8
Risk Factors
Truth in Advertising
If you tell the truth, you don’t have to remember anything.
—MARK TWAIN
Every business plan requires a statement of risk in which you tell investors what a high-risk investment this is. Make it clear that nothing is guaranteed. No entrepreneur likes a risk statement, but it is a protection for you. In a limited liability company (LLC) or limited partnership, your attorney will insert one whether you like it or not. You are well advised to do this in any proposal for funds. With a risk statement included in your business plan, investors cannot later claim that they did not know that the investment was unpredictable. Even though it seems obvious to you, and probably to them, assume nothing and state the facts anyway. If things should go awry and people lose money, they tend to sue.
A risk statement can be a very short statement or a long explanation. Sometimes, I see risk statements as long as 14 pages in business plans that I haven’t written. This is excessive for a business plan but appropriate for the legal document.
Short Statement
I always put a short statement like the following in the Executive Summary:
Investment in the film industry is highly speculative and inherently risky. There can be no assurance of the economic success of any motion picture, since the revenues derived from the production and distribution of a motion picture depend primarily upon its acceptance by the public, which cannot be predicted. See the “Risk Factors” section of the Investor Offering Memorandum for further particulars.
Long Version
I also put the following long statement before the Financial section. Some attorneys will feel that the short statement is enough. If you have an attorney putting together the Investor Agreement, ask her. If you are handing out the business plan separately from the legal document, include the following statement. You don’t need to copy this page, as it is downloadable from both the book’s companion website and http://www.moviemoney.com.
Risk Factors
Investment in the film industry is highly speculative and inherently risky. There can be no assurance of the economic success of any motion picture since the revenues derived from the production and distribution of a motion picture depend primarily upon its acceptance by the public, which cannot be predicted. The commercial success of a motion picture also depends upon the quality and acceptance of other competing films released into the marketplace at or near the same time, general economic factors, and other tangible and intangible factors, all of which can change and cannot be predicted with certainty.
The entertainment industry in general, and the motion picture industry in particular, are continuing to undergo significant changes, primarily due to technological developments. Although these developments have resulted in the availability of alternative and competing forms of leisure time entertainment, such technological developments have also resulted in the creation of additional revenue sources through licensing of rights to such new media, and potentially could lead to future reductions in the costs of producing and distributing motion pictures. In addition, the theatrical success of a motion picture remains a crucial factor in generating revenues in other media such as videocassettes and television. Due to the rapid growth of technology, shifting consumer tastes, and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors will have on the potential revenue from and profitability of feature-length motion pictures.
The Company itself is in the organizational stage and is subject to all the risks incident to the creation and development of a new business, including the absence of a history of operations and minimal net worth. In order to prosper, the success of [the name of your film here] will depend partly upon the ability of management to produce a film of exceptional quality at a lower cost which can compete in appeal with higher-budgeted films of the same genre. In order to minimize this risk, management plans to participate as much as possible throughout the process and will aim to mitigate financial risks where possible. Fulfilling this goal depends on the timing of investor financing, the ability to obtain distribution contracts with satisfactory terms and the continued participation of the current management.