There are multiple financial transactions on an independent film project, to finance, produce, and distribute the film.

An example can be an investor that pays money to the production, to invest in a film, with the aim to earn the investment back and receive a return on investment and share in the film’s profits, if any.

Another potential scenario is an international co-production. The co-producers from different countries jointly produce a film and each of the co-producers provides a financial contribution to cover their share of the production costs. The contributions will go towards the production account.

A third example of a financial transaction is a distributor who pays a minimum guarantee for the film’s distribution rights in return for the delivery materials, in accordance with the terms and conditions as agreed between the production company and distributor in the distribution agreement.

Financial risk in the film industry

All these transactions imply a certain level of financial risk.

How can the investor be sure to recover funds, if the investor pays the production company but eventually, for factors beyond the investor’s control, the film cannot be made?

What occurs when one co-producer remits its part of the production budget to the production account, but the other co-producers do not comply with their part?

And what happens if a film distributor pays a minimum guarantee, but delivery of film does not take place on time, or the materials are not in line with the conditions agreed in the distribution agreement?

A common solution for these kinds of potential transaction-related issues is to set up a so-called escrow account.

An escrow account as a solution to deal with the financial risk

If an escrow account is set up, both parties involved in a financial transaction agree not to exchange a product, asset, or service directly for payment, but to rather escrow the payment until such moment that the transaction is successfully closed.

Let’s take the example of the distributor who wants to acquire certain distribution rights of a film and the producer who is looking to license such rights. Both parties run a financial risk if they do the transaction directly.

If the distributor is the first to act, it runs a financial risk: it pays a royalty for the distribution rights and subsequently, 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, an A-list actor is mentioned as an essential element in making the film, but it turns out that the actor dropped out or become unavailable for the project.

On the other hand, also the producer runs a risk: it delivers the materials of the film to the distributor but then the distributor breaches the distribution agreement and does not pay the royalties for the distribution rights.

The solution is to set up an escrow account in between. The escrow account is opened in the name of a neutral third-party escrow manager.

How does an escrow account for a financial transaction in the film industry work?

So how does the transaction work, with an escrow account manager involved?

The producer and the distributor enter into an escrow agreement with the escrow account manager, and in the escrow agreement, the conditions are set forth for the release of the escrowed money.

The distributor subsequently pays the royalties for the distribution rights of the film into the escrow account. The money will be temporarily held in an escrow account by the escrow account manager.

Then it is up to the producer to deliver the film materials to the distributor before a jointly agreed cutoff date and to make sure that the materials meet the conditions as pre-agreed between the producer and distributor.

If the conditions under the escrow agreement are met by the producer, the escrow account manager will remit the money from the escrow account to the producer, and the financial transaction is successfully closed.

On the other hand, if delivery has not taken place on or before on the cutoff date or the delivery materials do not meet the pre-agreed conditions as set forth in the escrow agreement, the money in the escrow account is returned by the escrow account manager to the distributor and the financial transaction is canceled.

Conclusion

On an independent film, it is common to have multiple financial transactions. Each of these transactions can mean a financial risk for the parties involved. A way to mitigate that risk is by using an escrow account to secure accurate handling of the transaction and effectively rule out the financial risk. The escrow account is set up by a bank with a track record in the entertainment industry, in the name of a neutral third-party escrow account manager. All the parties involved in the transaction, together with the escrow account manager, execute the escrow agreement. The escrow arrangement guarantees that if the conditions under the escrow agreement or met, the transaction is successfully closed, and money is released from the escrow account. On the other hand, if conditions under the escrow agreement are not met, the escrow account manager will safely return the funds to the payee.

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