Valuation of a Player in Sports

In the previous few articles, we have already seen that the valuation of a sports franchise is heavily influenced by the value of its human assets i.e. the players. This is because sporting franchises do not generally own a lot of assets.

Hence, player contracts are one of the biggest contributors to the overall balance sheet of a sporting franchise. Hence, in order to gauge whether the valuation of a sporting franchise is accurate, an investor will also need to understand how individual players are valued.

Investors cannot simply assume that the book value of the players is correct. This is because if they do make such an assumption, they are likely to acquire a club that may have a lot of overvalued player contracts on their balance sheet.

The valuation of a player is indeed a complex activity that is dependent upon several variables. Some of the important variables that have an impact on the valuation of a player have been listed in the article below.

1. Historical Cost Data: One of the most basic factors considered while determining the valuation of any player is the history of their costs in the recent past.

   It is common for sporting franchises to do some analysis of the previous cost data. They try to find a trend regarding whether the contract price that has been paid for a player has shown a consistent upward trend or whether there have been ups and downs in their valuation.

   A player whose historical data shows a consistent upward trend is likely to get a contract with a better valuation.

2. Contract Status: When the valuation of a player is considered, their contract status with another club is also taken into account. This is because the other club currently has the player’s contract as an asset on their balance sheet. Hence, if such a player has to be acquired, their previous club will have to be compensated in the form of transfer fees.

   Therefore, when players are nearing the end of their contract term, the transfer fee is less. Also, when they do not have an active contract, there is no transfer fee. Hence, these players receive a higher compensation as compared to the players who have a lot of time left on their contract.

3. Skills: Needless to say, the game skills that a player brings along are the most important factor in their valuation. The statistics related to the game skills of the players are thoroughly scrutinized.

   Nowadays complex data models are used in order to understand whether the skills being brought in by the prospective player complement the skills which are already possessed by other players on the team. Since there is no data available regarding the skills of new players, they generally receive a lower valuation as compared to players who have some experience.

   

4. Age: Players who are younger and have a little bit of experience are likely to receive more compensation as compared to older players who have a lot of experience. This is because of the fact that younger players have fitness on their side. Also, they have more time left to train and improve their skills.

   On the other hand, the skills of older players are considered to be more or less fixed. Hence, players who have just started playing receive a low compensation. But younger players who have some experience receive better compensation and finally players who have crossed a certain age threshold again receive lower compensation.

5. Social Media Presence: It is important to realize that digital rights as well as merchandise sales form a very important part of the revenue mix of almost any franchise. It is for this reason that these teams try to acquire players who can enable them to generate such revenues as well.

   Players who have a huge fan following on social media as well as who have a high level of engagement with their fans are considered to be assets by sporting franchises.

   Teams are willing to pay a higher compensation in order to obtain the rights to sign such players. The importance of social media following in the valuation of a player has been increasing in the recent past.

6. Background: It is important to realize that players who belong to a certain background have a higher likelihood of receiving a higher compensation.

   For instance, when it comes to soccer, players from countries such as Brazil and Argentina are considered to be highly skilled. These nations have produced many great players in the past. It is for this reason that newer players from these locations are considered to be more marketable and hence are paid a higher compensation as compared to their peers from other locations.

7. Injuries and Discipline: Last but not least, there are certain factors that lead to a drastic fall in the valuation of a player. If a player is injury-prone, then it is likely that the club will have to pay them money while they are not available for competitions.

   Hence, the valuation of injury-prone players tends to be lower. Also, if a player has discipline issues, they are likely to bring a lot of negative publicity to the club. The public as well as the media are hyper-focused on the negative news relating to sporting franchises and their players. Such negative news leads to a fall in the brand value and goodwill of the club. It is for this reason that players with discipline issues are given a negative valuation.