Financial Considerations for

Potential Film Financing Investors

Validation of the old adage content is king continues to occur. Value of filmed entertainment content is increasing
due to factors including new forms of distribution, increasing consumer media consumption rates, and
globalization of the film market. Investing in filmed entertainment is continuing to be attractive despite various
risks involved. This article will present a summary of issues that a potential investor should take into account
before making an investment decision in filmed entertainment.

Costs of film production escalated rapidly throughout the last decade due in part to rising talent costs and new
technologies. As a result, studios and production companies often look for outside funding for a film, a slate of
films or certain windows in a slate of films. Investors in film product should consider all risks along with the
opportunity for potential returns. Varying strategies exist, ranging from self-financing to turning over all rights for a
period of time in exchange for cash flow based on the estimated value of the assets. There are costs and benefits
for each strategy along this continuum. For example, minimizing initial outlay (often achieved through co-
financing) may provide for a safer investment, but this strategy may limit ultimate profit. Conversely, self-financing
increases the potential financial loss but may maximize profit potential.

The film business is attracting an influx of new financing sources including individuals and companies not
historically heavily involved in the entertainment space. Typical return on investment considerations are often
discarded by traditionally rational and prudent investors, and new investors are entering the space who lack
filmed entertainment backgrounds or an understanding of current market conditions. Although many production
companies and studios are well managed and deals have been structured based on accurate and reasonable
projections, prospective investors should review potential risks to gain comfort with the diligence review process.
Some of these risks are highlighted in the following pages:

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Financial Considerations for Potential Film Financing Investors

Potential Risk 1. Historical comparable film properties are inappropriately

included/excluded in an analysis or the data presented is inaccurate.
Historical films results are often used as a indication to base future film property anticipated results. This may
cause certain problems in analyzing a potential investment due to:

• Historical comparables used may be inappropriate and/or incomplete.

• An inappropriate methodology may be used in developing and maintaining the historical film ultimates
(revenue and cost projections over the life of the film product).
• Changes in the market and technology may make historical data invalid.

Potential Risk 2. Future film property releases contain inaccurate or inappropriate

projections which are then utilized in the financial model.
Inaccurate or inappropriate projections may cause certain problems in analyzing a potential investment due to:

• An unclear understanding may exist of the methodology and consistency used in developing future film
ultimates (revenues and costs projected to be achieved during the life of the property) including various
revenue and cost timing assumptions.
• Ultimates for anticipated films may not be based on results of historical comparable films or industry available
data.
• Past, current and future trends within the industry and market place may not be considered.
• Agreements entered (or projected to be entered) into may contain issues such as prohibition of re-sale of
investment or inability to audit results.
• Histories of third party companies intended to be utilized, including distributors may be questionable.
• Corporate projections including the support and composition of projected overhead costs may be erroneous.

Potential Risk 3. The financial modeling is inconsistent with proposed deal terms,
lacks integrity, and/or contains data that is inconsistent with source documents.
Errors or inconsistencies with the financial model may cause certain problems in analyzing a potential investment
due to:

• Term sheets or other deal documents may not be consistent with financial terms in the model, including the
cash flows.
• Input data, both historical and forecasted, may contain errors.
• Errors may exist with the mathematical accuracy and integrity of the financial model, including the underlying
assumptions.
• Model functionality may be insufficient to incorporate certain covenants.
•
• Sufficient stresses of the model may not have been considered and/or integrated.

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Financial Considerations for Potential Film Financing Investors

Potential Risk 4. The policies, procedures, controls & corporate governance are
insufficient, which could effect the development, production, distribution, and
cash management related to individual films.
Effective policies and governance must be in place before making an investment decision. Lax or insufficient
policies or governance may cause certain problems if the investors do not consider:

• Insufficient understanding of the green-lighting (project acceptance), production, co-production, sales,

distribution, and reporting processes, including the accounting implications impacting the financing, may exist.
• Policies and procedures used to apply cash receipts and expenditures may be insufficient.
• Insufficient policies and procedures used in determining the credit worthiness of distributors and other
customers and credit/collection/withholding issues may exist.
• Internal controls relating to the production of financial information may be insufficient.

In summary, it is imperative to take into account that not all stakeholders have the same interests and goals and it
is therefore crucial for each interested party to perform procedures individually or to interpret other analysts’
results with their own objectives in mind. Although many deals are well thought out and are related to successfully
run production companies and studios, prospective investors should consider potential risks that may have a
material effect. Many unsophisticated investors have begun to engage industry specialists to assist in performing
due diligence related to potential investment options. Hiring experts may yield great benefit due to the intricacies
involved in these deals. A review of the aforementioned risks may even produce a more successful and profitable
deal for all involved parties. While no single factor often solidifies a conclusion, reviewing the combination of the
above issues should assist in making an investment decision.

Matthew Lieberman is a Manager in PricewaterhouseCoopers' Entertainment and Media Practice within Advisory
Services in Los Angeles - matthew.lieberman@us.pwc.com

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