Business Plans for Filmmakers

10. Financial Projections

138 10. Financial Projections Financial projections are estimates of the future economic performance of a proposed business or venture. Financial projections are not required for investor offerings for film projects regardless of whether the selected investment vehicle involves the sale to a few active investors in a nonsecurities transaction or the sale of securities to a larger group of passive investors. However, investors seem to prefer that a presentation of financial projections accompany whatever documentation is used to approach such investors. Financial projections provide the prospective investor and the film producer seeking investor financing with an additional point of discussion, and these projections certainly serve as an excellent exercise for the producer in helping him or her to understand how film revenues might flow back to the financing vehicle, the producer group and the investors. In all likelihood, a producer seeking investor financing will be subjected to questions from investors about how they will get their money back and make a profit, and, thus, it behooves the producer to do some research about this aspect of the transaction, to understand it and to be able to explain it as clearly as possible. Some entertainment attorneys claim that including financial projections with a business plan (or PPM for that matter) will inevitably result in a lawsuit, but it really depends on how well the financial projections are drafted. Also, in contrast to statements by some business-plan consultants, the point of financial projections is not to show investors how profitable the filmmaker’s business will be. Use of the word “will” in the context of financial projections is reckless. Instead, the purpose of financial projections is to show how the revenues may flow back to the investor in the event the assumptions upon which the financial projections are based come to fruition. In truth, it is very unlikely that all of the many assumptions that have to be made in order to come up with financial projections will turn out to be on target. So, the parties involved are really dealing with good Financial Projections 139 faith estimates in this situation. The best the filmmaker can do is to make his or her assumptions reasonable based on known marketplace conditions and to disclose those assumptions to his or her prospective investors so that everyone knows how the calculations were determined. If the sale of a security was involved, the SEC actually has a stated position on financial projections and offers some guidelines for their preparation and use. Although, again, not directly applicable to a business plan seeking a few active investors, these SEC guidelines may be helpful in the preparation of financial projections for both nonsecurities (for which a business plan may be used) and private securities offerings (for which a PPM may be used). Pursuant to SEC regulations,1 the SEC encourages the use of management’s projections of future economic performance that have a reasonable basis and are presented in an appropriate format. As noted above, this means, among other things, that financial projections are not required for securities disclosure documents and, again reasoning by analogy, are not legally required for business plans. Most business plan consultants strongly urge business-plan preparers to include financial projections—possibly because investors like to see them. From the SEC’s perspective, the following guidelines set forth the commission’s views on important factors to consider in preparing and disclosing financial projections. Basis for projections. A film producer (i.e., management) has the option to present its good faith assessment of a small business issuer’s future performance. The term “issuer” is securities terminology for the company or investment vehicle that is issuing the securities. For purposes of a business plan used with active investors in a nonsecurities transaction, that would correspond to the company, production company or investment vehicle selling the shares or units in an active-investor investment vehicle. Such a person or management, however, must have a reasonable basis for such an assessment. In other words, the calculations and numbers associated with financial projections must be based on assumptions, and those assumptions must be reasonable in light of current circumstances in the industry. Such assumptions cannot represent wild speculation on the part of the producer regarding the anticipated earnings of a proposed film (see the sample assumptions associated with the sample financial projections below). These assumptions are narrative statements regarding the many options or decisions that will have to be made in the future as the project proceeds. In other...