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.