Determining Foreign Sales Fees

The question came up over one of last weeks posts, why foreign buyers base license fees on budget percentages.  I have accepted this for so long, I had stopped questioning it -- but it is one of those things worth questioning, so I am glad it was raised.  Thanks.

It made me feel we should have an ongoing "ASK THE EXPERTS" section over here at Truly Free.  For this one I went to the legend of Glen Basner, a graduate of the Good Machine School of Everything, and the man behind the founding of the new sales powerhouse FILM NATION.  The Baz explains:
There are many factors in determining what a territorial license fee should be – a percentage of the budget is only one. These are standard amounts that are “typical” for an individual territory based on what distributors have paid historically (Yes, the world has changed quite a bit recently!). I don’t believe that they apply in singular fashion unless you are contemplating some form of output deal. 
On a single picture license, a distributor will want to know what the budget level is so that: a) they understand what the production value will be; and b) they can feel comfortable that they are not paying an excessive amount in relation to the cost of the film. These are valid points but what people forget is that ultimately the budget of the film does not necessarily have a correlation with its success at the box office (Blair Witch etc). 
Our approach is to think like a distributor and run estimates – both revenue and expense – for a film in all media to determine a low, base and high value a film is likely to have in any given territory. With these estimates we can back into a license fee figure that would allow for a distributor to make money should the film turn out well. The budget comes into play if the sum total of our international estimates do not raise enough money to finance a film.
Curiously enough, the WSJ has chimed in today on the issue of value of foreign licenses, albeit the lack thereof.  Check it out here.