. domestic box office only.
Source: Business Strategies.
Crazed Consultant Productions Cat Follies Gross Profits of Selected Films with Varied Genres* with Budgets of $6.0 to $24.0 Million, Years 2005–2007 (Millions of Dollars)
*The amounts obtained by these comparable films do not constitute a guarantee that Cat Follies will do as well.
(a) Rentals equal distributor 's share of U.S. box office.
(b) Domestic Other Revenue includes television, cable, video, and all other non-theatrical sources of revenue.
(c) Foreign Revenue includes both theatrical and ancillary revenues.
(d) Total Revenue equals Domestic Rentals, Domestic Other, and Foreign.
(e) Gross Profit before distributor 's fee is removed.
Source: Business Strategies.
Crazed Consultant Productions’ Cat Follies
Selected Comparative Films with Varied Genres*
U.S. Box Office and Budgets Only Budgets $7.0 to $23.0 Million,
Years 2008–2009 (Millions of Dollars)
FILMS |
BOX OFFICE |
BUDGET |
Adventures of Beaver, The** |
15.0 |
9.0 |
Badger Brothers |
55.9 |
20.0 |
Finding Millie |
35.0 |
15.4 |
Kung Fu Kitty |
43.0 |
17.0 |
Mad Hot Marmots |
40.0 |
12.0 |
P.S. I Love Abyssinians |
23.4 |
7.0 |
Race to Elephant Mountain |
87.0 |
23.0 |
Smokin’ Poker Shark |
36.0 |
8.5 |
Traveling Gerbil Show, The |
18.0 |
7.6 |
Unfinished Unicorn, An |
36.0 |
10.5 |
* The amounts obtained by these comparable films do not constitute a guarantee that Cat Follies will do as well.
** Still in North American distribution as of July 5, 2009.
Note: Domestic ancillary and all foreign data generally are not available until two years after a film's initial U.S. release.
Source: Business Strategies.
Crazed Consultant Productions’ Leonard's Love
Projected Income Low, Moderate,
High Results (Millions of Dollars)
LOW |
MODERATE |
HIGH |
||
U.S. BOX OFFICE REVENUE |
0.5 |
2.0 |
15.0 |
|
Domestic Rentals |
0.3 |
1.0 |
7.5 |
|
Domestic Other |
0.7 |
3.0 |
22.5 |
|
Foreign |
0.9 |
4.0 |
30.0 |
|
TOTAL DISTRIBUTOR GROSS REVENUE |
1.9 |
60.0 |
60.0 |
|
LESS |
||||
Budget Cost |
0.5 |
0.5 |
0.5 |
|
Prints and Advertising |
0.7 |
1.0 |
6.0 |
|
TOTAL COSTS |
1.2 |
1.5 |
6.5 |
|
DISTRIBUTOR'S GROSS INCOME |
0.7 |
6.5 |
53.5 |
|
Distributor's Fees |
0.7 |
2.8 |
21.0 |
|
NET INCOME BEFORE ALLOCATION TO PRODUCERS/INVESTORS |
0.0 |
3.7 |
32.5 |
|
Note: Box office revenues are for reference and not included in the totals. These projections do not constitute a guarantee that Leonard's Love will do as well.
(a) Box office revenues are for reference and not included in the totals. 50 percent of the box office goes to the exhibitor and 50 percent goes to the distributor as Domestic Rentals.
(b) Domestic Other Revenue includes television, cable, DVD, and all other nontheatrical sources of revenue.
(c) Foreign Revenue includes both theatrical and ancillary revenues.
(d) Distributor 's Fee equals 35 percent of Distributor 's Gross Revenue.
Prepared by Business Strategies.
Crazed Consultant Productions’ Len's Big Thrill
Projected Income Low, Moderate,
High Results (Millions of Dollars)
LOW |
MODERATE |
HIGH |
||
U.S. BOX OFFICE REVENUE |
3.0 |
14.5 |
43.5 |
|
Domestic Rentals |
1.5 |
7.3 |
21.8 |
|
Domestic Other |
2.3 |
27.6 |
82.7 |
|
Foreign |
2.8 |
29.0 |
87.0 |
|
TOTAL DISTRIBUTOR GROSS REVENUE |
6.6 |
63.9 |
191.5 |
|
LESS |
||||
Budget Cost |
3.0 |
3.0 |
3.0 |
|
Prints and Advertising |
1.3 |
12.0 |
30.0 |
|
TOTAL COSTS |
4.3 |
15.0 |
33.0 |
|
DISTRIBUTOR'S GROSS INCOME |
2.3 |
48.9 |
158.5 |
|
Distributor's Fees |
2.3 |
22.4 |
67.0 |
|
NET INCOME BEFORE ALLOCATION TO PRODUCERS/INVESTORS |
0.0 |
26.5 |
91.5 |
|
Note: Box office revenues are for reference and not included in the totals.
These projections do not constitute a guarantee that Len's Big Thrill will do as well.
(a) Box office revenues are for reference and not included in the totals. 50 percent of the box office goes to the exhibitor and 50 percent goes to the distributor as Domestic Rentals.
(b) Domestic Other Revenue includes television, cable, DVD, and all other nontheatrical sources of revenue.
(c) Foreign Revenue includes both theatrical and ancillary revenues.
(d) Distributor 's Fee equals 35 percent of Distributor 's Gross Revenue.
Prepared by Business Strategies.
Crazed Consultant Productions’ Cat Follies
Projected Income Low, Moderate,
High Results (Millions of Dollars)
LOW |
MODERATE |
HIGH |
||
U.S. BOX OFFICE REVENUE |
10.0 |
36.0 |
60.0 |
|
Domestic Rentals |
5.0 |
18.0 |
30.0 |
|
Domestic Other |
15.0 |
57.0 |
94.8 |
|
Foreign |
20.0 |
98.0 |
162.0 |
|
TOTAL DISTRIBUTOR GROSS REVENUE |
40.0 |
173.0 |
286.8 |
|
LESS |
||||
Budget Cost |
10.0 |
10.0 |
10.0 |
|
Prints and Advertising |
16.0 |
37.0 |
50.0 |
|
TOTAL COSTS |
26.0 |
47.0 |
60.0 |
|
DISTRIBUTOR'S GROSS INCOME |
14.0 |
126.0 |
226.8 |
|
Distributor's Fees |
14.0 |
60.6 |
100.4 |
|
NET INCOME BEFORE ALLOCATION TO PRODUCERS/INVESTORS |
0.0 |
65.4 |
126.4 |
|
Note: Box office revenues are for reference and not included in the totals.
These projections do not constitute a guarantee that Cat Follies will do as well.
(a) Box office revenues are for reference and not included in the totals. 50 percent of the box office goes to the exhibitor and 50 percent goes to the distributor as Domestic Rentals.
(b) Domestic Other Revenue includes television, cable, DVD, and all other nontheatrical sources of revenue.
(c) Foreign Revenue includes both theatrical and ancillary revenues.
(d) Distributor 's Fee equals 35 percent of Distributor 's Gross Revenue.
Prepared by Business Strategies.
Crazed Consultant Productions’ Combined Cash Flow for Three Films* Based on Moderate Profit Cases
(Millions of Dollars)
* For reference only. How and when monies are actually distributed depends on contract with distributor. Prints and advertising are usually paid back first, then the production budget.
Prepared by Business Strategies
Crazed Consultant Productions’ Sample Overhead Expenses
Format First Five Years
NOTE: I have provided the format only examples of line items. You must choose the line items that are appropriate for your company and fill in the data. One-film plans do not have overhead.