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From the previous articles, we now know that sports franchises across the world are now being viewed as commercial entities. Hence, it is vital to derive the correct valuation for them in order to ensure that buy and sell as well as restructuring transactions can take place at the correct valuation.
However, we also know that the valuation of sports franchises is not an easy task. This is because there are various approaches that are used to determine the fair value of a sports franchise.
The income-based approach to valuation is one of the most commonly used approaches that helps determine the fair value of a sports franchise.
The method used to arrive at the valuation of a sports franchise using an income-based approach as well as the benefits and drawbacks of using this approach have been mentioned in this article.
The income-based approach which is used to value sports franchises is quite similar to the discounted cash flow valuation approach which is used to find the intrinsic value of companies across the world.
Even though the name suggests an income-based approach to valuation, here too, the cash flow is being calculated and is being used to value the company. The steps involved are as follows:
Such forecasting is difficult since the revenues as well as expenses have a high degree of correlation with the performance of the team which can be quite difficult to predict. It needs to be understood that both cash as well as non-cash revenues and expenses are taken into account at this stage.
The income approach is preferred by some sporting franchises since it has some advantages. Details related to some of these advantages are as follows:
Hence, if the value of a sporting franchise has been calculated using this method, it is very unlikely that the sporting franchise has been overvalued and purchased at a higher cost.
This method has been called out as being unsuitable for calculating the valuation of sports franchises by many critics. The main disadvantages of using this approach have been mentioned below and are as follows:
There are many sporting franchises across the world who have ownership of control of assets which are several times greater than their own cash flow. In such cases, the income approach ends up undervaluing the firm since it does not take the asset base into account.
Just like fixed assets, these intangible assets are also not taken into account which creates an impression that the sporting franchise is being undervalued if this method is used.
The valuation of sporting franchises is less about finance and more about greed, hubris, pride, and other such factors that cannot really be accounted for. This is the reason that the actual transaction prices at which sporting franchises are brought or sold vary significantly from the valuation derived using the income approach.
However, the information related to income, expenses, cash flows, and other details is not widely known. Hence, even though, theoretically, this is a great method to value a sports franchise, the practical difficulties faced when implementing this method make it unviable.
The fact of the matter is that even though the income-based approach is theoretically the most appropriate method that can be used for the valuation of sports franchises, it is hardly ever used.
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