Dealmaking Tips for Film and Television:
The Acquisition/Distribution Agreement
By: Mark Litwak
AN OVERVIEW: THE ACQUISITION - DISTRIBUTION AGREEMENT
There are several ways to develop or produce a film. Beginning with an idea, or the movie rights to an existing literary property, a studio can hire a writer to create a script. The studio's development staff works with the writer to craft the story. Note that most of the scripts developed by studios never get produced.
Other movies begin with a script developed outside the studio. Here a writer, working on his own or hired by an independent producer, writes a screenplay. After it is finished, it may be packaged (joined) with other elements (e.g., a star or director) and presented to the studio for financing and distribution. The big three talent agencies (CAA, ICM and William Morris) are responsible for most packaging.
Other films are both developed and produced away from the studio that ultimately distributes them. These independently-produced projects are often dependent on investors or pre-sale distribution deals (selling off various foreign distribution rights) to finance production. The producer then enters an acquisition agreement with a distributor for release of the picture. This is often referred to as a NEGATIVE PICK-UP DEAL or pre-sale deal.
While the terms of these deals vary, the studio/distributor typically pays for all distribution, advertising and marketing costs. The studio and producer share revenues after recoupment of distribution fees and marketing expenses. Because the producer has taken more of the risk of financing production, he may be able to obtain a better definition of net profits than if he made the film with upfront studio financing. Profits may be split 50/50 between the studio and producer. Of course, the independent producer takes the risk that if the film cannot be completed and delivered, the producer can incur a substantial loss.
In an acquisition agreement for an independently produced film, the distributor may agree to give the producer an advance of his share of revenues. The producer can use this money to repay investors. Producers will want to obtain as large an advance as possible because they know they may never see anything on the back end of the deal (i.e., no revenues or profits).
The distributor wants to pay as small an advance as possible, and usually resists giving an amount that is more than the cost of production. Its executives will propose "We'll be partners. We will put up all the money for advertising and promotion. If the picture is successful we will share in its success." Sound good?
Unfortunately, distributors have been known to engage in creative accounting, and profit participants rarely see any return on their share of "net profits" because of the way that term is defined. Consequently, the shrewd producer tries to get as large an advance as possible. He also tries to retain foreign rights and keep them from being cross-collateralized.1
Note 1: Cross-collateralized means the monies earned from several markets are pooled. For example, let's say your picture made one million dollars in England and lost one million dollars in France. If those territories were cross-collateralized, and you were entitled to a percentage of the net revenue, you would get nothing. On the other hand, if the territories were not cross-collateralized, you would get your percentage of the English revenues and the distributor would absorb the loss incurred in France.
ORCHESTRATING THE DISTRIBUTION DEAL
The most important advice I can offer to filmmakers seeking distribution is "DON'T BRAG ABOUT HOW LITTLE MONEY YOU SPENT TO MAKE THE PICTURE" before you conclude your distribution deal. You may feel justly proud of making a great-looking picture for a mere $400,000. But if the distributor knows that is all you have spent, you will find it difficult to get an advance beyond that. It would be wiser not to reveal your investment, recognizing that production costs are not readily discernible from viewing a film. Remember, the distributor has no right to examine your books.2 What you have spent is between you, your investors and the I.R.S.
Acquisition deals can be negotiated before, during or after production. Often distributors become interested in a film after viewing it at a film festival and observing audience reaction. All the studios and independent distributors have one or more staffers in charge of acquisitions. It is the job of these acquisition executives to find good films to acquire.
It is not difficult to get acquisition executives to view your film. Once production has been announced, don't be surprised if they begin calling you. They will track the progress of your film so that they can see it as soon as it is finished -- before their competitors get a shot at it.
From the filmmaker's point of view, you will get the best distribution deal if you have more than one distributor interested in acquiring your movie. That way you can play them off against each other to get the best terms. But what if one distributor makes a pre-emptive bid for the film, offering you a $500,000 advance, and you have only 24 hours to accept their offer? If you pass, you may not be able to get a better deal later. It is possible you may fail to obtain any distribution deal at all. On the other hand, if you accept the offer, you may be foreclosing the possibility of a more lucrative deal that could be offered you later. Consequently, it is important to orchestrate the release of your film to potential distributors to maximize your leverage.
Note 2: Assuming the distributor has not provided any financing.
ORCHESTRATING THE RELEASE
1) KEEP THE FILM UNDER WRAPS: Don't show your film until it is finished. Executives may ask to see a rough cut. They will say "Don't worry. We're professionals, we can extrapolate and envision what the film will look like with sound and titles." Don't believe them. Most people can't extrapolate. They will view your unfinished film and think it amateurish. First impressions last.
The only reason to show your film before completion is if you are desperate to raise funds to finish it. The terms you can obtain under these circumstances will usually be less than those given on completion. If you must show a work in progress, exhibit it on a Moviola or flatbed editing table. People have lower expectations viewing a film on an editing console than when it is projected in a theater.
2) ARRANGE A SCREENING: Invite executives to a screening; don't send them a videocassette. If you send a tape to a busy executive, he will pop it in his VCR. Ten minutes later the phone rings and he hits the pause button. Then he watches another ten minutes until his secretary interrupts him. After being distracted ten times, he passes on your film because it is "too choppy." Well, of course it's choppy with all those interruptions.
You want to get the executive in a dark room, away from distractions, to view your film with a live audience -- hopefully one that will respond positively. So rent a screening room at MGM, invite all the acquisition executives you can, and pack the rest of the theater with your friends and relatives, especially Uncle Herb with his infectious laugh.
3) MAKE THE BUYERS COMPETE AGAINST EACH OTHER: Screen the film for all distributors simultaneously. Some executives will attempt to get an early look -- that is their job. Your job is to keep them intrigued until it is complete. You can promise to let them see it "as soon as it is finished." They may be annoyed to arrive at the screening and see their competitors. But this will get their competitive juices flowing. They will know that they better make a decent offer quickly if they hope to get the film.
4) OBTAIN AN EXPERIENCED ADVISOR: Retain an experienced producer's rep or entertainment attorney to negotiate your deal. Filmmakers know about film, distributors know about distribution. Don't kid yourself and believe you can play in their arena and win. There are many pitfalls to avoid. Get yourself an experienced guide to protect your interests. Any decent negotiator can improve a distributor's offer enough to outweigh the cost of his services.
5) INVESTIGATE THE DISTRIBUTOR: Always check the track record and experience of each distributor. As an entertainment attorney who represents many independent filmmakers, I often find myself in the position of trying to get unscrupulous distributors to live up to their contracts. The savvy filmmaker will carefully investigate potential distributors by calling filmmakers who have contracted with them. I recently read a Standard & Poors report on a distributor and was shocked to learn that the company was $2.3 million in arrears on royalty payments. One can also check the Superior Court dockets in Los Angeles to see if a company has been sued.
CHECKLIST FOR SELECTING A DISTRIBUTOR
1. Amount of advance.
2. Extent of rights conveyed. Domestic and/or foreign. Ancillary rights? Are any markets cross-collateralized?
3. Is there a guaranteed marketing commitment?
4. Does the producer have any input or veto power over artwork and theater selection in the top markets?
5. Track record and financial health of distributor.
6. Are monthly or quarterly accounting statements required?
7. To what extent does the distributor plan to involve the filmmakers in promotion?
8. Marketing strategy: demographics of intended market, grassroots promotion efforts, film festivals, etc.
9. Split of revenues and accounting of profits: Is there a distribution fee? Overhead fees?
10. Distributor leverage with exhibitors. Can the distributor collect monies owed?
11. Any competing films handled by distributor? Conflicts of interest?
12. Does the producer have the right to regain distribution rights if the distributor pulls the plug early on distribution?
13. Personal chemistry between producer and distribution executives.
There are several ways to develop or produce a film. Beginning with an idea, or the movie rights to an existing literary property, a studio can hire a writer to create a script. The studio's development staff works with the writer to craft the story. Note that most of the scripts developed by studios never get produced.
Other movies begin with a script developed outside the studio. Here a writer, working on his own or hired by an independent producer, writes a screenplay. After it is finished, it may be packaged (joined) with other elements (e.g., a star or director) and presented to the studio for financing and distribution. The big three talent agencies (CAA, ICM and William Morris) are responsible for most packaging.
Other films are both developed and produced away from the studio that ultimately distributes them. These independently-produced projects are often dependent on investors or pre-sale distribution deals (selling off various foreign distribution rights) to finance production. The producer then enters an acquisition agreement with a distributor for release of the picture. This is often referred to as a NEGATIVE PICK-UP DEAL or pre-sale deal.
While the terms of these deals vary, the studio/distributor typically pays for all distribution, advertising and marketing costs. The studio and producer share revenues after recoupment of distribution fees and marketing expenses. Because the producer has taken more of the risk of financing production, he may be able to obtain a better definition of net profits than if he made the film with upfront studio financing. Profits may be split 50/50 between the studio and producer. Of course, the independent producer takes the risk that if the film cannot be completed and delivered, the producer can incur a substantial loss.
In an acquisition agreement for an independently produced film, the distributor may agree to give the producer an advance of his share of revenues. The producer can use this money to repay investors. Producers will want to obtain as large an advance as possible because they know they may never see anything on the back end of the deal (i.e., no revenues or profits).
The distributor wants to pay as small an advance as possible, and usually resists giving an amount that is more than the cost of production. Its executives will propose "We'll be partners. We will put up all the money for advertising and promotion. If the picture is successful we will share in its success." Sound good?
Unfortunately, distributors have been known to engage in creative accounting, and profit participants rarely see any return on their share of "net profits" because of the way that term is defined. Consequently, the shrewd producer tries to get as large an advance as possible. He also tries to retain foreign rights and keep them from being cross-collateralized.1
Note 1: Cross-collateralized means the monies earned from several markets are pooled. For example, let's say your picture made one million dollars in England and lost one million dollars in France. If those territories were cross-collateralized, and you were entitled to a percentage of the net revenue, you would get nothing. On the other hand, if the territories were not cross-collateralized, you would get your percentage of the English revenues and the distributor would absorb the loss incurred in France.
ORCHESTRATING THE DISTRIBUTION DEAL
The most important advice I can offer to filmmakers seeking distribution is "DON'T BRAG ABOUT HOW LITTLE MONEY YOU SPENT TO MAKE THE PICTURE" before you conclude your distribution deal. You may feel justly proud of making a great-looking picture for a mere $400,000. But if the distributor knows that is all you have spent, you will find it difficult to get an advance beyond that. It would be wiser not to reveal your investment, recognizing that production costs are not readily discernible from viewing a film. Remember, the distributor has no right to examine your books.2 What you have spent is between you, your investors and the I.R.S.
Acquisition deals can be negotiated before, during or after production. Often distributors become interested in a film after viewing it at a film festival and observing audience reaction. All the studios and independent distributors have one or more staffers in charge of acquisitions. It is the job of these acquisition executives to find good films to acquire.
It is not difficult to get acquisition executives to view your film. Once production has been announced, don't be surprised if they begin calling you. They will track the progress of your film so that they can see it as soon as it is finished -- before their competitors get a shot at it.
From the filmmaker's point of view, you will get the best distribution deal if you have more than one distributor interested in acquiring your movie. That way you can play them off against each other to get the best terms. But what if one distributor makes a pre-emptive bid for the film, offering you a $500,000 advance, and you have only 24 hours to accept their offer? If you pass, you may not be able to get a better deal later. It is possible you may fail to obtain any distribution deal at all. On the other hand, if you accept the offer, you may be foreclosing the possibility of a more lucrative deal that could be offered you later. Consequently, it is important to orchestrate the release of your film to potential distributors to maximize your leverage.
Note 2: Assuming the distributor has not provided any financing.
ORCHESTRATING THE RELEASE
1) KEEP THE FILM UNDER WRAPS: Don't show your film until it is finished. Executives may ask to see a rough cut. They will say "Don't worry. We're professionals, we can extrapolate and envision what the film will look like with sound and titles." Don't believe them. Most people can't extrapolate. They will view your unfinished film and think it amateurish. First impressions last.
The only reason to show your film before completion is if you are desperate to raise funds to finish it. The terms you can obtain under these circumstances will usually be less than those given on completion. If you must show a work in progress, exhibit it on a Moviola or flatbed editing table. People have lower expectations viewing a film on an editing console than when it is projected in a theater.
2) ARRANGE A SCREENING: Invite executives to a screening; don't send them a videocassette. If you send a tape to a busy executive, he will pop it in his VCR. Ten minutes later the phone rings and he hits the pause button. Then he watches another ten minutes until his secretary interrupts him. After being distracted ten times, he passes on your film because it is "too choppy." Well, of course it's choppy with all those interruptions.
You want to get the executive in a dark room, away from distractions, to view your film with a live audience -- hopefully one that will respond positively. So rent a screening room at MGM, invite all the acquisition executives you can, and pack the rest of the theater with your friends and relatives, especially Uncle Herb with his infectious laugh.
3) MAKE THE BUYERS COMPETE AGAINST EACH OTHER: Screen the film for all distributors simultaneously. Some executives will attempt to get an early look -- that is their job. Your job is to keep them intrigued until it is complete. You can promise to let them see it "as soon as it is finished." They may be annoyed to arrive at the screening and see their competitors. But this will get their competitive juices flowing. They will know that they better make a decent offer quickly if they hope to get the film.
4) OBTAIN AN EXPERIENCED ADVISOR: Retain an experienced producer's rep or entertainment attorney to negotiate your deal. Filmmakers know about film, distributors know about distribution. Don't kid yourself and believe you can play in their arena and win. There are many pitfalls to avoid. Get yourself an experienced guide to protect your interests. Any decent negotiator can improve a distributor's offer enough to outweigh the cost of his services.
5) INVESTIGATE THE DISTRIBUTOR: Always check the track record and experience of each distributor. As an entertainment attorney who represents many independent filmmakers, I often find myself in the position of trying to get unscrupulous distributors to live up to their contracts. The savvy filmmaker will carefully investigate potential distributors by calling filmmakers who have contracted with them. I recently read a Standard & Poors report on a distributor and was shocked to learn that the company was $2.3 million in arrears on royalty payments. One can also check the Superior Court dockets in Los Angeles to see if a company has been sued.
CHECKLIST FOR SELECTING A DISTRIBUTOR
1. Amount of advance.
2. Extent of rights conveyed. Domestic and/or foreign. Ancillary rights? Are any markets cross-collateralized?
3. Is there a guaranteed marketing commitment?
4. Does the producer have any input or veto power over artwork and theater selection in the top markets?
5. Track record and financial health of distributor.
6. Are monthly or quarterly accounting statements required?
7. To what extent does the distributor plan to involve the filmmakers in promotion?
8. Marketing strategy: demographics of intended market, grassroots promotion efforts, film festivals, etc.
9. Split of revenues and accounting of profits: Is there a distribution fee? Overhead fees?
10. Distributor leverage with exhibitors. Can the distributor collect monies owed?
11. Any competing films handled by distributor? Conflicts of interest?
12. Does the producer have the right to regain distribution rights if the distributor pulls the plug early on distribution?
13. Personal chemistry between producer and distribution executives.
