Today’s independent “indie” films play an important role in continually advancing new creative content and media innovation to mainstream audiences worldwide. Accordingly, the value chain of developing, producing and distributing indie films is essential. With the constant change in market dynamics, a robust supply chain for high quality indie films is paramount in meeting the ever growing shifts in demographics and its wants, needs, and expectations.
For potential sponsors and lenders of indie films, it is essential to undertake proper due diligence in order to ensure bankability while assessing risks and determining mitigation measures. In this regard, the principles of structured finance and project finance can provide the key tools necessary, via qualitative and quantitative analysis, in order to provide a higher confidence level while determining the likeliness of an indie film to ultimately succeed in a very competitive global marketplace.
As part of the sponsors and lenders assessment process, firstly, a detailed review and analysis of the script is required since it is one of the main underlying assets of the indie film project. A feasibility evaluation is required of the script’s commercial viability, its protection via intellectual property rights (IPR), origination and ownership rights, and an appropriate market-based asset valuation of the script. It is important to keep in mind that any such asset valuations are “notional” and may become intrinsic only upon monetization and realization of multiple revenue streams and cash flows throughout the distribution phase.
As applicable, a review of the total development costs (preliminary and preoperative expenses), total production costs up to commercial release, total costs of distribution along with any contingencies. Economic models and financial analysis must be reviewed to determine assets, liabilities, revenues, expenses, margins, cash flows, taxation, fiscal incentives, working capital requirements, debt service coverage (DSCR), internal rate of return (IRR), return on equity (ROE), payback period, and breakeven capacity. It is important to perform a detailed sensitivity and scenario analysis to evaluate the resulting financial impact on the indie film project due to fluctuations in revenue streams, interest rates, production delays, cost overruns, and other such tangible parameters.
A detailed evaluation is required of the corporate, investment, functional and operational structure of the development and production company(s) vehicle(s), its promoters, shareholders, equity holding structure, key advisors, federal and state grants secured, corporate governance and committees, financial and accounting systems and related areas. Additional review of the various permits at federal, state and local levels is required. A detailed evaluation of the legal contracts and agreements covering the entire value chain of development, production and distribution is required in order to determine counter-party risks, credit-worthiness of distributors/off-takers, potential financial obligations and legal liabilities, insurance requirements, dispute resolution and other related contractual and transactional areas.In summary, ensuring bankability of the indie film is critical prior to achieving financial closure and start of full production activities.