to move up or make a change
in the film distribution industry
of Indie STORY-TELLING & STORY-SELLING
A series of conversational articles and brief essays on
The Art & Science of the Entertainment Media Business
Written by Stephen J. Kerr & Sarah Nean Bruce
Some of the most challenging assignments we get are advising film distributors and sales agencies.
We will refer to both film distribution companies and sales agencies as simply film distributors. The reason is that the line between what the entertainment industry has historically defined as a distributor and a sales agent has blurred to the point of being indistinguishable from one another.
Around the world, distributors often provide the same basic functions as do foreign sales agents; and, sales agencies sometimes provide complete film distribution services, both worldwide and in their home territory.
Key to these transactions is knowing how to properly value film distributors. What makes these companies more of a challenge is the degree to which each distributor controls the films they take to market and release. Distributors that have only short-term representation contracts to films and documentaries have an assumed lower value than companies that have long-term, or perpetual rights to films. Companies that Executive Produced, or otherwise own all distribution rights to their film properties, are perceived as more valuable than companies that have long-term, but (eventually) expiring distribution rights. On the other hand, even a foreign sales agent, with limited, territorial specific rights to major films with gravitas, has value.
The analytical keys to determining the value of any distributor are knowing what the company’s revenue drivers are. A foreign sale agency could have a high value, because it sells films with large budgets and big name stars. A global film distributor, with the same annual revenue, which represents mostly small, indie films and documentaries – without the A-List movie stars – might have a much lower appeal. Value is not just a factor of whether a company has long-term or short-term rights to its film properties, or whether they control the films or simply represent them – it is more complicated than that.
A distributor’s value is often dependent on the quality of the films they own, control or sell. Likewise, a company’s value is not just a matter of how many films it has under contract, or how long they have been in business. A distributor that has been in business just a few years, with thirty very current and significant films in their inventory, can be more valuable than a distributor that has been around for twenty years, and has more than 300 movies under contract.
One of the most important factors is the age of the films in a company’s inventory. Our firm has found that - other than award-winning or “legendary” titles - movies and documentaries that are over two or three years old typically have an extremely diminished value. Standard definition and public domain movies (except for “classics”) often have a very low, if any, asset value. A single film’s worth has a lot to do with the number of unsold territories that it has around the world.
Case In Point:
A critically acclaimed motion picture, released two years ago, which was never sold outside the four or five major English language markets, was valued higher than many recently released motion pictures. Likewise, a big budget, star-studded motion picture, that was already sold to most of the world, including China and India, under long-term contracts, was appraised as a low-value asset.
Determining the value of any distributor is not difficult. Our firm uses several proven methods to appraise the value of companies in the entertainment industry. Paramount among these techniques is the “Income Approach.” There are several methodologies to apply the Income Approach, but the goal is to determine the Present Value of the future revenue and cash flow of a company. We take a weighted average of the past years’ earnings, and create a predictive model for how the company should perform in the future. On this projection – we apply a discount based on volatility, market forces, the-state-of-the-industry, and the historic financial performance of the business. The Income Approach is almost solely based on the future cash-flow generating ability of the distribution company – not on its Balance Sheet.
One of our preferred valuation techniques is called the “Excess Earning Approach.” This valuation method utilizes the Weighted Average of a company’s historic revenue and earnings, and then adds to that - the company’s Net Worth (Total Assets minus Total Liabilities). The Income Approach works well when valuing many media companies, but we also utilize the Excess Earnings Approach, especially for companies that have a lot of cash, or other assets, on their books. Disregarding a company’s positive balance sheet completely can result in an inaccurate appraisal of the distributor’s true worth.
We often perform both methods of valuation for a client.
Merging or selling any distribution company is not difficult if they have been well managed. This means that all the producer statements, financial records, chain-of-title documents, and required reports have been properly maintained. Plus, whether, or not, the owners have continued to aggressively acquire new, high quality titles. Regrettably, some distributors that are “For Sale” lack in one or more of these areas. Some have stopped acquiring new films, their film rights are a mess, they have let key people go, or sales tracking is non-existent. Absent good financial reporting, new acquisitions and uninterrupted payments to producers, a company can be rendered unsellable.
Successfully buying, selling or merging distributors has a lot to do with the strategic value of the conjoined companies.
Many companies are acquired because of their key personnel and their industry reputation. These are often the greatest assets that a distributor possesses. It is hard to put a direct value on experienced personnel and a good reputation, but these aspects are often reflected in higher earnings, better quality films, and company longevity. Relationships are the key to success within the movie industry – and many companies have been pursued for purchase, or merger, because others covet their great relationships with both producers and buyers. Keeping the company heads and the employees around who built those strategic and worthwhile relationships is an important aspect of any successful transaction. As we all know, film producers and film buyers like coming back – again and again – to do business with people they know and trust. Building those lasting bridges with producers, and buyers, takes years for veteran entertainment professionals to accomplish.
Many distributors have told us,
“Our greatest assets walk on two feet.
Merging two or more distributors is often synergistically beneficial. Rarely do two distributors sell to the exact same buyers at the major film markets; or have deals with the same cable/satellite companies, over-the-top (OTT), video-on-demand (VOD), electronic sell-through (EST), or DVD wholesalers/retailers.
In a highly fragmented industry, like film distribution, consolidation is one way to survive, and then thrive. It is not difficult for business owners to have their individual worth professionally appraised, and then create a new entity for the combined companies.
Our firm has advised numerous media companies on their mission to merge (legally, financially, strategically). When entrepreneurs are honest with themselves, rational in their thoughts, and unconcerned with their ego or “legacy,” they will often see that combining their strengths with another (sometimes a continent away) will give their organizations a major boost (and even an advantage) in the global entertainment market. Sometimes they need look no further than their biggest content supplier or content buyer for that strategic partner.
Our firm continually reports on the rapid changes confronting the global film distribution industry.
These marketplace changes include:
- the added competition of companies like Netflix and Amazon;
- the demise of DVD revenue, and the lack of commensurate digital revenues;
- the vanishing value of catalog film titles;
- the technological sea change that 4K / UltraHD / High Dynamic Range content represents.
While film distributors face a host of new challenges to their businesses, they still provide producers with the vital service of bringing filmed entertainment to audiences around the world. Now may be one of the best times to contemplate making a change. Film distribution is in a transitional state and those who make smart financial and transactional moves now will be the winners tomorrow.
Every company that makes a profit, employs smart people and acquires new titles – has value. As we wrote earlier, no two film distributors are exactly alike. It is not difficult for us to determine an accurate market value for these kinds of companies. Similarly, buying, selling or merging film distribution and sales agency companies is a core competency for our firm. It has taken training, knowledge, experience, reputations, relationships, and good information for us to do this well.
Our firm has been involved in the sale of over 50 media companies, and while each offered their own unique challenges, all transactions were completed successfully, to the benefit of both buyer and seller. Mergers are sometimes our most taxing, but most rewarding transactions, because we get to witness how two, or more, entrepreneurs use their strengths to build one, better company.
The value drivers of a film distributor take some detective work to be ascertained, but every company has them. There are tried and true techniques that we can use to arrive at an accurate appraisal of film rights and companies, when all the facts are known to us. A company’s human assets are sometimes more valuable than their movies. Every distribution company represents a patchwork of assets. Sometimes it’s worth is found in relationships, sometimes it’s found in rights and titles, sometimes it’s a result of longevity and good management, and sometimes it is anchored in geographic significance.
No company has just one value. Value is often a question of “to whom?” Our job has been to help company owners determine what that value is and how to best maintain it, multiply it, cash-in on it, or capitalize on it.
Our firm, Bel Âge Médias (B.Â.M.}, is a company specializing in developing film, television, and other media properties, as well as providing business development, branding guidance, and investment banking services. Additionally, under our ongoing 4K / Ultra HD initiative, we continue pursuing strategic alignments with high-end, entertainment technology providers, and explore low-cost alternatives for theatrical, televised, and online distribution of 4K (and 2K) films and television programs globally.
Bel Âge Médias • Santa Monica, California
Call Us or Visit Us Online or Email Us:
+1 310 666-6474
http://BelAgeMedias.com • email@example.com • belagemedias@ME.com
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Even If You're On The Right Track... | BMC Online – 06/28/2014
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GRAPHIC_BUY, SELL, MERGE, VALUE by Bel Âge Médias
IMAGE_SYNERGY-MERGINGS-CIRCLES.png by Bel Âge Médias
PHOTO_Sarah&Stephen 2.png via Bel Âge Médias
Simultaneously Published at:
LinkedIn-Stephen J. Kerr – https://www.linkedin.com/pulse/how-buy-sell-merge-value-film-distributor-stephen-kerr