Uniquely Priced Assets: Professional Sports Teams
As the world is shuttered due to concerns over the outbreak of COVID-19, many have discussed the effects of the outbreak on the sporting world. The sudden disappearance of sports will erase at least $12 billion in revenue and hundreds of thousands of jobs in the United States, according to a recent study conducted by ESPN. Now is a good time to ask, how does this disruption in revenue impact the value of this $100 billion-dollar United States sports industry? As a business valuation firm, Shenehon Company understands the unique aspects involved in the valuation of professional sports franchises. These businesses require special treatment in order to find their accurate value.
Forbes last released their annual rankings of the 50 most valuable sports franchises as of July 2019. One trend over the recent term has been the exploding growth of team valuations. For instance, in 2012, Manchester United was the only sports team valued at over $2 billion dollars. Now, every one of the 50 franchises are valued at over $2 billion dollars. Locally, the only Minnesota franchise to make the list was the Minnesota Vikings, at $2.4 billion. Forbes does not release its propriety models to valuing sports franchises; however, we at Shenehon Company know that it is not as straight-forward as valuing other privately held companies.
The three traditional approaches to valuing a private company are: the income approach, the market approach, and the asset-based approach. Each approach has its own unique way of assessing value:
• The income approach, most often via the discounted cash flow method, is where the value is estimated based on the cash flows a business can expect to generate over its remaining useful life.
• The market approach is where the value of a business is determined by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.
• The asset approach is where value is estimated based on the value of assets net of liabilities.
However, professional sports teams are more difficult to value based on traditional business valuation techniques for several reasons. First, the valuation of professional sports franchises is driven higher by the severe lack of supply. There is a limited supply of professional sports teams in the four major sporting leagues in the US and Canada (NFL, NBA, MLB, and NHL), with 123 total franchises. Therefore, sports franchises are many times treated as “trophy” assets, which means that they attract wealthy individuals in a way similar to other luxury goods. Next, the income approach is not an accurate approach to valuing sports franchises due to low expected cash flow. Most owners expect to realize their return on their investment at the time of sale, not from cash distributions on the investment during ownership. The market approach, by comparing the franchise to other previously purchased franchises, comes closest to finding the accurate fair market value. Even then, unique aspects of a sports franchise, such as the local media market, sponsorship and stadium revenue, revenue sharing mandated by collective bargaining agreements, and brand strength, must be accounted for in each valuation.
To use a recent example, the Houston Rockets were purchased by wealthy businessman, Tilman Fertitta, for $2.2 billion in 2017. According to Forbes, the Houston Rockets had approximately $296 million in revenue in 2017. This implies a revenue multiple of 7.4 for ownership of this private company, which is astronomically high. For comparison, the average entertainment company in the United States trades at a revenue multiple of 4.08, according to data compiled by NYU professor Aswath Damodaran. However, the Houston Rockets compete in a large media market and historically have been popular overseas, leading to greater franchise prestige. This makes them an attractive asset to own. Another unique franchise is the New York Yankees, who are the second most valuable sports franchise in the world at $4.6 billion. The Yankees can achieve this high valuation due to exceptional brand value, size of media market, and unique local television rights that make the franchise a “trophy” of the modern sporting world, even with operating income of $30 million.
The multiples implied in transactions of professional sports franchises highlight the unique valuation approach to these businesses. The distinct honor and prestige of owning a sports franchise serves as its own social currency, which is a distinguishing consideration when appraising these assets. Given that buyers seek benefits beyond the expectation of future cashflows throughout their ownership tenure, there is a significant difference in valuing sports franchises from valuing other businesses. These unique challenges are the dreams of the modern appraiser.