Contracts L 7 Ing. Jiří Šnajdar 2014

Title P&Ls A Title Profit and Loss Statement, or simply a Title P&L, should be completed for every book that passes the editorial meeting. By using this template, you can make informed decisions about estimated sales, returns, royalties, cost of goods, and ultimately, net profitability or contribution for that particular title.

Any book has the potential to break out of the pack and become a bestseller. Few actually do. The Title P&L is the basis upon which most budgeting is done and also functions as the initial stimulus to knowing which books will be on what lists. There are a number of essential ingredients to a Title P&L, but first and foremost, is conservatism.

Sales Figures Whatever the impulse, sales figures must be realistic and conservative. Realistic and conservative sales numbers are the only meaningful way to begin the process of looking at profitability. Editors should consult with their sales and marketing associates to get an accurate assessment of the market.

Returns OK, maybe your book is the best book ever created. What goes out in small numbers usually (but not always) comes back in small numbers (31% - 11%). You’re more likely to have higher return rates than lower. Let your experience over time be your guide to reducing the rate. ” Whatever the return rate is, it is—so be even more careful and conservative.

Cost of Goods Cost of goods consists of those costs that are repeated each time a book is printed, primarily paper, printing, and binding royalties amortized development costs freight in

Smaller runs cost more to produce per unit than longer runs because the time and effort of getting the press ready to run is significant and essentially the same, regardless of run size. The same is true of paper costs; smaller quantities are generally priced higher than truckload lots.

Estimating higher sales figures to reduce the cost of goods and increase the gross margin is self- defeating. Don’t just think about cost per unit. Think, as well, about the total out-of- pocket cost and conserving cash flow. Never print more books than you realistically think you’ll sell in a six-month period.

Development or Plant Costs Every time you create a book, you incur one-time costs. These costs are combined under the label Development Costs, or Plant Costs. Included among these costs are: editorial costs: copyediting, developmental editing, indexing and proof-reading expenses art costs: text costs: typesetting through preparation of copy for the printer design costs: jacket, cover, and interior text design

Development or Plant Costs cont… separation and proofing costs XML conversion costs Development costs can be amortized or written off for tax purposes in various percentages over different periods of time, depending upon the kind of book it is and its expected life. Check with your accountant about the best way to take advantage of amortizing your costs. The most conservative approach to plant costs is to amortize them 100% in year 1.

Development or Plant Costs cont… From a management standpoint, amortization can make a difference in terms of taxes. If you strategically want to improve profits, you can postpone publication of books from later in this year to early in the next year.

Royalties Royalties are usually a publisher’s largest expense. If you are the owner-publisher, it makes sense to recognize and pay yourself appropriate royalties. Royalties are figured or based on either the retail price of the book or on the net amount received by the publisher after discounts (and excluding freight). Paying royalties allows publishers to get manuscripts a bit more easily because they can offer the author some compensation for his creative effort, which is only fair.

Royalties As the economics of publishing are squeezed by higher costs all along the line, more publishers are trying to negotiate royalty payments based upon the net amount received. As a publisher, you should almost always try to create a situation in which you pay the lowest possible advance and royalty but create a win-win situation with your author.

Royalties How much should you pay your authors as an advance against royalties? The question really comes down to how many copies of that book do you expect to sell. A good rule of thumb is to pay no more than the amount the author would earn if one-half of the edition is sold.

Gross Profit The amount remaining after subtracting royalties, paper, printing and binding, the appropriate percentage of development or plant costs, and freight in from net revenues is your gross profit. As a benchmark, most trade publishers work on a gross profit of around 50%, most professional publishers around 60–65%.

Gross Profit Editors, through contract negotiation, can control royalty and development costs, and should get input on sales and production costs prior to extending any contract. Focusing on gross profit, rather than on net profit, is an excellent way to get editors involved in the day- to-day evaluation of profit for specific titels. At the same time, management knows it must contain or reduce expenses to achieve greater profitability.

Subsidiary Rights Subsidiary rights income is extra revenue generated by selling the subsidiary right to publish your book to someone else. Subsidiary rights includes sales of : serial rights book club rights foreign rights audio rights

Subsidiary Rights cont… movie rights electronic rights merchandising rights and others One question you may be asking is should you factor sub-rights income into your title profitability analysis? No!

Subsidiary Rights cont… Many publishers make the mistake of thinking they can predict sales to book clubs, audio publishers, foreign publishers, and magazines. Many a publisher has inflated his Title P&L figures with income from these sources only to find that no purchaser is interested in his products. It’s hard enough to predict sales to bookstores and libraries. Focus on these and let your sub-rights income be truly supplemental and incremental.

EBITDA vs. Net Profit The amount of money left over after all of the expense categories have been deducted from net sales is EBITDA. The average operating profit for larger publishers is approximately 11.5%.

Contracts To work with contracts, seek the guidance of a good attorney. Don’t be afraid to ask for advice. The contract, as has been noted, is one of the publishing house’s prime assets. You must have a contract for every book you publish. In most cases, the primary clauses on which you’ll want to focus your attention are those relating to: who the parties to the contract are description of the work

Contracts cont… format (hardcover, paperback, electronic) rights granted a “satisfactory manuscript” clause manuscript or disk due date territories granted and language term of the contract advance (if any) against royalties royalty rates and dates of payment subsidiary rights grants and splits defining who the copyright holder is author warranties

Contracts cont… defining who has responsibility for procuring and paying for artwork, illustrations, photos, permissions, index, etc. assignability of the contract reversion of rights any agency clause arbitration clause Defining Who the Parties to the Contract Are? A contract must be between two or more parties. Is an agent involved? If so, how is the agent involved and to whom is money paid? Do you need an agency clause?

Describing the Work Every contract must state what it is you, the publisher, are buying and what the author is selling. There should also be a notice of how many words the work will be, how many illustrations, and the format, whether hardcover or paperback. Including whether as hard copy, disk, or both.

Rights Granted Every contract provides for the ownership or licensing of specific rights that you, as the publisher, control. The publisher with the right or license to publish in book form, such as audio book, dramatic (play or movie), merchandising, and more. One right should absolutely be clearly specified: electronic rights and formats, whether e-book, database, online, or other.

Satisfactory Manuscript Clause As the organization paying for the privilege of publishing the author’s work, you want to ensure the manuscript you ultimately get is what you agreed upon. You should insist upon a “satisfactory manuscript” clause stating that the manuscript submitted must meet your needs. If you provide a mechanism for author satisfaction, then you’ll be able to include a satisfactory manuscript clause.

Due Dates To plan your program (remember consistency and credibility), you must provide due dates that tie in to your publishing program. If manuscripts don’t come in on time, there is little you can do other than cancel the contract. Of course if the manuscript is never delivered, the publisher should ask the author to return the original advance because the author failed to fulfill his obligation.

Due Dates cont… One strategy a publisher should consider is to include a first-proceeds clause in the contract. This clause states that the author may retain any advance paid to date, but that such advance will be repaid to the publisher if the author sells the manuscript to another publisher.

Territory What territorial rights will you be acquiring? In other words, where will you be allowed to sell the work? In the best of all worlds, you’ll get world rights— that is, the ability to sell the work throughout the world in all languages.

Term of the Contract This clause is fairly straightforward. For how long does the author grant the publisher the rights to publish the work in question? In most cases the grant is for the life of the copyright with the proviso that the book must be kept in print and be available for sale. In most cases, “in print” is defined obliquely; that is, as long as the publisher has inventory of the work available for sale to anyone who orders the book.

Royalty Advances Most authors write to earn money as well as to disseminate information. Thus, they expect an advance against royalty or an advance payment from the publisher that will be deducted from any royalty the author may earn from the sale of the work. The question both you and the author must decide is how much of an advance is fair to both parties?

Royalty Advances cont… Pay as little as possible. Pay as close to one-half the first year’s total earned royalty The second item that impacts your negotiation is the market value of the manuscript. In many cases, when competition is involved, you’ll find the author’s expectations are large and the manuscript may be priced out of your range. Never put your program at risk for one book.

Royalty Rates and Payment Dates Like royalty advances, royalty rates vary widely depending upon the stature of the author, the particular publisher, the category of book, and the market demand for the work. Royalty rates are those percentages of an agreed-upon dollar amount that the author will receive for the sale of each book the publisher sells.

Royalty Rates and Payment Dates Royalty rates have a number of bases, but most publishers use one of two criteria: the suggested retail price of the book the net amount received by the publisher, meaning the retail price less any discounts the publisher may give an account

Royalty Rates and Payment Dates Most larger publishers within the established trade publishing community base royalties on the suggested retail price. Most smaller,professional, and college publishers base royalties on the net amount received. Agents tend to like royalties based on retail price not because it means the author (and the agent) will earn more. If royalties are based on net received, rates are commonly 10 to 15% on hardcovers and 8 to 10% on paperbacks. Most publishers pay royalties twice a year.

Subsidiary Rights Grants and Splits Subsidiary rights are extremely important to the publisher. They can absolutely mean the difference between profit and loss. While most splits are traditionally 50 –50%, some, such as first serial, or foreign rights, may favor the author.

Who Holds Copyright? Today, copyright is usually held by the author, who transfers publishing rights to the publisher. Be sure to define who is responsible for obtaining copyright from the Copyright Office; typically it’s the publisher.

Author Warranties One of the most important clauses in your author contract is the “author warranty” clause. In this clause, the author “warrants,” or guarantees, a number of important items that make publishing his book more palatable, and safer, for the Publisher. Every contract you sign should have a strong author’s warranty clause.

Who Pays for the Artwork, Index, and More? Especially for the procurement of artwork, illustrations, and photos, all of which demand payment of fees. Most of the time, it is the author’s responsibility. In academic publishing, there are frequently grants paid to the author by the publisher to cover these costs. Quite often they are done by the publisher and the cost charged against the author’s royalties.

Assignability of the Contract The assignability of the contract is a critical clause that should be in every contract. If you don’t have an assignability clause in your contract, you may not be able to include that contract among the assets you merge or sell to the other publishing house. Make sure, that the contract allows you, as publisher, to assign every contract to another party.

Reversion of Rights Authors and agents always insist on a reversion clause for good reason. If the book isn’t selling, the author (and agent) aren’t making money on that book. As a publisher, you don’t want to give up, or revert, rights to any book. The simple answer to this situation is to couple the “in print” clause to a minimum sales quantity.

Agency Clause If an author uses an agent, then the agent will request an agency clause that stipulates the agent is empowered by the author to act for the author. The clause further states that all sums of money that will be paid to the author should be paid to the agent as the author’s agent.

Arbitration Clause In most cases, publishers, authors, and agents enter into contracts with all good will intended. Arbitration has its own costs plus those for the attorneys who are involved. If you do decide to include an arbitration clause in your contracts, specify the venue in which the arbitration will occur.

Contract Analysis Form This is simply a summary of the contract’s most important terms. These forms should then be filed in an easy-to- access place, so they can be conveniently found when contract questions arise.

Title Fact Sheets A good Title Fact Sheet will have entries for: title author ISBN publishing season and year format and size number of pages tentative price

Title Fact Sheets cont… A good Title Fact Sheet will have entries for: estimated initial print run (taken from Title P&L) content description author biographical details marketing plans and budgets directly competitive books blurbs, awards, citations