Is The Advance You’ve Been Offered Good Enough?

The other day I wrote about my consternation over a thread on Kindleboards about whether or not an indie writer should use an agent to help negotiate the deal if publishers come knocking on the writer’s door.

My thesis is no.  There’s only down-side to doing that.

I attempted to explain why I thought that on the kindleboards, but based on the initial responses to my comments, I don’t think I did a very good job of it.  Plus, I began behaving badly in that thread, and that never helps lend weight to one’s arguments.  I have no idea how the rest of that thread turned out.  I’m not sure I really care, either.  But I think there are some important points to make on this subject, so I’ll try again here to explain where I’m coming from.

One of the arguments people make about why we should use agents is that publishers won’t accept submissions from unagented writers.  Dean Wesley Smith did a good enough job debunking that particular meme that I don’t need to go into that here. 

But there’s an extension of that thought which crept into the thread over on the boards.  Agents know the publishers, therefore they know which ones are more likely to offer more, which are more likely to be interested in the first place, and which are more likely to do the best job with the book.  Now that may or may not be true, but that’s immaterial in the situation we’re talking about.  In this case, the writer already has an established sales record, and the publishers are coming to HER based on that sales record.  Now maybe she might want to query some others publishers as well, and really get a bidding war started.  But if she’s already got a couple people knocking on her door, I’m not sure what that buys her.  And beyond that, I think she could probably do that querying herself.  How long it would take is another issue, though, and might make it impractical for her to do on her own.  So I’ll plead ignorance about those prospects.

Another reason people have said she should use an agent is that the agent will be able to get a better advance for her than she can on her own.  I’ve heard that particular meme a number of times before, and from multiple places.  I’m unsure if it’s true though: is there data behind this, or is it just groupthink?  How many writers even try to neogtiate their contracts at all?  How many just leap at any opportunity that’s thrown in front of them?  I kind of think this is another myth.

But even if it’s not, it doesn’t matter.  And here’s why.

As an example, let’s say I publish Masters next month (I will…finally), then its sequel next spring.  I’m unsure if the story will require a third book or not, but let’s say it does, and I put that out next fall.  For the sake of argument, let’s assume that the Dawn Of Enlightenment series makes me $2,000 next year, then it starts picking up in 2013 and makes me $10,000.  Then, in 2014, it really starts cooking, and I make $30,000 from it.  At $3.99, assuming the other titles are the same length as Masters, that’s a little over 10,000 sales.  Not too shabby.  But then suppose in 2015, it goes up again, to 15,000 sales, or $41,895.  Then at the end of 2015, a publisher notices it and approaches me with an offer to publish it in print, and I decide I want to do that because bookstores have figured out how to thrive in the new environment and print is still attractive to a lot of people.  How much should the publisher pay me?  What level of advance would be good enough for me to sell?

In the past, writers were pretty much in the dark about this sort of thing.  How much would they sell?  Who the hell knows?  They didn’t know, their agents didn’t know, and neither did the publisher.  It was a shot in the dark.  So in negotiations, it would be really hard to know if the writer was getting a good deal or not.  So maybe back then a good agent really could make a big difference.  But no longer.  Now, I’ve got an existing sales record that I can draw on to make forecasts of what I can expect in years to come.  And that makes a huge difference when it comes time to negotiate.

So how does that work?

Let’s assume that the meteoric rise in Dawn of the Enlightenment readers stops, and sales growth slows to 10% per year each year after 2015.  If that happens, my cash flow for 2012 through 2020 looks like this:

 

I hear the questions now.  What’s that NPV thing?

NPV is Net Present Value.  What you have to understand when you’re dealing with money, and future cash flow streams, is that a dollar five years from now is not the same as a dollar today.  Inflation will make that dollar worth less, and to compare apple with apples, you need to account for inflation when comparing two cash flow streams.  To compute the net present value of a cash flow stream is pretty simple.  You discount each year’s cash flow back to it’s value in current dollars, then sum them.  Use this equation:

In the equation P(0) is the value of the cash flow in current dollars.  P(n) is the value of the cash flow in year n. i is the discount rate (interest rate) you use for the computation.  And n is the year.  Year 0 is today, 1 is next year, 2 is the year after, etc.

You can do this computation very easily in excel.  The NPV function is a snap.  Just enter the cash flows into excel cells, the pick the cell you want to do the computation in and type =npv(interest rate, cell identifiers for the cash flow cells).  The only thing to watch out for is that you have to enter the interest rates as a decimal (in other words 3% would be .03).  The interest rate can be anything you choose.  If you’re using NPV to compare different investment options, for instance, you’d use the expected return from those investments.  When a business decides whether or not to launch a new product or start a new project, they compute a minimum required rate of return for the project, then use that as their interest rate in the NPV computation

In this case, I assumed a 3% inflation rate, since this is money I wouldn’t have anyway, and wouldn’t be investing if I didn’t have it.  So the average inflation rate is a reasonable interest rate to assume.  Doing that, the net present value of my projected cash flow for 2016 through 2020 is equal to $256,256.20. 

Right now, at the end of 2015 (for this example), I’m considering whether or not to take this publishing deal.  Since I’d have to take Dawn of Enlightenment down and couldn’t sell it as an indie any more, to make it worth my while the publisher would have to give me an advance of at least $256,256.20, assuming a contract length of five years.  A longer contract length would require a greater advance.

But Mike, you don’t know for certain that you’ll make that much in those future years!

True.  But you have to assume something.  I guarantee you the publishers have finance people plugging away to forecast future cash flows before they offer any advances.  They’re NOT going to pay out more than they think they can bring in.  I would be a fool to not do the same thing.

Now, maybe I want to be conservative.  Maybe my indie sales will go down from here on out.  It’s possible, so let’s compute what happens if my sales decrease by 10% each year after 2015.  That cash flow looks like this:

Now my NPV is $142,305.85.  So if I think my sales are going to go down from here, maybe I accept something as low as this, but I try to get more.

The question, sports fans, is the following: knowing these facts and projections, going into the negotiations armed and prepared, what am I missing by not having an agent?  What exactly can an agent do to earn his 15%.  For the life of the contract.  Get a better advance?  *snort*  I know exactly what the advance should be, and I’ll walk if I don’t get it.

So really, what am I paying for?

Think about it.

0 thoughts on “Is The Advance You’ve Been Offered Good Enough?

  1. Interesting math. (I’m a math geek, at heart.)

    What I really want to know is how you’re going to sell 10k copies 😉 I’ve been in this since February and am nowhere near that…

        1. Yes. I used the bigger numbers just to illustrate the point (and since indies who have publishers come to them tend to have bigger numbers; that’s how they got the publisher’s attention to begin with). But the underlying process is the same: look at what sales have been. Make a reasonable forecast for what they may be in the future, based on what’s gone on to date. Discount that cash flow back to the present. If the money offered is equal to or greater than that net present value, it’s worthwhile to make the deal. If not, then maybe you say no unless you can get some other concessions to sweeten the pot a bit.

          Point is, go into the negotiations with a target, and a plan.

  2. I don’t really agree with your reasoning. The reason that a publisher would offer a deal is that they see some reason that you are underselling. For example, they may believe that your marketing isn’t adequate, or your cover design is bad, or they can develop you to be a bestseller who will sell a million copies in the first year.

    In other words, they would be basing their advance on more value than you would expect from net present value calculations

    I don’t personally believe in agents, but it only stands to reason that some understanding of what the publisher is bringing to the table in terms of the value proposition is necessary for the negotiation.

    Which is, presumably, what a agent may offer..

    1. I agree. There’s nothing in it for the publisher if they don’t see potential for increased sales down the road. They’ve got to get return on their investment, too. But I was looking at it strictly from the writer’s point of view. If the publisher isn’t willing to pay me more than I could make on my own, then I’m losing out. Oh sure, the book MIGHT go on to be a huge bestseller and make me millions in royalties. But how often does that really happen? I don’t think it’s a good idea to make that very slim probability a basis of the negotiation.

      Your point about other things the publisher brings to add value is a good one, too, and I didn’t mean to rule that out completely. It may be that I’d be willing to take less cash in exchange for, say, a guaranteed marketing blitz and expense-paid book tour or something. So clearly that has to be part of the negotiation too. But if I go into it knowing what I’m worth from the get-go, I’ll have a better starting point to begin that negotiation from. That was the main point I was trying to make. A writer (who has sales to base his assumptions off of) doesn’t need to blindly trust in a third party to determine what he should get in payment. He can have a pretty good idea of what the right number is on his own. And that’s a good place to be.

    2. I would add, though, that if the publisher really thinks they could turn my book into a huge bestseller that will sell millions, to use your example, I would expect their offer would meet or exceed my estimates of what I can make on my own.

  3. Many people are still thinking that the old methods of getting published are still in effect, ignoring the significant changes that have occurred in the last 2 years. I can’t understand why they insist on getting an agent when the publisher has approached them with a deal. In the old days, getting an agent would have been a no brainer, but today you really need to consider your options more carefully then ever. Having an agent may still be justified, but it is no longer a certainty anymore.

    For example, you can argue the exact numbers or the way it was calculated, that Michael K. used to determine what a publisher would need to offer to secure a deal for his book. The publisher has already ran their own figures to arrive at what they would be willing to offer, and you’d be naive to not expect them to low-ball you, especially if you’re an unknown author. If the publishers offer is less than what Michael feels he can make himself, passing on the deal may be the best choice. Almost every day I read about previously published authors receiving advances on new books for substantially less then they have for previous books, from $5-10K in many cases, when before it may have been $10-15K advance.

    However, if money is not your main goal, then accepting an offer for less than you can make self-publishing may be the correct answer for you. I just listened to an interview with Michael J. Sullivan (http://riyria.blogspot.com/), author of the Riyria novels, who claimed he signed with Orbit for less money than he might have made selling his books on his own. His main goal was to become a ‘published’ author by a major imprint, and to hopefully gain all the accoutrements one gathers from being one. Things like better editing, better marketing, best-seller possibilities, more foreign-right sales, etc. He made a conscious decision to forgo some money now in the hope that his enhanced status down the road would be even better. I hope it works out for him.

    I think what Michael K. shows is that an author should know what they want and know where they stand when they talk to any publisher that approaches them with an offer. If I was an unknown author with no self-publishing record and someone offers me $5K for my first book I might be so overwhelmed with gratitude that I might accept it immediately.

    However, if I had self-published the book and knew I was making that much every month or two, $5K is almost an insult and I wouldn’t even consider their offer until they came back with something realistic (ala Michael K’s calculations), or I really, really desired the kind of publishing status one gets from being recognized as a ‘published author’ (ala Mr. Sullivan). Even then, the offer would need to be improved to make it worth my while.

    I think the thing to remember today is that authors are now in the drivers seat of publishing, if that’s what they want. Publishers are no longer the only game in town when everyone can be one. Recognizing that there are options for authors is just the first step in regaining control of their works and career. Many authors like the old methods and won’t change. Many new ones yearn for the comfort of letting others control their destiny and don’t want the changes to happen at all, and so fight for things to remain static. But more and more, many authors, both old and new, are retaking back that control and finding it both liberating and exciting on so many levels.

    Guess which author herd I’m in. LOL

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