When Hope Meets Reality: Why Visionary Leaders Have to Balance Dreams with Realities
Why Successful Leadership is All about Finding the Balance between Hopes and Realities Management Theory talks a lot about how leaders have to vision and why without it, they are no different from managers who are more concerned about the Day to Day running of organizations. Indeed, pick up any book on Leadership and, chances […]
Definition of Competency – Understanding Core Business Competencies
Competence has been long understood as a person’s ability or capacity to do a job. It was devised in the 1970s by the US Company McBer to identify the specific personal characteristics which resulted in effective and/or superior performance. So, what exactly is the idea behind competencies ? Every job has a requirement of specific […]
How HR Managers can Make the On-boarding Process more Pleasant and Effective
Love at First Sight and First Impressions are Best Impressions On-boarding is an important and critical part of the overall employee experience in organizations. It would not be remiss to say that it is perhaps the best way to make incoming employees more engaged and tuned in to the needs of the organizations. Indeed, as […]
Myths about Talent Management
Without doubt talent management is a very useful concept for organizations but unfortunately many of them look upon the former as an overhead rather than a value creating process. This can be attributed to some flaws in the implementation and some myths among HR practitioners regarding the same. In this write up we try to […]
How to build Your Best Team
Group of individuals working together for a common objective form a team. Teams are generally formed to accomplish complicated and difficult tasks. All individuals come together on a common platform and strive hard to achieve the set objective. When individuals work as a single unit towards a common predefined goal, a team is formed. Not […]
In the previous article, we have already seen that it is common for sporting franchises to raise significant amounts of debt funding. We also know that there are certain special characteristics of sports franchises that need to be taken into account before giving out loans to them.
One more such important characteristic of debt funding to sports franchises is the involvement of the franchisor in such deals. Generally, a loan agreement between any organization and a bank is a bilateral agreement. This means that the deal must be signed by both parties in order to be valid. However, this is not the case with sporting franchises.
The franchise agreements are often structured in such a way that the franchisors also have significant control over how the franchises manage their finances. Hence, this creates a unique situation wherein the banks have to be careful that any agreement being made between the bank and the franchise is also carefully vetted by the franchisor in order to make sure that it is valid as per their rules. Hence, the debt agreement between a bank and a sports franchise almost becomes a tri-party agreement.
In this article, we will have a closer look at the involvement of the franchisor at various stages of the debt funding process.
For instance, the NBA as well as the NFL, both of which are based in the United States, limit the amount of debt that their franchises can undertake. This is known as the debt ceiling.
It is important for banks and other lending institutions to ensure that the sporting franchise remains compliant with these rules even after receiving the debt
Generally, if it is purely a financial transaction i.e. one bank assigning a loan to the other, the sporting league does not object and allows the transfer to take place. However, if it is an attempt to gain control over certain assets of the league, then the franchisor may reject such a transfer.
The main intention behind keeping this control is to ensure that “vulture funds” are not able to obtain ownership of the debt owed by the franchises. This will allow vulture funds to take control of the franchise operations which might be detrimental to the interests of the franchisor as well as other franchises in the league.
The franchise derives its economic value because it is a part of the overall ecosystem that the franchisor has built. It is for this reason that franchisors also want to exert some control over the situation if a franchise is unable to pay down the debt.
Unlike normal circumstances, the banks may not get complete control of the assets. This means that they may not be able to sell the franchise assets to the highest bidder in order to recover their dues.
It is common for the sporting league to have the first right to dispose of the assets of the franchise in the event of a default. This means that if a team has defaulted on its debt, the franchisor will be given the option to find a suitable buyer for the league so that the debt owed to the third party can be paid off. Only if the league is unable to find a buyer, will the bank be able to take control of the assets and liquidate them on the open market.
The bottom line is that the franchisors realize that the economic value of any franchise is connected with others and the entire league as a whole. Hence, if they do not control the debt funding these franchises receive, they ultimately end up leaving the backdoor open to hostile takeovers. Hence, they create elaborate rules in order to prevent such loss of control.
However, the extent to which this control can be legally exercised by the franchisor is debatable. This is because some of the rules and regulations created by these franchisors are actually in violation of the bankruptcy code.
Your email address will not be published. Required fields are marked *
