Team Valuation Factors and Valuation Models in Sports Finance and Management

SPORTS FINANCE AND MANAGEMENT Real Estate, Media, and the New Business of Sport Jason A. Winfree, Mark S. Rosentraub, Brian M. Mills, and Mackenzie P. Zondlak

Chapter 8 What Are Teams Worth? Team Valuation

Team Valuation: Factors to Consider First, it can be difficult to obtain accurate financial data for most teams teams are under no legal obligation to share their financial records, so estimates are commonly used. the full value may still be unclear as money and profits can be shifted between related businesses Team owners have an incentive to show a financial loss or low levels of operating profits to prepare for negotiations with the players unions. Claiming a loss is one way owners can portray players as greedy or that greater support is needed from local governments. Disclosures of the financial records of the Florida Marlins and Los Angeles Dodgers illustrated that some owners entered their own salaries and salaries of family members as expenses, thereby lowering profits (and illustrating operating losses). It is often very difficult to estimate profits as teams can obscure costs and shift revenues to other entities.

Team Valuation: Factors to Consider Second, owners might view owning a team as consumption something acquired to gain prestige. the owner did not buy the team solely to maximize profits or for financial returns on the investment. the buyer is seeking to maximize intangible but valuable gains. Third, teams are becoming part of larger conglomerates it is not always easy to know how the team contributes to the profits of an owner s related businesses. it can be difficult to determine the team s contribution to the related corporations bottom lines. the team can have a different value depending on who buys the team. the value accruing to a team s majority owner could increase if he/she is involved in other businesses related to the team because many teams have become anchors for entertainment complexes, much of the value of these teams can come from ensuring the success or value of other capital assets.

Team Valuation: Factors to Consider Fourth, given league structure, policies can dramatically affect team values. Salary caps, luxury taxes, revenue sharing, and player drafts all have a large impact on team value. Each of these policies is intended to help small-market teams, though some might increase franchise values of all teams. Fifth, there are countless other benefits to team owners that do not show up on financial statements. Tax shelters from owning a team are one such benefit.

Valuation Models Assuming the team is bought as a financial investment, the value of the team is equal to the present value of all future profits the team expects to gain over an infinite horizon. This equation is given by: where is the team sprofit s in year t and r is the required return. The required return represents the owner s discount rate and can vary depending on the type of asset. the problem with this model is that an analyst does not know exactly what future profits will be.

Multiple Earnings Therefore, this method is typically used to simply generate a gross estimate of the team s value. Using the multiple earnings approach, the value of a team is considered to be some multiple (an industry rule of thumb) of revenue. Value =Multiple Revenue where Multiple simply represents some number. costs are not taken into account. the growth of future revenues or profits is not considered the Multiple changes for leagues over time.

Zero Growth Model The zero growth model assumes that any cash flow (in our case, profits) does not change. The problem is that a team s profits are usually not constant. one s best guess might be that, on average, a team s profits might not change much from year to year in the foreseeable future. even if one expects profits to change, it is completely unclear if profits will increase or decrease. Risk-free discount rates are typically (but not always) around 5 to 10 percent. This means that 1 divided by the discount rate is roughly 10 to 20. If we know the value and profits for a firm or team, then that tells a financial manager something about what people expect future profits to be. If the value divided by profits is less than 10, then people expect profits to decrease (either that or it is undervalued). If value divided by profits is more than 20, profits are expected to grow.

Constant Growth Model and CAPM Refer to PPT chapter 8-1 for detail.

Free Cash Flow Model Free cash flow is defined as the available cash flow that investors can access. Investors include all providers of debt and equity. free cash flow is the difference between cash flows from operations and capital expenditures. This method might be preferred over the others if a team is not as established. Older teams have a history of profits, which can be used to estimate valuations (although outside analysts have a hard time getting reliable profit values). The free cash flow is similar to other models that use profit or dividends in that it estimates the present value of money https://jufinance.com/fcf/

What Are Professional Teams Worth? using actual sale data Financial World and Forbes valuations a multiple earnings approach present value models

Free Cash Flow Model Free cash flow is defined as the available cash flow that investors can access. Investors include all providers of debt and equity. free cash flow is the difference between cash flows from operations and capital expenditures. This method might be preferred over the others if a team is not as established. Older teams have a history of profits, which can be used to estimate valuations (although outside analysts have a hard time getting reliable profit values). The free cash flow is similar to other models that use profit or dividends in that it estimates the present value of money https://jufinance.com/fcf/

Sale Prices The obvious advantage of examining actual sale prices is that a sale price is literally the amount an individual is willing to pay to own a team. These values typically include any ancillary benefits as well as any consumption values realized by the new owner. The drawback of using actual sale data teams are not sold frequently (small sample size), and the sale price of one team may not be transferable to other teams. the exact structure of the sale might not be known. Even if it is disclosed, it is difficult to separate the team from other entities, such as the facility and terms for its use, or land or other assets related to the team.

Financial World and Forbes Data Financial World provided valuation estimates for franchises from 1991 to 1997. Forbes has produced these estimates since 1998. The strength of the Financial World/Forbes data is that it estimates values for teams for each year. Also, the authors of these estimates have some information on facility- based revenue and then input that data into their proprietary formulae. The drawback the methodology of Financial World/Forbes analyses is unknown. it is not clear that the revenue data that Financial World/Forbes uses are reliable. revenue data can be difficult to find. revenue data may not show all of the benefits of owning a team

Multiple Earnings This approach simply multiplies revenue by some number to find the value of the firm. the average revenue multiple used to value teams from 4.7 to 4.4. The benefits of this approach are that it is quick and easy, and only revenue data are needed The drawback costs and growth rates are not taken into account. this method assumes that costs (as a percentage of revenue) and growth rates are similar for all teams. Given that owners use their teams very differently and in different types of ownership structures, it is difficult to see how all teams can have the same ratio between value and revenue.

Multiple Earnings

Constant Growth Model

College Sport a large number of college athletic departments operate at a loss. Virtually no college athletic department is a major source of profits for the school, and many are subsidized. college teams must be looked at as part of a larger organization. Universities and colleges use these teams as a marketing tool. College sports also have an impact on donations. Universities often try to generate donations by providing donors with tickets to games. Some schools, like the University of Chicago, have decided to pursue athletics without scholarship athletes and compete at a different level than the universities with major athletic programs. The leaders of institutions that followed the lead of the University of Chicago place less value on athletic departments The leaders of other universities with major athletic departments, such as the University of Texas and those at Big Ten Conference schools, are just the opposite

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