Do Broadway shows need bigger reserves? Part II

Ok, now we get to the good stuff.

Yesterday, we talked all about the all-important reserve in Broadway Budgets, and how they are used and when they are used (and how we all dream of doing shows that never have to tap into them – because then you can just distribute them back to the investors right away!).

But the question that got us started on this topic was . . . how big are they, and in 2015, should they be bigger?

Here’s why it’s an issue:

A fairly traditional rule of thumb has been that your reserve should be 10% of your production budget.  So a $10mm show should have $1mm in reserve (remember a reserve will be used for budgetary overruns, preview losses, and anything else you don’t want to happen!).

I always like to make my reserves a bit bigger, to have a little extra cushion or some “mad money” if a wonderful opportunity comes up that you haven’t planned for (a star wants to do your show at the last second, or an incredible billboard becomes available).

And lately, I’ve started to wonder if that rule of thumb is a little low.

Here’s why . . . the competitive landscape is now busier than ever.  With more shows on the boards, it now takes shows longer to get out of the gate, and get the attention of theatergoers.  There are more ads for them to sort through, more recommendations from friends, etc.

So I’m seeing a trend of shows running out of reserve money a little bit quicker than they used to.

And that means shows that aren’t ready to give up the ghost and close have to raise more money.

Here’s where it gets tricky . . .

When Producers raise more money after the original offering has closed (usually tied to the opening of the show), that money is traditionally taken in the form of a priority loan.  And a priority loan is exactly that . . . it’s a loan, that is put in 1st position (priority) over all the other payback to investors.

So, in other words, if a show makes money after getting a priority loan, that loan has to be paid back before investors receive any funds.  If the loan works, and the show turns around and pays back its loan, then and only then do investors start to get monies returned to them.

What happens if the show doesn’t turn around?  Well, the loan is lost, or stays in first position in case anything else happens with the show (licensing money, film, etc.) . . . and the investors stay in second position, most likely never to receive a dime.

Sad times for them.

And that’s why I wonder if reserves should be bigger.  With a bigger reserve, the first investors don’t get put in second position if the show is in trouble. So if the show doesn’t work on Broadway, but is a hit in the summer stock and amateur world, they will start to recoup their losses.  When there is a loan in front of them, they never get anything (and licensing is sometimes a reason why people invest).

Of course, a bigger reserve means more money to be raised up front.  And some Producers would rather keep their initial budgets lower, and then just go out and raise more later.

But I’m starting to wonder . . .

What would you rather do?  Raise more up front?  Invest more up front?  Do you think reserves should increase?

I’m staring at a Broadway budget right this very second, and I’m still figuring it out for myself . . .


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  • Shane says:

    The observation that a higher reserve means “more money to be raised up front” doesn’t quite highlight the right comparison to the preceding paragraphs on the risks of investors being pushed to a lower priority. It’s not really a question of the producer having to do more work in raising money, but the fact that any profits for investors are ultimately diluted if reserves are unnecessarily large.

    The nature of the industry means the investors can’t be too risk averse, so while reserves should be adequate for what is expected but getting unnecessarily conservative will be diluting your investor’s potential returns without significantly reducing risk.

    Of course, what is unneccessarily conservative for one show is probably appropriate for another. It depends what is going to drive demand for your show and how long you realistically should be prepared for that to happen.

  • Ken Wydro says:

    It is much easier to raise additional $$$ for a reserve while the investor is still excited than to inform everybody that the show is in trouble and needs a priority loan. If the show breaks even at least during previews, the reserve never has to be touched, so the pay back is faster, not so much diluted. As an investor/producer, I would rather bite the bullet and close the show rather than push the original investor further down the recoupment totem pole with a priority loan. I personally do not know of ANY show that got itself out of trouble because of a priority loan which pays the loan-er back first plus interest before the original investor sees anything. For me, having to get a priority loan is more than a kiss of death, with many examples to illustrate that sad story. It only prolongs the pain of an empty or papered house. Having to secure a priority loan in order to keep open often means that the lead producer mis-read or over estimated the commercial potential of a show – which almost often means that the book was poor. When a producer keeps a show open because of “love” and throws good money after bad, the investor should head to his accountant right away and get the Final K-1 asap. Take the loss on your taxes.

  • Jared says:

    I feel like it makes more sense for the show and the investors to raise a little more money up front. If I had money to invest in a show, I would not be happy about the one-two punch of taking out a priority loan, which means not only is my show in trouble but now even if things turn around I get paid back later. Maybe 15% is a better target figure in today’s marketplace?

  • Marshall says:

    Good golly Ms. Molly! 10%?!? How ’bout 20%? An additional $2M on a $10M show provides a LOT more options. First, if the show seems to be in trouble, a meeting w/Investors would be much less stressful. Even if you dipped into the reserve for $1M to increase marketing, bring in a name, buy some advertising, pitch road show folks, etc. you’re protecting the investors. And you’d still have a mil left.

    Re-evaluate after spending the $1M to resuscitate. Priority loans don’t seem to make good business sense.

  • Trudee says:

    If you are able to raise more $ up front that’s what I would do, especially for Broadway (vs. Off Broadway). The world today throws us so many unknowns, it’s a way to protect the initial investment and investors. They may not want to invest again in a new project if they get burned too many times…

  • Jessica says:

    I can understand why an investor/producer wouldn’t want to have an overly large reserve fund which would delay recoupment, but I think that it is important to give a show a fighting chance at finding its legs. How long does it take in today’s market to determine whether or not a show is going to be a draw? Surely you’d want to get through previews, opening night, and the first month or so of performances to see if word of mouth gets traction.

    10% of total budget formula is too stingy, because it is not just for getting through the early weeks of the show, but it’s cushion for cost overruns.

    What percentage of the total box office is your break even point on weekly costs? What do you need to hit in order to make the decision to stay open? What do most successful shows make at the box office in the first 6-8 weeks of their run (including previews)?

    There should be enough money in the reserve fund to keep the show up until it’s run long enough to demonstrate whether or not it is going to track the same way a successful show does.

  • Ken brings up a big issue in today’s competitive Broadway landscape. I’ve had a few years of experience raising funds for shows and I’ve learned that priority loans are the kiss of death. I now look for a healthy reserve in the budget as part of my decision-making process to come on board.

  • I’m in the middle of producing my first show now and, honestly speaking, I think it should be as high as 25%. But I also think that this is part of a conversation you have with your investors, and find out how much they’re willing to put in for that purpose. I feel, however, that whether the money is spent on stage or off (marketing, reserves for early losses, etc.), the end result is a better show and one that is more likely to be successful that it otherwise would be. And that’s what I would tell my investors.

  • Melissa Bell says:

    This is a great question Ken and conversation from your followers. I think you have made your own case; ask the initial investors which they would rather do: Raise a little more before the show opens or get pushed to 2nd place if a loan has to be taken out. I think you’ll get your answer. No one wants to be second.

  • Gary says:

    I had a small investment in a show last fall. I was told that the producers had enough in the reserve to
    “get us to Tony nomination time”! (Which by the way I found very appealing). The show got great reviews,
    but wasn’t filling the house (although it was a relatively small loss each week). As it was building an audience the theater owner decided to give the theater to another show coming in! The show closed in January (hardly anywhere near Tony time)! Lots of pissed off people. Where was the reserve?
    Or was it just a ploy to get investors?
    I still think a large reserve is the way to go.

    • Jared says:

      I suspect I know which show you were a part of, and from what I heard the theatre owners had a clause in the rental contract that said if the show didn’t make x amount of dollars a week they could kick it out in favor of something else. Apparently this is relatively common? If it makes you feel any better, I really enjoyed this show with great reviews that closed in early January and am grateful people like you allowed it to happen, even though I understand your frustration with your loss.

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