How to calculate Returns for your next film

FILM FINANCING FOR INDEPENDENT FILMS – How to Calculate Potential ROI

Funding sources like to see that you’ve done your homework.

I was asked to help a friend do an analysis on their film project potential revenue. I do this for a living, but since it was a friend I agreed to do it in exchange for posting the case study here.

ARE YOU TRYING TO FIGURE OUT HOW TO DETERMINE POTENTIAL RETURN FOR YOUR FILM?

There are a LOT of variables and this is a simple description of how I do it for clients. It’s also one of the HARDEST questions to accurately answer and in fact you’ll probably be right fewer times than the weatherman.

Generally, net profit for participation purposes is defined as the film’s gross receipts less distribution fees, certain distribution expenses, film production cost “called “negative cost”, interest on unrecovered negative cost, and payouts to any gross profit participants. Already things are getting a bit “loose”. Remember also, REVENUE is based on what the market and the customer will pay. This can be estimated a number of ways..

First, I make sure I have a through knowledge of the product ( a doc , or film, or show ) including: Budget, Talent, Director, Producers, Music Licensing, Product Placement, Distribution path, P&A budget, Story and potential Audience. I then complete my research on between 10 to 15 similar projects ( or as many as possible) that have been distributed in the same manner over the past 4 years. If I have to go beyond 4 years I weight them accordingly. Additionally, you need to look at projected opening sales and how long the shelf life of the project might be.

I take all the data and do a comparative cost analysis comparing these projects, each against the primary project, and then once again, using weighted averages and using Chi-Squared sampling to determine what of these variables actual has the most potential to affect the outcome of the project (you can download statistical software to do this quite easily).

The next problem is to simply determine the long term potential revenue – not just the “out of the gate” first 6 months.. A lot depends on how long a movie can remain running and the amount of screens it runs on until it reaches saturation. Once saturation is reached movie projects have an exponential decline in revenue… most of the time. Some hold on longer and some fall apart quickly, and a few start slow and build. But for the top percentage you can work with a “traditional” revenue stream analysis… big opening and exponentially declining revenues. basically, theatrical run duration until saturation, then secondary market value, and foreign market values.

This is a very interesting white paper on determining the valuation of a film. I use some of these in my analyses to work out the potential values I use in film budgets and film revenue projections for clients.

http://www.bus.lsu.edu/hill/aie/hillebrand.pdf

I normally use these math equations for development/creation of a set of figures that include the following columns in my spreadsheets: Blockbuster, High-potential, Expected Potential, Break-Even, Low-potential, and Minimum. Be very careful with minimum, as you are making a potential promise to investors if your wording surrounding your documentation is unclear as to the risk factors.

I pull all these together and create a spreadsheet that has the following columns (you may not choose to analyze all of these, but at least consider them):

Domestic Theatrical US Gross box office:
Distributors Share -(Rentals)
P and A,
Distribution Fee,
Theatrical Gross,
Home Video,
RENTALS,
Wholesale Pricing,
Wholesale Revenue,
Expenses,
Returns,
Expenses for manufacturing,
Residuals,
Distribution Fees,
Then do a similar analysis for Total Video Rental Net Revenue and sell thru, then on to Total Video Sales Net Revenue, Other Revenue Free and Pay Television, PPV and VOD, Ancillary Markets (Planes etc) and other misc costs and revenue. I put all of this in my business projections for my clients.

It seems like all silly math games. But with a bit of real world understanding and a bit of fuzzy math, you can get in a realistic ballpark of what you can -potentially- gross on your project and what the -potential- net will be. Potential funders like to see that you’ve done your homework.

But when all is said and done…. as Helmuth von Moltke once said: “No plan survives first contact with the Enemy…”

cheers and prepare to dust off those old math skills! ;) geo