Factors Impacting the Valuation of a Sports Franchise
Sports franchises are also business entities just like other private companies. Hence, it is possible for the owners of these companies to want to sell their stake just like other companies do. If the owner does want to sell off their stake, they need to know its valuation.
Also, the valuation of different clubs can be very different from one another even if they are in the same league and sport.
For example, Manchester City is valued at 1.3 billion British pounds whereas Luton Town is valued at 67 million British pounds even though both these teams play the same sport in the same sporting league i.e. English Premier League.
However, it is also important to note that sports franchises operate a very different business. Hence, the derivation of the valuation of a sports franchise is not a straightforward activity. The various methods of deriving a valuation as well as the complexities present in each will be discussed in later articles.
Hence, for now, it is important to realize that there are multiple factors that impact the valuation of any sports franchise. Therefore, the valuation of such entities cannot be done without truly understanding how these factors affect the final valuation of the entity.
Some of the common factors which influence the valuation of sports franchises have been explained in this article.
- Size of Geographical Area: Almost every sports franchise is linked to a geographical area. New York Yankees, Chicago Bulls, and Dallas Cowboys are all examples of sporting league franchises that operate in a particular geographical area. This is done to ensure that the population of sporting fans living in a particular area serves as a readymade market for these franchises.
Hence, the size of the population and the purchasing power of the people living in a particular geographical area are key determinants of the financial valuation of a firm.
Hence, while valuing a sports franchise, it is important to take into account the size of the geographical area it represents. Sporting franchises which represent a larger geographical area should be given a higher valuation.
- Demographics: It is not only the size of the population that matters. The demographics of the population are equally important, if not more.
For example, males in a certain age group are more likely to engage with sports-related content. Hence, the fans of such sports franchises maybe more valuable to an advertiser.
It is therefore important to know the age, gender, income levels, interests, and other details of the target market before an educated guess can be made regarding the financial valuation that can be obtained for a sports franchise.
- Brand Value: There are some sports franchises that are well known as compared to other franchises. For example, the brand value of Manchester United will be much higher as compared to other clubs such as Tottenham Hotspur. This could be the case for several reasons.
Firstly, it is possible that the club may have been in existence for a longer period of time. It is also possible that the club has performed significantly better than the others or has a more dedicated fan following. The end result of the brand value is that fans are either willing to buy products and services more often or at a higher price.
Hence, the higher brand value sooner or later translates into higher cash flow for the club. Also, clubs with higher brand value have more bargaining power during negotiations. This is the reason that brand value is considered to be an important factor that is taken into account while valuing the sports franchise.
- Presence of Star Athletes: The revenue potential of a club is also closely intertwined with the number of star athletes that they have. It is possible for a club to be very successful but not have many star athletes.
It has been observed that even though these clubs are successful, the monetary benefits are lower. This may be because star players enable higher sales of tickets, higher viewership, and even higher merchandise sales.
It is for this reason that the presence or absence of star players is an important factor that impacts the valuation of a sports franchise.
The presence of a player as well as the probability that the player will stay on in the club for a certain amount of time needs to be taken into consideration while valuing a club.
- Player Relations: A sporting franchise can only become successful if they are able to attract and retain the best talent available in the market.
In order to do so, they need to have a system wherein they are able to attract, develop, and retain their players. This can be measured by checking the player churn rate i.e. the rate at which players are leaving the organization. If many players leave the organization, it will be difficult to attract high-quality talent and this reduces the overall valuation of the sporting franchise.
- Revenue Sharing Arrangements: It is important to realize that different clubs have different revenue-sharing agreements within the same league. There are some clubs that receive a much bigger share of the overall revenue generated by the league than certain other clubs.
Hence, such sporting franchises have a larger and more stable source of revenue which they have negotiated in the form of revenue sharing agreements. It is only logical to provide a higher valuation to such franchises since they have more stable cash flows.
- Customer Contracts: There are some sporting franchises that have developed a stable base of revenues by entering into long-term customer contracts. For example, there are many sporting franchises that are able to sell season tickets to their fans in large numbers and generate stable revenue from ticket sales.
Similarly, many sporting teams have a tie-up with corporations to provide them with corporate boxes that provide a high-quality viewing experience. These corporates then provide the tickets to these boxes to their employees or to their clients. However, these additional sources of revenue also need to be taken into account while calculating the probable cash flow that will occur in the future and then discounting it in order to arrive at the valuation of the firm.
- Broadcasting Contracts: We are already aware that broadcasting revenues form a large part of the overall revenue which is generated by any sporting franchise. Hence, during the valuation of a franchise, it is important to take into account the quantum of broadcasting revenue that the franchise is likely to generate in a sustainable manner over a period of years.
Any increase or decrease in such revenue is likely to have a huge impact on the overall financial well-being of the sporting franchise and hence it is likely to also impact it’s valuation.
- Venue Characteristics: Apart from taking revenues into account, it is also important to take the debt and the expenses of the team into account while arriving at the valuation.
There are some sporting franchises present that own sporting venues which are in prime shape and there is no debt on their balance sheets. The valuation of such sporting franchises needs to be significantly higher than the others. This is because there is significantly less cash outflow on a month-on-month basis.
On the other hand, most sporting franchises have taken on some debt with respect to their venue. This debt could be related to building a new venue from scratch or it could be related to repairing an existing facility to make sure it is in line with the standards set by the league. In each of these cases, a large portion of cash needs to be paid out as interest regardless of whether any revenue is generated. These cash outflows end up reducing the valuation of the sporting franchise.
There are some sporting franchises which do not own any type of venue. Instead, they lease out the venue based on their requirements. In such cases, the effect of such lease contracts on the overall valuation of the sporting franchise can be complex. This is because of the fact that operating leases and financial leases need to be treated separately during valuation.
For instance, the value of financial leases gets added back to the balance sheet in the form of debt while this is not the case in an operating league. Hence, the characteristics of the venue controlled by the sporting franchise can have massive implications on their valuation.
- Fan Cost: The revenue earned by the team in the form of television revenue, mobile application revenue, and even ticket sales are all paid for by the fans.
Generally, fans have a limitation with regard to how much they can spend on a particular sporting league. Also, as per the law of demand, if the price is reduced, the demand is increased. As a result, sporting franchises where the per unit cost is lower for the fans have a higher valuation. This is because they are able to target the mass market.
- Disputes and Scandals: Last but not least, the presence of disputes and scandals also has a huge impact on the overall valuation of the team. This is because scandals tend to cost the franchise money in the form of legal payments. Also, there is damage to the overall reputation of the sporting franchise. This leads to lowered brand power which eventually leads to lower cash flow.
It is true that small and irrelevant scandals lead to a publicity burst without any significant downside. However, if the sporting franchise is implicated in any kind of scandal that has underlying moral connotations, it leads to a significant loss in the valuation of the sporting franchise.
The fact of the matter is that the valuation of the sporting franchise is driven by several factors. In the past couple of articles, we have covered most of the factors even though the list is not exhaustive. Depending upon the sport as well as the geographical location, some factors assume more importance than others.
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