The news that ARC, one of Toronto’s largest animation studios, has gone into receivership spread in record time thanks to social media. I’ve been dismayed at many of the comments I’ve read in various places online. Many are ignorant; some are accusatory. I have no inside information, but anyone with experience in the animation business knows that a bankruptcy is always a possibility, especially for studios doing service work.
Everyone in animation has probably worked on a project that’s gone bad. It could be due to demanding or ignorant clients. It could be due to unforeseen technical challenges. It could be due to an inadequate schedule. If a job goes over budget, the costs have to be covered from the next job. With luck, the profits from that job are enough to cover the loss, which leaves the studio in a break-even position. But if the profits are not enough, or the next job goes bad as well, the debt begins to pile up. This puts a studio in the position of using income from current jobs to pay off old jobs, and it becomes necessary to keep new jobs coming in so as to service old debts.
Every budget and schedule (really two sides of the same coin) contains unknowns. Studios try to build contingencies into budgets to cover the unknowns, but in the competitive market that service studios face, budgets are lean and sometimes intentionally lower than the job requires.
There are valid reasons for under-budgeting. The studio wants to work with a client that commissions a lot of work and the studio has to land a project in order to establish a relationship. Or the studio has a crew that will finish a project shortly and needs something to keep the crew on the payroll. Finally, there’s the need to keep money coming in to meet overhead and maybe service debt. Every day that the studio stays alive is another chance for the studio to find the profitable job that will solve its problems.
There is also the issue of cash flow. A studio can be profitable on paper, but if the money isn’t flowing in at a rate fast enough to meet the studio’s expenses, the studio is forced to borrow to bridge the gap. That borrowing has costs attached to it: legal fees and interest to name just two. If the cash flow can’t be straightened out, the interest piles up and the studio may be forced to seek other bridge financing. The end result once again is debt that is paid by diverting money from current jobs. This just pushes the debt forward.
Either of the above cases can drive a studio into receivership. It’s important to understand that studios are forced into receivership by creditors. It’s not something they would choose to do. So when a studio shuts suddenly, it’s because the creditors have forced it to happen, not because management was trying to screw over artists. Undoubtedly, management was negotiating with the creditors, hoping to reschedule debt payments or restructure the debt. If the creditors decide that they’ve had enough, meaning they have no confidence that the studio can meet its obligations, they force receivership, capping their losses and hoping to recoup something from the bankruptcy.
No one – the creditors or the management – wants that to happen. The creditors would prefer to be paid in full, something that rarely happens in a bankruptcy and won’t happen when a studio’s only assets are computers and furniture. Management prefers to run a profitable company. It puts more money in their pockets and makes their resumes look better. Having a bankruptcy on a resume is not the greatest job reference. It is possible that ARC’s management made bad decisions. It’s equally possible that clients, competition and bad luck forced them into decisions they did not want to make.
There is no question that the closing of the studio is a tragedy for all concerned. But without inside knowledge, no one can assume to know what went wrong. Bankruptcies are common in all industries because sales, overhead, production and cash flow are difficult to get right. Attributing malicious motives to this bankruptcy is wrong. Attributing it to gross mismanagement may also be wrong.
More than any other studio, ARC (under a series of owners) got Canada farther into the animated feature game than any other studio to date. While the studio had an unhappy ending, it provided lots of jobs and opportunity while it lasted. If the management is going to be criticized for the bankruptcy, the least we can do is give it credit for what it accomplished.