Producing : Tip for the Day #10: Backend Participation/Profit Sharing. What is it and what's a good deal? by Patrick McIntire

I’ll use an example of an equity investment with budget of $5 million. This is a simplistic example, however, it shows key information.

It’s important for the producer to fully understand backend participation. Each film starts with 100%, or 100 “points”. Investors normally will negotiate their expectations on how many points they get on the "backend". In most cases on indie films, producers don’t receive any backend until the investor has been paid back, plus 10% (this is an average and is very much negotiable). Once that milestone has been reached, profit sharing kicks in. In some cases, that milestone is never reached, or just barely, and there’s not much, if any, backend left. This is the risk the producer takes.

But I need to back up for a moment. First off, backend is normally based on NET revenues, not gross. If you don't know the difference, check out one of my recent "Tips for the Day" to see a detailed example. A common formula used is take your budget and multiply it by 3. That’s roughly the amount your project has to make, in all rights worldwide, just to break even. The 3 times is commonly the investment, the distribution fees and the marketing fees (which on average, is roughly the same amount as the budget).

A common mistake indie producers make is giving away backend points without fully understanding distribution. Distribution fees in the US average about 30% (sometimes a little lower, sometimes a little higher). Foreign distribution fee averages about 25%. These percentages are averages and are negotiable. What’s important to know is the distributor will almost always take their fees first. Keeping in mind their 30% distribution fee, what the mistake many indie producers make is not realizing that the 30% is backend (30 points). In other words, the distributor is taking 30 “points” off the top. The reality check here is that your project does not have 100 points anymore, instead, it has 70 points. This is crucial to understand when negotiating with your investor. You want to make sure the investors points come in AFTER the distributor. In other words, you make sure the investor knows you’re dealing with 70 points, and not 100 points and any backend deal you make with the investor is based on 70% and not 100%.

“So what’s a good deal? My investor wants a 50/50 deal. Is that good?” To put it short, NO!

Now here’s an example of why doing a 50-50 split with your investor is a horrible deal for you. For example if the investor wants 50 points (50%), is that 50% of the 100 points or of the 70 points? You have to make that clear. Why? Because if it’s of the 100 points, that’s 50 points off the top, combined with the 30 points from the distribution fee, which leaves the producer with only 20 points. And any points you offered to cast, director and sometimes writer, comes out of the producers share, not the investors. So let’s say you offered a big name talent 10 points to get their fee down (this is common), and you offered a co-lead talent 3 points, the director 5 points and the writer 2 points. Adding those up is another 20 points that comes out of your share of 20 points. Leaving you a whopping 0 points for all the work you’ve done. That’s right, 0%. Think I’m kidding? Sadly this is not an uncommon mistake newer producers make and this is why a 50/50 deal with the investor is the financial kiss of death. These are averages commonly used and of course you can negotiate lower rates.

Now let’s say all the above points are based on the 70 points left and not the 100 points. The investors share of 50% and the producer’s shares are now at 35 points apiece. The actors 10% and 3% are now 7 points and 2.1 points (based on the 70 points). Director is now 3.5 points and the writer is down to 1.4 points. This all adds up to roughly 14 points. This comes out of the producer’s 35% and now you have 21% left instead of 0%.

While this example is accurate in how profit sharing points work, it does not have to be as I portrayed. Everything is negotiable. My main points are to show why a 50/50 deal is never a good idea and also to understand that distribution takes on average, 30 points. So when you negotiate your “profit sharing”, keep the investors percentage as low as possible and fair (average is about 20% to 25%) and that you negotiate off the 70 points left and not the 100 points. Also, go easy on tossing talent and others backend. Remember, it all comes out of your share. The better you understand distribution and the better you are at negotiating, the more you and your company will see higher revenue. So negotiate. I mean, negotiate. Did I say negotiate? Yes I did. And don’t be afraid to ask for better rates. Investors want to make as much as they can. So do you. Trust me, there’s a common ground somewhere in between. On a side note, I do offer consulting services. Good luck!

Disclosures: It’s important to know the marketing fee, once fully recouped, will go to 0% and is not forever. The remaining revenue (if any) is then split evenly between producers and investor. Also, it’s ok to offer the investor a “buy out”. For example, once the investor has received their full investment back, you can negotiate a set limit of revenue to the investor. Once that milestone is reached, the investor can then be “bought out” and any remaining revenue goes to the producers. This will take some savvy negotiating but many have succeeded in this option. It’s always worth a try.

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