Writers Anthony Fingleton and Carlos Davis wrote the part of Fred just for Rik Mayall, who even threw ideas into the script, such as the opening where Elizabeth's mother reads her a bedtime story and Fred sinking the houseboat.
PolyGram and Working Title Films did not have US distribution divisions at the time. They often relied on other distributors to handle US distribution for their movies. They were both struggling to find a US distributor to sell the film to. They showed the final cut of Drop Dead Fred to various distributors including Orion Pictures, Miramax Films, The Samuel Goldwyn Company, Vestron Pictures, TriStar Pictures, MGM/UA, and 20th Century Fox. All of them called the film "a depressing children's movie on drugs" and turned the movie down. They even brought it to The Geffen Film Company. But they turned it down because they felt the movie was a rip off of Beetlejuice (1988), which Geffen distributed 3 years earlier. Finally they showed the film to New Line Cinema. New Line CEO Robert Shaye and executive Michael DeLuca bashed and hated the movie with Shaye allegedly calling the movie "horseshit". But fellow executive Sara Risher was the only one who liked the movie. She felt that the character of Drop Dead Fred was a comedic reversal of Freddy Krueger in their A Nightmare on Elm Street (1984) franchise. New Line at that time was also trying to find another "Freddy Krueger" character, as they were ending the Nightmare on Elm Street franchise with Freddy's Dead: The Final Nightmare (1991) the same year. For the next few days, Risher kept trying to convince Robert Shaye to buy the rights to the movie. Shaye finally agreed, but decided to only handle the theatrical and TV rights. He insisted on finding a different distributor to handle the video rights. Shaye tried selling them to Media Home Entertainment and HBO Video without any success. He finally sold the video rights to LIVE Entertainment who also bought the home video rights to Teenage Mutant Ninja Turtles (1990) from New Line a year earlier.