How to Value a Sports Franchise
Why do I need a Sports Franchise Valuation?
In its most basic form, the definition of the value of a team can be best described as what an individual is willing to pay. However it can be a complicated process with multiple variables when attempting to fix a hypothetical value to a professional sports franchise. Most people in the business of sports agree that traditional financial metrics cannot be used when attempting to predict what anyone is willing to pay for the acquisition of one of these unique assets. Valuing a franchise is particularly difficult, since there is a large disparity between big market and small market teams and the league-wide revenue sharing is evolving to balance the wide chasm of financial differences between teams.
Additionally, there is no industry publication reliably instructive as to what the true value of major league professional franchises are since most professional franchises are privately owned and do not publish annual financial statements. Publications that currently attempt to value professional sports franchises are usually operating on data that is publicly available, such as attendance and average pricing for tickets sold or other information, that is anecdotally available.
Sports Value Consulting can assist with valuations being needed for different reasons including:
Mergers & acquisitions
Divorce & Marital disputes
Commercial Litigation & other Legal Issues
Shareholder agreements and disputes
Sports Franchise Valuation Methods
Investment bankers, brokers, and sports consultants representing potential buyers have traditionally used a wide array of data points when trying to determine a recommended acquisition price for professional sports franchises. None of the information is used in a singular fashion, and a great deal of thought is put into how all the information and measurable inputs to be acquired interact with each other both quantitatively and qualitatively.
Many of the teams are cash flow and EBITDA negative, so universally trying to apply multiples of these data points is usually an effort in futility. In recent years, professionals in the industry have retrospectively looked at recent sales transactions, measured the sale as a multiple of a team’s revenues, and tried to apply this standard as a measure of the hypothetical future value of future transactions. While this method has been used by some sports industry experts to justify a franchise asking price, buyers have not solely relied on this metric as a benchmark empirical data in assessing a proposed transaction price.
There are three approaches to valuing a professional sports team are income, market and cost.
The Income Approach involves a projection of cash flow through a discrete period and a residual value assumed to be earned at the end of the investment-holding period. The future cash-flow is discounted at a rate-of-return commensurate with all the risk expected in the team.
The Market Approach involves a comparison of the subject team to other franchises which have sold. Adjustments to the sales price of other teams may be warranted based on known differences in operations, marketplace, and upside potential.
The Cost Approach involves estimating the value of the franchise based on what it would cost to reassemble the tangible and intangible assets and reestablish the business. This method is not used as there is a limited number of teams, and an investor cannot reestablish a team.
An Asset Valuation, i.e. Purchase Price Allocation, is a recommendation as to the Fair Value of the assets acquired in a team. The purpose of this valuation is to meet both tax and financial reporting requirements. This type of analysis is complex, and a thorough understanding of the accounting and tax rules is required.
No other firm has performed more purchase price allocations in the last decade than SVC. We have performed over 40 of these types of valuations for teams across North America and the United Kingdom.
When considering other firms, ask if the people directly involved with the team have performed this type of work for a team in their league. Many firms have been around for decades, but the people with the knowledge and experience have left. Furthermore, teams need to inquire if this work will be outsourced to another valuation firm. SVC has direct knowledge of several entities that outsource their valuation work.
Additional Valuation Drivers And Considerations
In addition to the previously discussed methodologies there are several other factors that can impact the valuation of a franchise. These include:
Strength of the League, including new opportunities for revenue for the teams; popularity of the League versus other professional sports leagues
Ability of the team to generate positive cash flow
Recent trends in transactions
Management of the team
Location of the team
Contractual obligated income of the organization (naming rights, local media, suites, and sponsorships)
Competition in the market from teams from other leagues (NHL, NBA, MLB & MLS).
The price one buyer is willing to pay for a professional sports franchise might be higher than what other buyers are willing to pay. Sports franchises are trophy assets with very limited availability and uber wealthy individuals have often developed their own rationale for determining price.