Sports Management Companies: Sources of Financing
There are many sports management companies across the world that can be classified as large corporations. Many of these corporations or franchises have assets worth several millions of dollars. Hence, an average person will assume that the sources of financing for sports franchises are also similar to that of other corporations. However, this is not the case. Even though the sources of financing are similar, the proportion in which they are used by sports franchises differs.
For instance, publicly traded corporations which issue equity shares that can be traded by individual shareholders are most common in other industries. However, when it comes to sports management, almost no sports franchise in the world is a publicly traded company.
In this article, we will have a closer look at the different sources of financing used by sports franchises and how they differ from the financing used by other corporations.
- Equity Shares: As mentioned above, in almost all industries, the large players are publicly traded corporations. This means that they issue equity shares that are listed on the exchange and can be bought and sold by individuals. There are numerous benefits to using this source of financing. The first and foremost benefit is the fact that large amounts of funds can be easily raised by accessing the public.
However, despite the benefits, sports management companies and franchises tend to stay away from being publicly listed. Most of these companies are held privately by a small group of individuals. In fact, there are many sports leagues such as the NFL in the United States which explicitly prohibit publicly traded franchises from participating in their tournament.
This abhorrence towards publicly traded corporations is largely because of two reasons. First and foremost is the fact that when companies are publicly traded, they become answerable to the larger shareholder groups. Such shareholders may demand immediate profitability and may influence decision-making. Team owners as well as league officials do not want this to be the case.
Passion for the sport is the reason that the team and the league exist in the first place. Hence, sometimes teams need to be able to sacrifice short-term profits in order to make winning decisions on the field. The second reason is the fact that once corporations become publicly listed, they are under obligation to disclose their finances to the public at large. Hence, sports franchises deliberately avoid going public so that they are able to maintain secrecy and not disclose competitive information.
- Celebrity Owners: Large corporations in most parts of the world are the primary business of the people running them. For instance, retailing is the primary business of the Walton family which runs Walmart. Similarly, the software is the primary business of Bill Gates who owns Microsoft. However, this is not the case with sports franchises.
Sports franchises are generally owned by celebrities i.e. movie stars, businessmen, and people who have made their money in another field. In most cases, even though big money is involved in sports franchises, it is generally the secondary business of celebrities who are accomplished in other fields.
Examples of this can be seen as follows:
- Sheikh Mansour, an Emirati royal, owns the Manchester City football club
- Roman Abramovich, a Russian oligarch, was the former owner of Chelsea club
- Steve Ballmer, the former CEO of Microsoft, owns Los Angeles Clippers
- Shahrukh Khan, an Indian movie actor, owns Kolkata Knight Riders
Hence, it can be said, that money that is already in the possession of high-net-worth celebrities is the biggest source of funding for sports management companies and franchises across the world.
- Private Equity: As mentioned above, sports franchises are either not allowed to or are not interested in raising money by selling shares to the common public. However, sometimes celebrity money itself is not enough in order to sustain the sporting franchise. In such cases, it is common for a sporting franchise to sell its shares to private equity firms.
Private equity firms obtain money from a group of high-net-worth individuals. These individuals can decide to actively participate in the operations of the franchise or they could be passively involved. Also, sporting franchises generally enter into non-disclosure agreements with these firms in order to prevent the information from being leaked to competitors and to the general public.
Examples of this type of financing include Chelsea football club which is held by an investment firm called Blue Co. Similarly, Indian cricket team Gujarat Titans is owned by CVC Capital Partners.
- Debt: Debt is another viable source of funding for franchise owners as well. However, it is common for sporting franchises to avoid debt unless the investment being made has a very long gestation period.
Sporting franchises generally use debt when a very large expense needs to be incurred. For example, the New York Yankees have borrowed a whopping $1.3 billion in order to build a stadium. The investment banking company Goldman Sachs was involved in this deal. Sporting franchises have issued bonds, and have taken loans from banks and also from other institutions in the past.
- Government Funding: Last but not least, government funding is also a source of funding that is available to sporting franchises. This is because sporting franchises help build up sporting infrastructure which is useful to the general public. Hence, many times, taxpayers’ funds are also made available to sporting franchises.
For instance, in the example mentioned above i.e. in the New York Yankee Stadium, the taxpayers also paid a significant amount. In fact, it became a media controversy that is still quoted to explain how sports franchises are able to take advantage of taxpayer dollars.
Hence, it can be said that the sources of funding used by sports franchises are quite different compared to that used by regular corporations.
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- Finance in Sports Management
- Sports Management Companies: Sources of Financing
- What is Sports Franchising?
- Sports League Franchise Agreement
- Revenue Sharing in Sports Leagues
- Issues in Revenue Sharing in Sports Leagues
- How Salary Caps Work in Sports Leagues?
- Advantages of Salary Caps
- Disadvantages of Salary Caps
- Alternative To Salary Caps: Luxury Tax
- Sources of Revenue: Broadcasting Rights
- How are Broadcasting Rights Revenue Split Amongst Franchises?
- Common Issues with Revenue Generated from Broadcasting Right
- Digital Media Rights and Sports League Financing
- Sports League Sponsorships: A Primer
- Types of Sponsorships Given to Individual Players
- The Economics of Sports Leagues
- Why Do Sponsors Fund Teams in Sports Leagues?
- Title Sponsorship and its Disadvantages
- Advantages of Title Sponsorship
- Team Sponsorship: Advantages and Disadvantages
- Objectives of Sponsorships
- Factors Affecting Selection of Sponsorship of Sports Event
- Risks Associated with Sponsorship from Sponsor’s Perspective
- Risks Associated with Sponsorship from Sponsored Entity’s Perspective
- Level Based Sponsorship (Tiered Sponsorship)
- Issues With Sponsorship Levels
- Evaluating the Effectiveness of Sports Sponsorships
- Issues Related to Sponsorship Evaluation
- Source of Revenue: Fantasy Sports Leagues
- Benefits of Fantasy Sports Leagues
- Source of Revenue: Sports Merchandising
- Issues With Merchandising
- How are Organizational Aspects of Sports Leagues Linked to Finance
- The Optimal Size of a Sports League
- Why are Professional Sports Franchises Increasing in Value?
- Use of Price to Revenue Ratio in Valuing Sports Franchises
- Factors Impacting the Valuation of a Sports Franchise
- Income Approach to Valuation of Sports Franchises
- Valuation of Sports Franchises: Discount Rate Calculation
- Issues in Determining Discount Rate for Valuation of Sports Franchises
- Valuation of Sports Franchises: Discount Rate Calculation
- Replacement Cost Approach Advantages and Disadvantages
- Valuation of a Sports Franchise: Market Approach
- How Team Performance Affects Valuation?
- Issues With the Valuation of Sports Franchises
- Impact of Technology on Sporting Finance
- Revenue From Releasing Players for International Tournaments
- Private Equity Investments in the Sports World
- Disadvantages of Private Equity Investment in Sporting Franchises
- Why do Sporting Franchises Lease Out Stadiums?
- Disadvantages of Leasing Out Stadiums
- Accounting for Stadium Leases
- Lease Accounting: Right of Use Asset
- The Case Against Government Funding for Sports Stadiums
- Public-Private Partnership in Stadium Financing
- Advantages of Public Private Partnership Model
- Risks in Public-Private Partnerships
- What is Sports Tourism?
- Pros and Cons of Sports Tourism
- How Sporting Franchises Help Billionaires to Plan Their Taxes
- What is Jock Tax and How is it Calculated?
- Jock Taxes: Pros and Cons
- Valuation of a Player
- Financial Doping and Financial Fair Play
- Pros and Cons of Financial Fair Play Rules
- Debt Funding in Sports Franchises
- Involvement of the Franchisor in Debt Funding
- Debt Ceiling in Sporting World
- Pros and Cons of Debt Ceilings in Sports Leagues
- Securitization and Sports Finance
- Types of Securitizations in Sporting Franchises
- Advantages of Securitization in Sports
- Disadvantages of Securitization in Sports
- Accounting for Player Contracts
- Impairment in Sporting Franchises and Player Contracts
- Accounting for Players Who Have been Promoted Internally
- Why Government Should Not Invest Public Money in Sports Stadiums Used by Professional Franchises