MSG Team's other articles

10774 Types of Products Offered by Commercial Banks

In terms of products and service coverage, the commercial banking ecosystem is much larger than the retail banking ecosystem. Corporations have a wide variety of business needs and commercial banks being their financial partners are expected to take care of these needs. In this article, we will have a closer look at the various categories […]

12473 A Primer on Bills of Exchange

What are Bills of Exchange? A bill of exchange is a promissory note that is usually issued by the buyer to the seller of goods in return for the goods. The seller would like to sell their goods for cash. However, in certain cases, the buyer may not have cash immediately at the moment. However, […]

12369 Artificial Intelligence and Machine Learning in the Retail Sector

Artificial intelligence (AI) and machine learning (ML) are disrupting the entire business landscape across the globe. The retail industry is no exception. Leading retailers from across the world have started experimenting with Artificial intelligence (AI) and machine learning (ML). There has been an influx of various technologies into the sector in order to shape the […]

12048 Working Capital to Sales Ratio – Meaning, Formula, Assumptions and Interpretation

Formula Working Capital to Sales Ratio = Working Capital / Sales Meaning Stating the working capital as an absolute figure makes little sense. Consider two companies, both having the same working capital of USD 100. While one company uses this working capital to generate sales of USD 500, the other uses the same amount as […]

11374 Start-Ups and Public Relations

Almost every start-up firm tries to increase its sales. However, convincing more customers can be a very difficult task. It is common for start-up companies to have significant marketing budgets. However, most of the budget is utilized for direct marketing. There are very few start-up companies that believe that public relations can help them achieve […]

Search with tags

  • No tags available.

In the previous articles, we have already come across a couple of methods used for the valuation of a sports franchise. However, we know that both of those methods have certain shortcomings which make them unsuitable for the valuation of a sports franchise.

In this article, we will discuss a third approach called the market approach. The market approach is the most widely used approach when it comes to the valuation of sports franchises. The details of the market approach as well as the pros and cons of this approach have been discussed below:

What is the Market Approach?

The market approach towards the valuation of a sports franchise means that the value of the franchise will be derived based on arms-length, third-party sales, or transaction data regarding the various assets owned by the franchise. This means that the value of the franchise will be calculated as the sum of its parts.

Instead, of valuing the entire sporting franchise as one unit, the market approach advocates breaking down the assets and liabilities of the franchise into its component parts such as player contracts, brand value, stadium leases, etc.

The logic behind this approach is that the valuation of the franchise as a whole is quite difficult. However, it is possible and even convenient to accurately estimate the sum of the parts that create the franchise. Hence, the value of each part can be found out and it can later be summed up in order to derive the valuation of the franchise.

For example, the financial value of any team is largely influenced by the players who play for the team. Now, even though transactions regarding the sale and purchase of sporting franchises do not take place every day, it is common for players to be transferred across teams.

Hence, the market value of an individual player can be found by obtaining such data and then using mathematical analysis. It is common for the analysis to include the price of a rookie player and then make adjustments for experience, fan following, and brand value.

Similarly, it is possible to estimate the financial value that each and every player brings to the overall team by making adjustments on top of an already determined base value.

The fundamental premise is that it is easier to derive the market value of the component parts and then sum it up. Let’s have a look at some of the pros and cons of this approach.

Benefits of Market Approach

The benefits of using the market approach for the valuation of a sporting franchise are as follows:

  1. High Degree of Accuracy: First and foremost, it needs to be mentioned that the market approach is the most accurate approach when it comes to deriving the valuation of sports franchises. This is because the biggest problem with the valuation of sporting franchises is the lack of available data. This is because sporting franchises do not publish their information publicly.

    Also, it is not common for sporting franchises to be sold and bought regularly. However, when it comes to players or the contracts signed by franchises, there is an abundance of data available. It is possible to use this data as a marker for the overall valuation of the firm. This is the reason why the market-based valuation approach is the one that is followed by franchises around the world.

  2. Cash Flows as Well as Assets are Considered: The shortcoming of the income approach is that the value of fixed assets is not considered. On the other hand, the shortcoming of the replacement cost approach is that the cash flows are not considered.

    In the case of the market approach, both cash flows as well as the valuation of assets are considered. It can be viewed as a hybrid method that uses either a cash flow based or replacement cost-based approach to derive the market value of individual assets which are then combined.

  3. Relative Value is Considered: The valuation parameters in the sporting industry are generally different as compared to the other industries. This is because investors buy sporting franchises for non-financial reasons as well. This makes the data from other industries incomparable to the sporting industry.

    However, when it comes to a market-based approach, the data from the sporting industry itself is used for valuation. Hence, this data can be considered to be more accurate and reflects the relative valuation based on the norms of the sporting industry.

Disadvantages of Market Approach

The disadvantages of using the market-based approach are as follows:

  1. Mathematical Complexity: First and foremost, the data available regarding individual assets is quite muddled up and has a lot of influencing factors. This data needs to be broken up in such a way that the financial factors can be segregated into a baseline rate which is then adjusted to come up with a financial value. This is possible after complex calculations which are not easy to understand.

  2. Valuation of Individual Assets: Last but not least, the market-based approach considers the sporting franchise to be a collection of assets and not a portfolio of assets.

    We already know from portfolio theory that a simple mathematical sum cannot be used to determine the financial value of assets. Correlation as well as other factors also need to be taken into account which is not done in such cases.

The fact of the matter is that the market-based approach is the best mechanism when it comes to the valuation of a sports franchise.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Common Issues with Revenue Generated from Broadcasting Right

MSG Team

Issues in Revenue Sharing in Sports Leagues

MSG Team

Sources of Revenue: Broadcasting Rights

MSG Team