Chapter 4

Creating Your Business Plan

Great – so you have your option agreement and you’ve set up your timeline. You’ve done some development on the script, and you’ve even done a table read to give you a great sense of what you need to change and what needs to be cut. I know what you’re thinking – let’s open up the LLC and the bank account. You want to get started raising the money. Hold on. Before you even think about opening up an LLC or a bank account, you have to focus first on your business plan.

K.I.S.S.

Don’t worry: setting up a business plan isn’t the long, arduous, boring process that you think it is. Writing commercials and promotions in television for years taught me one very important thing: keep it short and simple. Also, I approach everything I do by putting myself in the other person’s shoes, in this case, the potential investor. If I’m a busy person, do I want to read a 40- or 50-page business plan? Absolutely not!

TABLE OF CONTENTS

Let’s start with the first page, the table of contents. If I were the investor, what would I want to know about the film project, the people involved, the marketplace, and of course, what’s in it for me? How can I get involved and how can I possibly benefit from this investment? With these issues in mind, I decided that the following items should be in the business plan:

Quotation

Investor proposal

Project objective

The marketplace

Film comparisons

Company summary

The team

Synopsis

Revenue scenario

Los Angeles Times article

Section 181 (information)

Company mission statement

These items literally gave all the information necessary to have the potential investor decide whether or not they were interested. If they were interested, the next order of business was for them to read the full packet, which included the PPM, the operating agreement, and the subscription agreement.

QUOTATION

The quote was easy to find. I just went online and looked up information on projects in the same genre and in the low-budget arena. I had tons to pick from. When I was putting together our first low-budget film, Candy Stripers, I decided to pick a quote based on the great success of Cabin Fever, which had come out a couple of years earlier. Everyone had heard of that film, and what was so great about this particular quote was that it included the success of the genre: “The audiences keep accepting these films. There doesn’t seem to be a saturation point.” The quote came from a credible producer and was featured in a respected paper, Crain’s New York Business.

INVESTOR PROPOSAL

The next page, the investor proposal, was very clear and simple. Once again, I put myself in the investor’s shoes. What would get me excited? What would make me want to participate? Also, any time Kate and I took on any endeavor, we always made a point to stand in abundance, generosity, and graciousness. In the entertainment industry, there seems to be a pervasive feeling of scarcity. There is not enough – roles, jobs, shows, films, money. I have always refused to buy into that story and really work at coming from a place of, a mind set of abundance in everything I do.

So, with that in mind, with Séance, I started with three very short paragraphs. Please keep in mind that we were selling units in Séance in 2006 and the thriller/horror genre was thriving at that time.

Before I get into why the units were $7,500, I will address the other issues in this first part of the proposal. Kate and I had decided to go the traditional route of using a sales agent to sell domestic and foreign territories for us when the film was complete, and we were well aware that most of the sales would be done in the first two years (mostly the first year). There are three major markets worldwide: AFM, Berlin, and Cannes, where most of the sales are done. A lot has changed in the last few years, and there are now numerous ways to self-distribute; I will address this issue in chapter 13. I did not want to keep the LLC open indefinitely, paying taxes and paying an accountant every March to do all the K1s. I knew that would be money coming out of my personal pocket, so the decision was made to keep the LLC open for five years, and to make it very fair, we make it five years from delivery, knowing that it would take nearly a year just to complete the film.

Also, because Kate and I were planning to do a full slate of these films, we wanted to make our investors very, very happy, so before we would get a cent, we offered our investors all the profits until they reached 110 percent. Then and only then would we begin the 50/50 split. You don’t have to do it that way at all. You could do what is called a “corridor”: a 90/10 split or an 80/20 split from the beginning. As checks begin to come in (and after the sales agent has taken their expenses and commission), your investors would get 90 percent and you (as the producer and manger of the LLC) would get 10 percent, for example. If you do decide to use the corridor, then I would increase the amount the investors receive before you move to the 50/50 split. It could be worded like this:

Commencing from the date of film delivery investors will benefit by receiving 90 percent (with 10 percent going to the producer/manager) of all profits until they have recouped 120 percent of their original capital contribution.

In the third paragraph in the investor proposal, I invited the investors to the wrap party and the screening (if there is a screening), but please note that I put an asterisk (*) on invite. This is a low-budget film, so you don’t want to make a promise to your investors that you can’t keep. And if you just say they are invited to these events, they will assume that you will be paying for their plane ticket and hotel. The sentence at the bottom of the page that followed the asterisk said “All invitations mentioned above are at investors’ own expense.” Please be conscious when you are drawing up your proposal, PPM, and so on: wording is everything. The same holds true when you are speaking about your film project. Don’t be misleading in any way. It could cost you dearly. It all goes back to what I talked about in Chapter 1: it’s a business!

WHY $7,500? HERE ARE FOUR GOOD REASONS

We mention the price of $7,500 per unit (interest or share). Where did that number come from? The whole idea was to use the SAG ultra-low-budget agreement, which is $200,000. However, where so many producers make their first mistake is right here – and it’s an expensive, painful mistake. There is much more to making the movie than the budget of actually producing the movie. A line producer tells a producer that he or she can shoot this movie for $150,000 and then the producer goes off and raises that exact amount. Bad move.

There are other costs that you have to take into account, and these need to be added to your final number before you can open your LLC and start raising funds. There are operating costs that you will incur and for which you will need to be reimbursed when the time comes; there may be fees to be paid to your executive producers (finders), who will be helping to bring financing to your project; and the part that nearly everyone forgets is delivery. There will be expensive delivery costs.

The film’s budget is only one part. As you can now see, there are four distinct parts. So keep that in mind and do the math before you complete your business plan package. In fact, if you are anticipating self-distributing your film, you may want to have a separate category for that. There will be additional, perhaps substantial costs associated with this category, including creating a film website, planning a festival circuit, carrying out extensive social media campaigns, and doing a possible four-walling of your film.

1) Let’s Start with Delivery

Delivery is not even mentioned in a budget. The words that describe the items needed for delivery don’t exist anywhere except on the delivery list – which producers often don’t see until the film is long finished. Yet that list can cost anywhere from $15,000 to $30,000. With Candy Stripers, Séance, and Portal and when Kate and I were consulting on Desert of Blood, we decided to allow $20,000 for delivery costs. I describe some of the delivery items in Chapter 12.

2) Operating Costs

We knew we wanted around $15,000 for operating costs. We would be spending money on an attorney, budget/schedule, tons of photocopies as we put the LLC/business plan packets together, a possible one-sheet poster, mailing costs, table reads, and sales presentation hotel costs. Also, I don’t believe in putting the wrap party in the film budget, so that is a cost you may have to incur. In addition, I know how important it is to be able to have treats for your cast and crew, but in a low-budget film, there’s no room for that in your budget, yet it is something you want to have available funds for. Now, of course, none of the money needed for expenses before preproduction came from the investors. It was all our own money, but we kept our receipts and reimbursed ourselves the first day of preproduction from the operating costs budget.

3) Executive Producer Fee

Once again standing in abundance, we decided on an executive producer’s fee of 10 percent for those who worked with us to help raise the financing. In some states, you are able to use the term “finder” for those who come on board to help with funding, but because it varies from country to country and in the United States from state to state, ask your attorney about the best and most appropriate term to use.

I know 10 percent sounds ridiculously high – the norm in the industry is 2½ to 5 percent –but our units were going to be so small that it would hardly be worth the effort for someone to make a phone call for $200 or $300. And I knew I needed help. I didn’t want to spend a year raising the money for the first project, Candy Stripers, so why not be generous and have some of our colleagues work with us and therefore move the project forward with velocity? That way it’s a win/win for everyone and your executive producers get to come and be on the set of the film, act in the film, write a song for the film or do any number of the fun jobs that are available.

4) Budget

Your line producer will do your budget. That’s not your job. Knowing how to read a budget and a schedule is your job, but you don’t have to create the actual budget or schedule. It is one of those areas that stop producers from moving forward. They think they have to do everything, which is just not the case. Line producers are specialists when it comes to budgets, so take advantage of that knowledge. Also, this is one of the places that I do spend money early in the process: hiring someone to do the budget before we even try to start raising funds. As I’ve mentioned before, make sure to keep track of any out-of-pocket money so that you can be reimbursed during preproduction. When we were doing the SAG ultra-low-budget projects, it was important to keep the budget at $200,000. So, to be safe, we asked our line producer to bring it in at closer to $190,000, allowing us some breathing room during the production of the film.

EXTRA BONUS

On the investor proposal page, there is also an extra bonus that helped us raise the money so quickly that it was amazing. And it’s just one more instance of putting yourself in the other person’s shoes. Looking at it from their perspective, here is what I came up with:

Should an individual buy and/or sell three to five units, that individual will receive an Executive Producer credit on a shared card in the main titles of the picture.

Should an individual buy and/or sell six or more units, that individual will receive an Executive Producer credit on a single card in the main titles. And in addition, their credit will appear on the movie poster and DVD box.

On the film Portal, we sold two sets of six units immediately to two individuals who wanted the credit of executive producer because they were in the process of starting up their own production company. It was an important business move for them to have their company credit in the main title of our film. It was that kind of unconventional – and generous – thinking that had the units sell more quickly. It doesn’t take much, just thinking as if you were the investor. What would get you excited, make you happy, have you want to play? Keep that in mind when you are writing up your own investor proposal. In the low-budget world, when the units are this small, it’s not as much about making a big profit as it is about playing in the entertainment industry and having fun.

RISK

Please note that on the investor proposal page, I allowed one-third of the page to talk about the risk involved. The risk references are all in capital letters. It begins with this sentence: ONLY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE THE INTERESTS.

Then it goes on to tell them to read the OPERATING AGREEMENT and the CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM. Any time you are mentioning investing in your film, whether on paper or verbally, you have to mention the risk factor.

Once again, the page I have just talked about – the investor proposal – is only part of the business plan that was actually included in my full PPM packet. If I were sending out just the business plan to pique people’s interest, separate from the full packet, I would not be permitted to include this page. When you are requesting funds, explaining the process by which people can invest and the benefits they may receive by investing, you are dealing with items that fall under government regulations. Therefore, it’s important that these types of proposals be included only when your PPM is attached.

PROJECT OBJECTIVE

The project objective page is fun to write. Mine is only one-third of a page – and it’s double-spaced – but it explains the objective very clearly. At the time we were putting together the business plans for these genre films, the game plan was to do a full slate of ten films. No one could foresee what was to take place: the glut of horror films, the worldwide pirating, and the economy breakdown that affected territory sales around the world. Okay, so maybe my timing was a little off! Here is the project objective that we used on Candy Stripers:

Our objective is to produce Candy Stripers as a successful feature film that will be one of many “horror” movies that are part of our genre division here at WindChill Films. WindChill Films will be a major contributor of horror films committed to producing a minimum of two projects per year. Our films will be extremely well written with exceptional plots … edgy, unique, scary stories that will leave our audiences trembling in their seats and wanting more. In addition to creating quality projects, we are one hundred percent committed to having each and every film generate a healthy profit for our investors.

As you can see, it is something that only you can write. You should never hire someone to write this for you. The project objective makes you think about why you are doing this film or this slate of films. It benefits you as much as the investors, and it forces you to get very clear about what you are trying to accomplish.

THE MARKETPLACE

The marketplace page is fun to work on and very easy to do. I just went on the Internet and found articles on horror films and how great they were doing (at that time) internationally. My page started like this:

The “horror” and “thriller” genres have always done extremely well in the marketplace. Year after year, these films outperform all other genres except action and animation. And action and animation require huge budgets, and therefore a huge risk. Projects like Séance can be produced for a low budget, thus allowing for higher profits.

Then I included a number of quotes that backed up that statement. For example, “It’s alive! Horror flicks help restore pulse at box office” and “Massacre appeal: no matter how you slice it, horror movies are making a real killing at the box office.” Both these quotes were from reputable sources, in this case, the Los Angeles Times and Entertainment Weekly, respectively. Once again, there is no guarantee that your film will perform the way the other films performed, but it does give some real credibility as to why you chose your particular film and genre. Others have done it before you and proved to be successful and profitable.

FILM COMPARISONS

I personally think the film comparison page is useless, but everyone seemed to love it. It speaks for itself: it is a list of films in the same genre and budget size as your film, along with the budget amount and how much the film has grossed worldwide. Once again, with the Internet and access to sites like IMDb, it is easy to get both the domestic and worldwide numbers.

The problem that I ran into was finding current films that were done at the budgets we were planning to do – budgets ranging from $200,000 to $600,000 (SAG ultra and SAG modified). There are many cases in which these films have done extremely well and were exceptionally profitable, but because they are often straight to DVD or VOD (video on demand), there are no box office numbers. And because the sales agents who are selling these films often do full buy-outs on each territory sale (which seldom has any back end associated with the deal), there is no way to track the profits.

For example, we sold Candy Stripers to Screen Gems as a full buy-out for a specific amount of money, yet Screen Gems went on to make a huge profit. Or so we were told. But we have no way of getting that exact information, and it’s not listed online like the numbers are for the box office. That is why it is so important that when you do territory sales, you get a back-end participation so that the distributor will be required to give you quarterly records. That way you will have the numbers you need to help you put your package together for your next project.

COMPANY SUMMARY AND TEAM

Because our company had already completed four films, had won awards, and had been featured at a number of high-profile festivals, we had a great company bio. We also included bios for the writer, director, DP, and line producer. In addition, we added the bios of other keys who had impressive backgrounds. Our composer, for example, had been honored at Sundance and had worked on a number of award-winning films. It is very important to make a note at the bottom of their bios that says “subject to availability.” In fact, on Candy Stripers, our line producer and our special effects producer had to be replaced a couple of months before production because they got bigger jobs. I love disclaimers and I love being completely honest with people. You are dealing with other people’s money, and it is extremely important that they are aware of all of this information.

SYNOPSIS

This one is obvious: you always add the synopsis to your business plan. People have asked me if they should include the entire script or offer the script to investors with the business plan. The answer is “no!” Of the 54 investors who bought a total of 82 units in Candy Stripers, Séance, and Portal, only one investor requested the script, which I of course gave to him. But you don’t have to offer it to them. For the most part, investors are not in the entertainment industry, and they wouldn’t know how to read a script. It’s not easy for people outside the industry. It doesn’t read like anything they would have seen before and it will only bring up a ton of questions, comments, and suggestions from someone who doesn’t know the world of filmmaking.

REVENUE SCENARIO

As I mentioned earlier, when we were planning to produce Candy Stripers, the Internet was not as advanced as it is now in terms of allowing for easier, more efficient ways to self-distribute. So we planned to go the traditional route of having a sales agent sell domestic and foreign territories for us when the film was complete.

We made a point of getting to know sales agents, and we spoke with them about the project very early on. I highly recommend that you do the same. Even if you are planning to go the self-distribution route, I would still get to know sales agents and distributors because you never know what direction your film might take when the time comes. Be open and be educated on all fronts. We asked one of the companies that we had created a great relationship with for sales estimates on our film – and we got them.

In the case of Candy Stripers, we were not going to have any major stars, but we were going to have great aliens, and it was going to be a fun, campy horror film being done for the ultra-low budget. So with that information, we got the estimates back. From there, we just did the math: based on the high end sales agent’s expenses and commission at that time, we figured out the possible percentage the investors could make, should the sales agent fulfill their estimated sales. Of course, as always, please put a disclaimer at the bottom of the page, because you never really know exactly what the final number will be. They could be much higher or lower, depending on so many variables: the economy, pirating, a glut of films in your genre, the success of your stars, and so on. We wrote in bold block letters: “THESE SCENARIOS ARE FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A PROMISE OR AN EXPECTATION OF FUTURE REVENUE.”

The revenue scenario also mentions “high-risk investment”; it is important to mention this on any and every page where you are talking about sales estimates, possible profits, and anything that has to do with money. Figure 4.1 shows a sample revenue scenario.

FIGURE 4.1

NEWSPAPER ARTICLES

In 2005, there were tons of articles on the amazing success of horror films. We picked one from the Los Angeles Times Calendar section that was called “Horror Returns to Make a Killing.” How great was that? It was a two-page article with a photo from The Grudge on the first page, and the caption under the picture gave the budget of the film at $10 million, stating that it had already made $110 million domestically. The article was written at the same time that we were sending out our PPM/business plan packages. I highly recommend that when you are putting your business plan together, you find a fantastic article that really helps back up what you have been saying in your proposal and gives it additional credibility.

SECTION 181

Our timing was perfect with the film projects we were planning to shoot here in the United States. Section 181, part of the American Job Creation Act, had just been passed, which allowed investors to get an incredible tax write-off if they invested in films that were shooting on American soil. So find out if there are incentives like that in your country and also include any possible local incentives that may benefit investors in any way. In many cases, provincial and state incentives are something you might want to explain in your business plan if your plan is to give them back to the investor. If you are shooting in an area that offers a 25 or 35 percent labor/tax incentive (based on the local spend … what % of the budget was spent in that state or province), then you might want to do a conservative estimate of what that amount would be and find out approximately when you will see the return from that incentive. That could be a substantial check that could go directly to your investors the minute it arrives, and it’s safe, guaranteed money.

MISSION STATEMENT

It is important to write a mission statement for your company. In fact, you should already have one. If you don’t, stop reading and go work on your mission statement. Now! I had an investor call to tell me that it was solely because of our company mission statement that he made the decision to buy a unit in one of our films. Plus, it gives more credibility to your company and to you. It makes it all more real. People are not just investing in your film; they are investing in you and your company. Figure 4.2 shows our mission statement.

FIGURE 4.2

YOUR ONE-SHEET POSTER

Ordinarily, in the low-budget world I hate to spend money before pre-production because anything before preproduction will be out of my own pocket. Yes, I will get reimbursed, but it is still money that is at risk at this stage. However, if a small, 8½ × 11 good-quality color poster of your film is so compelling and so visually stunning that it will entice the investor, then do it – spend the money and make the poster. Call in some favors if you need to. Our poster cost us $40, and that was for buying the candy striper outfit for the photo. Everything else was a gift from friends. Of course, today, with social media playing a major factor in building your fan base well in advance, having a poster on your website or YouTube channel is essential.

I didn’t do a poster for the business plan for Séance or Portal, but by that time, I already had 50 percent of the investors from Candy Stripers coming back on board. But for the first one in this slate of new genre films that we had decided to do, it was important to take advantage of every marketing tool available, and because the poster so clearly depicted the film, it really was a smart decision. I had investors write a check based on the poster alone.

Figure 4.3 is the final poster with the billing block included. The one we used in our business plan package for Candy Stripers was identical, but in the billing block section we had just our names, the writers’ names, and the line producer’s name. It is a pretty fantastic poster, if I do say so myself, and you can see why some of the investors wrote their check based on this amazing one-sheet!

FIGURE 4.3

PPM/OPERATING AGREEMENT/SUBSCRIPTION AGREEMENT

This is the part that can be expensive – anywhere from $15,000 to $25,000. So what I did was borrowed four business plans/LLC packages from other successful producers. I really don’t believe in reinventing the wheel, especially if it will save me money. A PPM is easily 25 pages, and so is an operating agreement – so I had a lot of reading to do. I wanted to know exactly what was in these intense documents, so reading them was well worth the time. I took what I thought was the best from each one and literally created my own, typing it up one word at a time. Then once I read it over a few times and Kate read it over, I handed it off to our attorney and was charged by the hour (in some cases, an attorney will sign on for 5 percent of producer’s net profit in exchange for this type of work), which was a whole lot better than the $15,000 we’d been quoted to have an attorney create the PPM and operating agreement from scratch.

Because this is an extremely important topic and because I am not qualified to describe to you what is involved in a PPM, operating agreement, or subscription agreement, I have asked attorney Rick Rosenthal to go into more detail. Here is Rick’s explanation:

The Private Placement Memorandum (“PPM”) is a document that describes the interests that are being sold as an investment in order to comply with various state and federal securities laws which require that an investor be given a comprehensive description of the investment. The purpose of this document is to protect the producer from certain liabilities related to selling unregistered securities. A PPM should contain a complete description of the security (interest) being offered for sale, the terms of the sale, including any and all fees being paid to finders; and a detailed business plan that includes the nature of the risk associated with the investment.

An operating agreement is an agreement among Limited Liability Company (“LLC”) members governing the LLC’s business and the member’s financial and managerial rights and duties. Many states in the United States have specific requirements as to what terms and conditions need to be in the operating agreement at a minimum. It is similar to a partnership agreement when there are more than one member, with each member protected from personal liability in most cases (except for such things as fraud, for example). It will provide for the governance of the LLC and who the managers are that are authorized to act on its behalf. It will also address the ownership and the voting rights of each member by allocating shares or percentages of membership interest. The operating agreement does not need to be filed with the state, but without it the LLC may not be considered a complete legal entity. Operating agreements can be amended at any time by the company members or managers.

The subscription agreement is in the form of an application to purchase LLC membership interests. The subscription agreement requires the applicant to disclose financial information relevant to his or her suitability to participate in the LLC. It is in the form of a questionnaire that asks the applicant specific questions about the nature of the investment, his or her finances, and an understanding of the risk involved. It also contains a signed pledge by the investor to invest a certain amount of money on or before a certain date. The subscription agreement is often made a part of the PPM.

Please familiarize yourself with the Security and Exchange Commission in your area for information regarding filing. Because our budget was under $1 million, we were able to use what’s called Rule 504 under the Regulation D Offering. In the United States, for information about the SEC’s registration requirements and common exemptions, go to www.sec.gov.

It is important that you follow government rulings at all times. Because phone calls to their office (and their attorneys) are free, why not call and get educated on the proper procedures? For example, one of the things I found out when I called was that in the State of California, under our LLC, we were able to go to only 35 nonaccredited investors. You can go to as many accredited investors as you want, but you are restricted to 35 nonaccredited. That is important information to be aware of. An accredited investor is someone who has at least $1 million net worth that’s liquid (does not include a house or alternatively) and someone who’s made $200,000 in income in two of the last three years. A married couple must have made $300,000 in two of the past three years. The bottom line here is to get educated. One of my students refused to listen to me regarding this issue, and I got a call from him a couple of years ago telling me that he was fined $25,000 for not following government rulings. Wouldn’t it be a whole lot more fun to make a movie with that $25,000?