Sports Franchise Valuation Considerations
January 14, 2022
By Varnit Kaushik
In a recent Forbes1 list, the average value of the 50 most valuable sports teams in 2021 has jumped 9.9% from last year to $3.4 billion. The Dallas Cowboys claim the top spot with a valuation of $5.7 billion, followed by the New York Yankees at $5.25 billion. The National Basketball Association’s New York Knicks round out the top three at $5 billion. European soccer clubs FC Barcelona and Real Madrid, each with a valuation just above $4.7 billion, round up the top five. The 50 teams on the 2021 list come from four sports: football (26), basketball (9), soccer (9) and baseball (6). Each of these top 50 teams has a valuation in excess of $2.35 billion. With a recent increase in private equity investments in professional sports franchises and the increase in the valuations of these sports franchises, it becomes imperative to discuss the nuances of the valuation of a sports franchise.
Professional sports franchises comprise a distinct market where teams typically sell at prices in excess of what would be expected based on traditional valuation methodologies. The decision for the buyer of a sports franchise in most cases is either emotionally driven, due to the attached sentimental value, or driven by the expectation to enjoy incremental economic benefits and synergies upon integration of the purchased business with their current business(es)—in the case of special interest purchasers. The valuation of professional sports franchises requires consideration of several unique factors that do not exist in most traditional business valuations.
There are primarily two approaches used to valuing a professional sports team:
- Income Approach – Projection of cash flows for the sports franchise through a discrete period and a residual value assumed to be earned at the end of the investment-holding period. The future cash flows are discounted at a rate of return commensurate with all the risk expected in the sports team.
- Market Approach – Comparison via the comparable franchises or the precedent transactions. The precedent transaction method, where the value is estimated based on exchange prices in actual transactions, is the most frequently used method for valuation of a sports franchise.
As is the case with most businesses, a sports franchise’s value is derived from its future benefits, such as revenue, EBITDA and net cash flow. While the goal of profit maximization is consistent with any business, a professional sports team’s sources of revenue and operating expenses are unique. The main sources of revenue for a sports franchise are:
- Media revenue (television, radio and other)
- Gate receipts and game revenue
- Merchandising revenue
- Franchising and other advertising
The primary expense for a sports franchise is player expense. Other expenses include administrative expenses and other operating expenses.
Other factors influencing the perceived future benefits for a sports franchise include its management team, trademarks, brand, logo, fan base relations, customer contracts (e.g., season tickets, corporate boxes), player relations and contracts, broadcasting contracts, arena/stadium ownership or lease agreements, stadium naming rights and so forth.
In sports business valuations, the market approach is frequently utilized, considering the market that exists for many professional sports franchises. Under the market approach, the subject sports franchise is compared to similar franchises by performing a detailed analysis of prior transactions involving similar sports franchises and/or in the ownership of the subject sports franchise. Adjustments to the sales price of other teams may be warranted based on known differences in operations, marketplace and upside potential. In baseball, the sports team value comes down to how big is a team’s television market? For example, New York and Los Angeles are the largest markets and are unrivalled in the U.S., hence they have the highest valued teams. How big is a team’s catchment area is for fans, or how many million people live in the team’s geographic catchment zone? Los Angeles has far more people than, say, Seattle? Does the brand have any tradition or cultural cache nationally or internationally?
Revenue and EBITDA multiples from the sports industry can be used as benchmarks for valuing a sports franchise. For reference, the following table shows the latest 2021 value, revenue and corresponding revenue multiple for the top five teams from Major League Baseball:
|Current Value (in $ millions)||Revenue (in $ millions)||Multiple|
|New York Yankees||5,250||108||48.6x|
|Los Angeles Dodgers||3,750||185||20.3x|
|Boston Red Sox||3,465||152||22.8x|
|San Fransisco Giants||3,175||151||21.0x|
The precedent transaction approach is most commonly applied in the valuation of a professional sports franchise, with revenue serving as the valuation metric.
For the income approach, future benefits often cannot be measured with absolute certainty. For example, if a team is relegated to the English Premier League, its TV revenue (and thus its overall revenue) will significantly plummet. Likewise, if Arsenal Football Club fails to qualify for the UEFA European Champions League for two or more consecutive years, its revenue will take an enormous hit. As per a 2019 article by The Independent2, Manchester United's failure to qualify for the Champions League in the upcoming season would cost the club approximately £50 million in lost broadcast and prize money revenue. Another risk for the club is a potential 30% reduction in income from their sponsorship deal with Adidas. Why? The sportswear giant is entitled to a discount if Manchester United misses out on Champions League football for two consecutive seasons. Because none of this can be predicted with any certainty, there is no straight approach or formula that can be used to determine the value of sports teams in every situation. Many significant assumptions need to be made to capture the value around the intangible assets associated with the sports franchise and estimate its future benefits.
For the market approach, while certain financial information is reported in the press, the accuracy of this information is largely unverified and sometimes disputed by the teams. Since most professional franchises are privately owned, they do not publish audited financial statements. Many of the teams are cash flow and EBITDA negative, so applying multiples of these data points might not be meaningful. In analyzing precedent transactions in sports industry—aside from reviewing the price and structure of the transaction—it is challenging for the valuation professional to identify and quantify key elements that generate value for the subject professional sports club such as management team, brand, fan base relations, club ethics and others.
While applying the traditional valuation approaches to value a sports franchise, the valuation professional must examine the ability of the sports organization to maximize the value of its intangible assets. Ideally, management should maintain and enhance the quality of the team brand in a variety of ways, including winning championships, attracting marquee players, fostering positive community relations and developing a robust club tradition.
The valuation professional also needs to be cognizant of the ever-evolving value drivers for the sports industry and make appropriate adjustments in the valuation analysis. For example, despite the recent impact on the sports industry due COVID-19, with matches played in empty stadiums, there has been a significant shift in the viewership pattern driven by data and team content on Over the Top (“OTT”) streaming platforms. This shift in viewership patterns to OTT platforms has emerged as a new driver to be considered in the valuation of a sports franchise.
1"World’s Most Valuable Sports Teams 2021” by Forbes.com, dated May 7, 2021
2Manchester United’s Champions League failure will cost the club an estimated £50m, experts warn | The Independent | The Independent