Everyone who has been involved in an independent film or television production has seen the multiple financial transactions that take place, either to finance, produce or distribute the project.
An example may be investors who pay investment money towards the production.
Another scenario is a co-production, between several co-producing partners. Each of the co-producer provides a financial contribution to cover the production costs. The contributions will go towards the production account, from which the production will be paid.
And as a third example of a financial transaction, a distributor pays a minimum guarantee to the producers for the film’s or television series’ distribution rights.
Financial risk in the independent film and TV industry
All these transactions come with a certain level of financial risk.
What happens with the investment money if the investor pays to the production company, but the producers cannot get the project made?
What to do if one co-producer pays its part of the production’s budget, but the other co-producers fail to pay their part, and the production is abandoned?
And what occurs if a distributor pays a minimum guarantee for the distribution rights, but the producer does not deliver materials on time? or the materials are not in line with the conditions agreed in the distribution agreement between producers and distributor?
The dilemma: who takes the first step in the transaction?
Let’s focus on the dilemma and take the example of the distributor who wants to buy the distribution rights of a film, and the producer who wants to sell the rights.
If the distributor is the first to act, it runs a financial risk: it pays a royalty for the distribution rights but then, the producer may default and may not deliver the materials, or the materials are delivered but may not meet the conditions set forth in the distribution agreement. For example, a certain actor is mentioned as an essential element, but it turns out that the actor was eventually not engaged in the project. This may change the value of the distribution rights substantially. How will the distributor get its money back?
On the other hand, also the producers run a risk: if the producers deliver the film’s materials to the distributor, but then, once payment for the distribution rights is due, the distributor defaults and does not pay. What would happen with the distribution rights? Can the producer sell to another distributor?
The solution: escrowing the transaction
The solution for these kinds of dilemmas is to carry out financial transactions through a so-called escrow account, managed by a neutral third-party escrow manager.
Producers, distributor, and escrow account manager sign an escrow agreement.
The escrow account manager opens the escrow account in its own name.
The distributor will then pay the royalties for the distribution rights of the film into the escrow account. The money will be retained in an escrow account by the escrow account manager.
Then the producers will have to deliver the materials to the distributor before a jointly agreed cut-off date, and the materials should meet the conditions as pre-agreed between producer and distributor.
If the conditions under the escrow agreement are met by the producer, the escrow account manager will remit the royalties towards the production and the financial transaction is successfully closed.
However, if delivery does not take place ultimately on the cut-off date, or the delivery materials do not meet the pre-agreed conditions, the money in the escrow account is paid back by the escrow account manager to the distributor and the financial transaction is canceled.
Would you like to know more about escrowing a financial transaction?
by David Zannoni
David is a representative of Fintage House, one of the major providers of Collection Account Management Services and runs his own media consultancy and representation firm Zannoni Media, which provides consultancy and representation services in the audiovisual industry, with a special focus on transactions between the USA, the countries of Latin America and Spain. David has an extensive network among film producers, financiers, bankers, sales agents, law firms and agencies.