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.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.