Investing in theater requires careful consideration of both financial and artistic aspects. Some investors choose projects that resonate with them creatively, while others focus primarily on profitability. At Sipario Entertainment, we evaluate both content and financial potential. While we prefer to invest in productions we are passionate about, there are times when we invest purely for the expected financial return, or, conversely, as we want to support that particular artist or message.

It’s essential to assess opportunity costs and the potential impact of each investment before making a decision. Most importantly, the investors should always be prepared for the possibility of losing the entire investment.

Analysis of an investment in a theatrical production can be approached from both a financial and artistic perspective. I consider investment in theater an alternative investment, where there is high risk, but potentially high return and a long-lasting stream of cash flow. 

Every venture presents investors with certain essential information, such as: 

- marketing materials highlighting the show's cast, creative team, etc; 

- budget itemizing costs associated with opening and ongoing running expenses. 

- a recoupment chart anticipating the required ticket sales for recoupment. 

Recoupment: "The point at which the production has repaid investors the initial capital invested (the capitalization), that is, all the money raised to develop, mount, and produce the show."

As a prospective investor, three metrics are pivotal to understanding the viability of a theatrical production:

- Capitalization – The total sum of finances required to bring the production from development to opening night. This is the capital raised and profitability is contingent upon recoupment of this amount.

- Weekly Running Costs - The operational costs for any given week must be lower than the gross profits for that same period or else losses will ensue.

- Weekly Potential Gross - A realistic forecast based on the size and capacity of the theater where the production is being staged. Premium and dynamic pricing may increase the weekly potential in some cases.

When considering a potential investment in a show, one must account for the capitalization (budget) and running costs. A lower capitalization rate will provide a larger stake in the show for the same cost. Lower running costs ensue that a lower gross is necessary to turn a profit, and the returns will be realized faster. 

Capitalization and Recoupment Schedule

The Capitalization is the budget needed to produce the show. The recoupment chart projects the probability of the capital recoupment. Each column in the chart presents an individual case based on the percentage of maximum gross achieved and how long it would take to receive money back if a show is at 100% capacity as well as at 50% (the lowest percentage mentioned generally depicts the point where profit margins are negative or approaching that point). 

The royalties represent money allocated to the authors, creators, licensors, producers, and other stakeholders. Charts can show different method of calculating royalties, which are usually equivalent. It is customary that a minimum royalty percentage applies regardless of profits. In case of low weekly profit, the producer uses the reserve to pay the royalties. Often, if the show is not profitable, the producer will ask the cast to waive their royalties to keep the show running through a period of low box office. 

Occupancy level will fluctuate throughout the life of the show. Weeks to recoup capitalization indicated the number of weeks needed to recoup the initial investment at that level of occupancy. (Capitalization / Net Weekly Operating Profit = Weeks to recoup capitalization). 

Who can invest?

Accredited investors are the only allowed individuals under federal regulation to invest in Broadway shows. Accreditation requires a:

• net worth of $1,000,000 excluding primary residence or combined income of at least $300,000 for married couples over the past two years as well as the expectation of earning this amount this year. 

• An income of at least $200,000 per year for each year for the last two years (or $300,000 per year combined income for married couples) and the expectation of making the same amount this year.

This rule is not specific to Broadway and applies to most investments in private entities in the U.S. (Broadway investment is a private placement and categorized as a 506(b) private placement investment. 

Ok, I am ready to invest. How do I do that?

The customary minimum investment for a Broadway production was around $25,000; with the emergence of larger-budget musicals, this amount has been adjusted accordingly, generally with a minimum investment of $50,000 per show, or $25,000 with some limitations. 

Genrally, upon interest, I explain the terms of the investment and answered all your questions. If you are happy to go ahead, I will have the investment documents sent to you (Operating Agreement, Subscription Agreement and Tax Documents), which you will review, sign and send back, then wire them money or mail a check to the production office.

Some shows, especially potential hits, will only be offered to people who producers have worked with before. Those shows tend to sell out quickly and the opportunity to invest lasts only a few days.

As co-producer, I make a point never to ask anyone for money if I am not also investing my own money, so I do share the risk. And as co-producer I only make money if the show is a financial success, so my incentive is only to invest in shows that have strong potential to be a financial success. 

What should I expect after I invest?

With most financial investments, you hand over your money, and wait for the recoupment, hopefully with a hefty return on top. Apart from potential monetary returns, investors can reap a few main benefits:

- Opening night tickets: these events offer an opportunity to network with esteemed members of the industry in a unique setting.

- Opening night party: usually opening night is followed by a party with cast and creators, crew and all people invested in the musical.

- House seats: investors can purchase premium seats tickets at discounted prices, so they can enjoy their own show without the added cost of premium pricing. 

- A portion of the on-going subsidiary rights of the show (English-speaking world tour, domestic regional tours, licensing rights, merchandising rights), this can vary depending on the individual show.

There are other perks as well, though they depend on the show and the lead producer. If these aren’t offered, it’s always worth asking. Additional benefits can include:

• Access to Tony Awards tickets: These are pricey ($750+), but it’s always a grand evening, and if your show is nominated, there’s also possibly a party for you to attend afterward.

How do I track the show?

From initial investment until the show is on Broadway, the lead producer will be busy putting together the show. Once the show is up and running, the production will send reports periodically during the run of the show.

How do I get paid back?

The show will run weekly and every profitable week, will set aside a portion of the recouped capital. 

Once the producer feels they have enough reserve, they will start distributing some of the initial capital back to the investors. A successful show will send checks/wires/ACHs at irregular intervals based on the cash flow of the show. 

Depending on several factors, mostly relating to the overall health of the show, producers may hold onto more or less cash at any given time. Even successful shows have quieter weeks (Broadway is quite seasonal), so some producers hold onto significant amounts to ensure they can weather the slow periods.

Once the show is in profit, the adjusted net profit is split 50/50 between producers’ pool and investors’ pool with each investor sharing in that 50% pro-rata of their investment. 

Practical Tax Considerations

Broadway productions form production-specific LLCs and are treated as pass-through entities. It’s a passive investment, so investors get an annual K-1 for tax purposes. 

If the production goes into profit, the income reported on that K-1 is taxed as ordinary income, and any losses are passive until the LLC is closed, at which point the investor will get a final K-1 and can write off the loss. 

Factoring in the tax write-off, even if the production never returns a cent, the investor will eventually get whatever your tax rate is back when you file your taxes. Since you must be accredited, this is likely to be more than 30%. An investment going to zero is painful, but the tax deductibility results in your maximum loss being about 70% of what you invested.

How does the Tour Work?

The national tour that inevitably follows even unsuccessful Broadway shows is another place where money can be made. 

Tours are usually financed independently of the Broadway production, through an additional capitalization, but the opportunity to invest your pro-rata share is usually given to the original Broadway Investors. 

The economics of the tour are more favorable, as most tour happen in theaters with large following and guaranteed seats, it is generally advantageous to invest in the tour.