Issues With the Valuation of Sports Franchises
The valuation of sports franchises is often quoted widely in the public domain. This is generally done based on the valuation provided by the sports franchise itself.
The media just published the number that was quoted by the sports franchise. This is because the media is in no position to validate these numbers.
Also, since there are generally no investors or prospective investors in the readers, the accuracy of the numbers is immaterial. The end result is that the valuation of sports franchises is difficult to validate by its very definition. This is because of many factors.
Some of the relevant factors that make it difficult to come up with a financial valuation of sports franchises have been explained below:
- Opaque Financials: Firstly, it is important to note that most sports franchises around the world are privately held. This is mostly because of the personal choice of the owners who want to keep their holdings private. However, it is also true that there are many leagues around the world that explicitly prohibit public listing of companies.
In both of these scenarios, the financial statements of the sporting franchise are not made public. Hence, financial analysts are not aware of how much revenue the sporting franchise generates and how. They are not in a position to predict future revenues, expenses, and any other financial information on behalf of the sporting franchise.
It is for this reason that analysts have to rely only on the stated figures. Many times, they do not have access to even basic financial statements. This makes the valuation of sports franchises a very difficult task.
- No Cash Flow Data: There is generally some kind of data related to the profits, losses, assets, or liabilities of a sporting franchise in the public domain. However, there is almost no data available related to the cash flows of any particular sporting club in the financial domain.
There are many critics who allege that this situation exists because the cash flow of these firms is very different from their claimed profitability. Anyways, the basic principle of valuation is that it is always done on the basis of cash flows. This is because the profit of a firm can be easily manipulated.
However, it is almost impossible to manipulate cash flows. This is the reason why the valuation method is called the discounted cash flow method. Now, since the cash flow of a sporting club is not known at all, it is almost impossible to run a discounted cash flow valuation. This makes it even more difficult to arrive at a valuation for sporting franchises.
- Intangible Assets: It is a generally accepted fact in financial reporting that companies, where the valuation is based on hard tangible assets, are easier to value in comparison with companies where the valuation is based on intangible factors.
When it comes to sports franchises, the vast majority of their assets are intangible assets. This includes various types of contracts such as broadcasting rights agreements and revenue sharing agreements.
It also includes the brand value of the sporting franchise as a whole and that of the players that play in the team. These factors play a pivotal role in deciding the valuation of the firm. If any of these factors were to change, the underlying valuation of the firm would change significantly. However, these intangible assets can be quite difficult to value. Hence, deriving the overall valuation of a sports franchise becomes a difficult task.
- No Comparable Investments: The relative valuation approach is one of the most popular approaches used to value complex investments. This means that if the data related to the cash flows of the firm is not available, then investors all across the world use the relative valuation approach. This means that they find the valuation of a similar asset, use it as a starting point, and then extrapolate the data using certain assumptions.
However, this approach does not work when it comes to sporting franchises. This is because of the fact that there are no similar assets to begin with.
Each sporting club operates as a monopoly. This is done by design and hence is unlikely to change. Hence, finding comparable investments is a difficult, if not impossible task making the valuation of sports franchises even more complex.
- Complex Contracts: It is also important to note that each contract which is signed by the sporting franchise has the potential to create both cash inflows as well as cash outflows. Also, the money that will be received or paid at a future date is not certain till the event is completed. For instance, it is possible that the franchise may be entitled to a share of the proceedings of ticket sales and broadcast rights from an event.
However, the event could get canceled due to issues such as weather, political turmoil, or even terrorism. In such cases, the cash flow that may be applicable to the franchises may turn out to be very different than what was imagined earlier.
There can be many such complicated clauses in the contracts which might lead to a change in the cash flow. This makes the valuation of sporting franchises a difficult task.
- Evolving Technology: Last but not least, technology is evolving constantly. The speed at which this technology is impacting the sporting industry is also changing at a rapid pace.
Newer avenues of revenue generation are being created and the cash flow generated by older avenues is reducing. As such, it is difficult to attribute the exact amount of cash flow that will be generated by a sporting franchise making valuation even more difficult.
The fact of the matter is that the valuation of sporting franchises is a complex endeavor because of many aspects. This is the reason why there is hardly any accurate valuation of sporting franchises available.
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