8 Recoupment – Net Profits

The safest way to double your money is to fold it over and put it in your pocket.

Kim Hubbard

Net Profits

As a general rule of thumb, a film producer should try to retain 50 per cent of net profits for himself and use the other 50 per cent to pay investors in the film. Producers will be required to pay talent, such as writers, actors and the director, a share of the net profits as part of their overall payment. The balance retained by the producer is sometimes known as ‘Producer's Net Profits'.

During the deal-making process, it is important to define what the producer is actually offering. Those negotiating with the producer should enquire whether the percentage offered is the entire net profits of the film or only from the producer's share of net profits. There can be a noticeable difference between 5 per cent of 100 per cent of net profits and 5 per cent of 50 per cent of net profits.

Generally, net profits would be those revenues from the sales and exploitation of the film after deductions of:

1. the distributor or sales agents commissions;
2. the distribution or sales agents expenses;
3. the actual cost of production;
4. any deferments.

Producer's net profits would be all of the revenues from the exploitation of the film after the above deductions and any share of ‘net profits' payable to third party investors and not retained by the producer for his or her own benefit.

However, it should be stressed that this is only a general rule and, depending on the circumstances of the transaction, a financier's or producer's lawyer will make specific variations.

Gross Receipts

The Recoupment Schedule set out below reflects a sales agency agreement between a sales agent and a producer in relation to an advance of funds to the producer for certain rights in a film. The term ‘Advance’ will also be defined in the agreement with the producer. Other terms such as: ‘Deferred Fees', ‘Sales Agent Costs', ‘Excluding Sales Agent Costs', ‘Gross Receipts', ‘Net Receipts', ‘Film’, ‘Producer’ and others will also be defined within the agreement.

The example below reflects an agreement where the sales agent is first entitled to recoup part of the advance made to the producer. In most cases the sales agent will recoup their advance first and the other participants will follow. This example shows that there are certain equity investors who have put up cash and therefore are entitled to a specific corridor for recoupment.

Second, the sales agent is entitled to deduct their costs in relation to sales. In this case, the costs are capped at 5 per cent of the total revenue payable to the sales agent. If there is no cap placed on the costs, then the sales agent can allocate or ‘cross' costs from other films against the sale of this specific film. This is also known as cross-collateralization.

Third, the sales agent will then pay himself a fee for selling the film so well! However, in this agreement, part of the fee is deferred until a certain revenue from amount of sales are made.

Fourth, the producer's equity investors (i.e., private individuals putting up cash or perhaps a film fund) will now have a corridor for recoupment in the same position as the sales agent. This example assumes that the sales agent has still not recouped the entire advance but enough of it so that further revenues can be shared with the producer's investors.

Fifth, at this stage of recoupment, the sales agent's advance has been paid off and the producer and investor can now both be repaid.

Sixth, at this stage of the recoupment schedule the producer's equity investors have recouped in full and any further income will be shared between the sales agent (who has in this case deferred some of their sales agent fees) and the producer who may also have deferred some of his or her fees.

Finally, in seventh position, will be those sums left over that, in this example, are defined as ‘Net Receipts'. One should note that this definition is not a rule of thumb and is sometimes referred toas ‘net profits' or ‘producer's net profits'. In many circumstances, the producer will deduct certain costs from net receipts for himself and then will pay those participants who are entitled to certain payments after these deductions. In this case, these participants will be entitled to ‘Producer's Net Profits' (i.e., those profits after deductions by the producer from net receipts).

One should note that this is only a guide and each definition is different depending on the transaction. Recoupment is an area for which expert legal advice should be obtained.

Sample Recoupment Schedule

1. Sales Agent Fee.Sales Agent shall be entitled to deduct and retain a Deferred Sales Agent Fee in respect of the first Gross Receipts received up to £[ ] in accordance with paragraph 2. Sales Agent shall be entitled to deduct and retain the Sales Agent Fee from Gross Receipts received beyond the first £[ ] as set forth in the paragraph 2(c), such fee being inclusive of all sub-Sales Agent fees and any Sales Agent or similar fees (whether or not paid to affiliates, subsidiaries or other companies related to Sales Agent) with respect to the exploitation and Sales Agent of the Film.
2. Allocation of Sales Agent's Gross Receipts.Sales Agent agrees that Gross Receipts derived from the Territory shall be applied as follows:

1. First, to Sales Agent until Sales Agent has received £[ ] to be applied by Sales Agent in reduction of the Advance;
2. Second, on an ongoing basis, to the payment to Sales Agent of its Sales Agent Costs it being understood that Sales Agent Costs incurred by Sales Agent will be capped at five per cent (5%) of gross revenues payable to Sales Agent and, in addition, its Excluded Sales Agent Costs;
3. Third, on an ongoing basis, to the payment to Sales Agent of the Sales Agent Fee;
4. Fourth, of the next £[ ] of Gross Receipts (after deduction of the fees and expenses permitted under subparagraphs (b) and (c)), on a pro rata pari passu basis, £[ ] shall be paid to Sales Agent in reduction of its Advance and £[ ] shall be paid to the Producer to be applied to recoup the contributions of the Producer's investors in the Film (less any amounts paid to the Sales Agent on account of permitted fees and expenses);
5. Fifth, the next £[ ] of Gross Receipts (after deduction of the fees and expenses permitted under subparagraphs (b) and (c)), shall be paid to the Producer to be applied to recoup the contributions of the Producer's investors in the Film;
6. Sixth, Gross Receipts (after deduction of the fees and expenses permitted under subparagraphs (b) and (c)), shall thereafter be allocated between Sales Agent and the Producer on a pro rata pari passu basis until the SalesAgent has received its Deferred Sales Agent Fee of £[ ] and the Producer has received £[ ];
7. Seventh, the balance (‘Net Receipts'), to the Producer is accordance with below:

1. First, the Producer in relation to all unrecouped development costs for the film;
2. Second, the Producer in relation to all unrecouped overheads costs relating to the film;
3. The balance (Producer's net profits) to those set out below;

4. Producer: 50%

   Director: 10%

   Writer: 5%

   Talent Pool: 10%

   Equity Investors:25%