How the War in Ukraine Spurred an Energy Crisis

How the War in Ukraine Spurred an Energy Crisis

When Russia officially launched their full scale attack on Ukraine in February, the world watched and waited. After more than ten months of consistent conflict, Ukraine prepares for another, harsher, winter. Russian occupation of important territory and tactical missile strikes have caused devastating damage to key areas of infrastructure throughout the small nation. Fallout from this war has prompted international response and compounded an already fast growing energy crisis.

Targeted Attacks

Military buildings, equipment, and siege camps are common targets in an attempt to reduce the fighting capacity of a wartime enemy. In addition to these historically important targets, Russia is also strategically targeting major infrastructural landmarks throughout key Ukraine territories. As frontline combat wins determined which nation held or overtook border towns, Russia worked fervently behind the scenes on a larger, more impactful approach.

Guided missiles have given Russia a distinct advantage in the war against Ukraine. Long-range Russian cruise missiles fired from the Black Sea almost continuously rain down on civilian ground. Whether these missiles are from a Russian stockpile or were a recent purchase from their allies in Iran makes no difference. Their ultimate destination and the resulting devastation are inevitable.

Virtually, all missile targets are major infrastructure centers. Water treatment plants, electrical grids, and manufacturing centers are just a few of the most popular targets. Widespread blackouts and unstable internet connections are becoming more common throughout major cities and rural areas. Lack of potable water, electricity, and heat sources are causing untold distress among the population in Ukraine. Less than half the nation has reliable internet connection, and this number continues to dwindle day by day.

Supportive Allies

As Russian attacks on the energy sectors throughout Ukraine continue, world political allies consider ways to support the people of Ukraine. European Commissioner for Energy, Kadri Simson, spoke on behalf of the Ukrainian people as she reproved the targeted attacks on energy sectors. Member states and other European Union (EU) partners quickly assembled in response to the human suffering throughout Ukraine.

One of the most immediate solutions offered was the transfer of energy equipment by foreign companies to the hardest hit regions in Ukraine. The G-7 joined in the EU response and called for a $60 per barrel cap on Russian crude oil imports to member nations.

Energy Crisis

Recovery efforts are not without potential fallout. While sanctions such as the cap on crude oil prices will curb the financial ability for Russian attacks to continue indefinitely, they will also have unintended consequences in the world marketplace.

Political ties will undoubtedly be strained as Russia prepares a response, which may come with unexpected sanctions or other retaliatory actions. The Russian Federation is one of the largest global providers of fossil fuels, including natural gas and crude oil. Interrupting this important process and distribution chain will undoubtedly intensify the current energy crisis into unknown proportions.

Although the future is uncertain, and there is no sure end to the conflict between Russia and Ukraine, there are still reliable facts when it comes to energy valuation. Our team is closely watching the energy sectors and anticipating world reactions. We have decades of experience working with government agencies, independent organizations, and other interested parties to determine the overall value and risk associated with energy sectors.

Donating Cryptocurrency Assets to Charity

Donating Cryptocurrency Assets to Charity

Philanthropic efforts provide necessary resources for a number of community and global improvement causes. Generous donors who make contributions to such causes create opportunities for those less fortunate. In addition to leaving a lasting legacy, charitable contributions also provide substantial tax benefits for the donor. In most cases, the fair market value of a charitable gift counts toward tax deductions. 

Types of Charitable Donations

Cash donations are still very common, but there are several other assets that count toward tax deductible gifts. Real property, including homes and acreage, offer physical meeting places that can be used for shelter, treatment, or administrative purposes.

Cryptocurrency as a charitable donation is also quickly becoming a viable trend among benefactors. Donating cryptocurrencies such as Bitcoin and Ethereum to public charities provides several benefits for the donor as well as the receiving organization.

Ways to Make Charitable Gift Donations

Historically, gift donations in the form of company stock, private or municipal bonds, and other securities were a two-step process. First, donors sold off specific shares or units of a particular security and then donated the proceeds from the sale to their preferred qualifying charitable organization.

This process required two separate transactions, several days for the settlement process, and left the actual donation amount to chance based on market conditions. New options for direct transfers of securities from an individual or trust to a charity have made it much more efficient to donate assets to a worthy cause.

Donor Advised Funds

Tax benefits of long term appreciated assets donated to public charities with the 501(c)(3) designation are strategic for both the benefactor and the charitable organization. Donor Advised Funds (DAFs) are accounts established by a charity that allows donors to contribute non-cash assets directly to the organization. Funds may be used immediately or may remain invested in the market and paid out in the form of grants over a specific time period. Directly transferred assets are not subject to capital gains taxes at the time of the donation.

Cryptocurrency Donations

Appreciated non-cash assets such as Bitcoin and other cryptos can be transferred to charitable organizations without the donor paying taxes on the appreciated value. Tax deductions to the benefactor are based on the fair market value of the cryptocurrency. Fair market value is based on the appraisal of a qualified reviewer.

As with charitable donations of other securities, cryptocurrency donations are received by the organization at their full and current value. While most charitable organizations now accept the transfer of non-cash assets, not all have the capability to accept cryptocurrency. This is likely to change in the near future.

Our experienced team can accurately appraise charitable contributions, regardless of the preferred investment vehicle. Contact us today!

SEC’s Recent Adoption of the Pay Versus Performance Disclosure Rules

SEC’s Recent Adoption of the Pay Versus Performance Disclosure Rules

Transparency is a key factor for stakeholders in the financial realm. Too many past incidents have left investors and the general public weary of new capital ventures.

The expectation of full disclosure has become a norm for doing business today. The Securities and Exchange Commission recently revised current policy amendments to reflect the culture of transparency. Registrants must now disclose additional information, including compensation structures for financial managers, according to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new disclosures include the reporting of changes in the fair value of certain unvested equity awards during the covered years. This will require revaluations of the unvested equity awards. The newly amended rules were implemented on August 25, 2022 and are expected to encourage investor confidence.

Renewed Interest in Item 402

The Securities Exchange Act of 1934 introduced some of the first regulatory guidelines for trading securities. Financial markets covered under the statutes of the act only pertained to traders registered in the United States. Updated amendments to Item 402 of Regulation S-K require additional disclosure of financial compensation to key officers of companies that register with the Securities and Exchange Commission (SEC) for trading privileges.

Despite technological advancements and the emergence of new global stock markets over the past several decades, much of the reporting required under the new amendments pertain to large domestic companies. Smaller Reporting Companies (SRCs) are required to provide similar disclosures, on a scale relative to their reporting structure and assets under management. Foreign private issuers and Emerging Growth Companies are among reporting companies not subject to the newly amended disclosure rules.

Executive Compensation Disclosures

Specific requirements of the Item 402 reporting guidelines include financial performance measures and a compensation table outlining total compensation for key officers of the reporting company. The table design is such that registrants include a layout of the total shareholder return after required deductions such as administrative costs, expense ratios, and total compensation paid to asset managers. The table will provide transparency through disclosure of pay versus performance.

Executive compensation paid to the Principal Executive Officer as well as other named officers are compared to the overall financial performance of the traded security during a specific time period and weighted against key financial performance measures chosen by the registered reporting company. Companies are able to select their key performance indicators and are permitted to include between three and seven measures of financial and nonfinancial impact.

In addition to current data, reporting companies must also provide a full accounting of the executive compensation paid to all named officers over the past five years.

Compliance and Valuation Impact

Beginning with fiscal years ending December 16, 2022, registrants are required to provide a Summary Compensation Table detailing each of the five prior fiscal years. SRC registrants must provide the same information, but are only required to report the data covering the past three fiscal years. Column A represents total compensation paid to the Chief Executive Officer, and Column B will utilize a formula derived by the SEC to provide the compensation actually paid to the Chief Executive Officer after all relevant factors are considered. Column C represents the average total compensation of all other named officers and Column D calculates the average compensation actually paid to all other named officers.

While such reporting and disclosure requirements provide a benefit to consumers and public image of major reporting companies, it may not deliver the full picture of compensation details under a pay for performance structure. The Appraisal Economics’ team understands the complexities of total compensation packages, including restricted stock and outperformance plans for executive officers. We provide valuation services for executive officers that account for all levels of compensation plans.

Ernst & Young Announces Potential Split of Audit and Advisory Services

Ernst & Young Announces Potential Split of Audit and Advisory Services

Earlier this year, Big Four accounting firm EY announced the possibility of a global split off of their audit and advisory operations. They are the first of the Big Four accounting firms to ever consider this approach, and it would be one of the most significant structural changes to happen at a Big Four firm in decades. 

This leaves many people speculating the purpose of EY’s decision. Yet, this news is not all that surprising. The Big Four have been under regulatory scrutiny recently for an increasing number of audit failures as the Securities & Exchange Commission has been hard at work investigating potential conflicts of interest. Additionally, the Financial Reporting Council (FRC) has been putting pressure on these companies to separate their audit and consulting services for years.

By splitting off their operations, EY can distance themselves from the rest of the Big Four. This reduces the risk of further reputational damage, gives them an opportunity to reinvent their brand, and also separates them from potential FRC fines that may be coming down the pipeline.

Ernst & Young’s split would produce two new companies: Assureco and Newco. Assureco would serve as an auditing firm and would maintain a similar structure to what EY has in place now. Newco, on the other hand, would be a stand-alone consulting company with a partnership structure similar to Goldman Sachs. Assureco has been valued at $20 billion and Newco at $25 billion.

Nothing can be finalized without a vote of approval from EY’s global partners. EY has been unable to set an official timeline for these changes and cannot do so until it has gone to a vote. Currently, they are in the process of implementing informational sessions to educate their partners. Once that is complete, voting can take place, likely sometime between November 2022 and January 2023. It is still possible the partners could veto the separation of operations and no changes would occur. If all partners approve the breakup, it is expected the transaction would be finalized towards the end of 2023. 

This move would put pressure on the rest of the Big Four accounting firms — KPMG, PricewaterhouseCoopers (PwC), and Deloitte — to follow suit, which has the potential to disrupt the profession. EY plans to use its first-mover advantage to secure more audit contracts through Assureco and hopes to see double digit growth in both Assureco and Newco once the transaction is complete. This would increase their profitability, as well as their stakeholders’ investments, and their employees could benefit from better promotions. 

Some Big Four firms provided their comments concerning EY’s plan to AccountancyAge. KPMG defended their position and maintained that they still believe in the benefits of a multi-disciplinary approach, but said they do not like to speculate on the news of what other companies have planned. A spokesperson for Deloitte stated that they are still committed to continuing on with their current business model. PwC denied the publication’s request for comment.

Residential Solar Systems: Should You Lease or Buy?

Residential Solar Systems: Should You Lease or Buy?

Are you a homeowner considering making the switch to renewable energy? Going solar has so many environmental benefits, but your wallet will thank you as well — although perhaps not at first. Solar panel systems come with a pretty high price tag, and the sticker shock often makes homeowners have second thoughts. The good news is that homeowners have options: they can either purchase and own the system outright or they can choose to lease their panels. It is important for everyone to understand both options so they can make the most informed decision for their unique circumstances. 

Both options have their advantages and disadvantages, so let us dive a little deeper into each option below.

The Key Differences Between Buying and Leasing Solar Panels

Homeowners that buy their solar panels might not have access to a payment plan, although there are usually credits and incentives in place to help ease the financial burden. Still, the upfront costs will be much higher when you buy, which is why solar panels are considered to be a huge investment.

Leasing solar panels makes the switch to renewable energy more attainable for homeowners who do not have the cash on-hand for an upfront payment. However, a third-party owns the equipment and handles the installation and maintenance for you. You pay a monthly fee to utilize the energy that is generated by the system you are leasing. 

The Pros and Cons

Your decision will ultimately depend on your circumstances, but below are some of the pros and cons of buying and leasing your solar panels.

Pros of Buying

  • Owning your system can give you access to federal tax benefits and local incentives.
  • You will enjoy monthly savings on energy bills and get a full return on investment in less time than someone who leases their system.

Cons of Buying

  • Regardless of if you use cash or a loan to pay for the system upfront, it will still be a pretty substantial payment.
  • You are responsible for the cost of removing the system at the end of its useful life, or if the next homebuyer does not see the value in solar energy.

Pros of Leasing

  • Most solar leases require little to no upfront costs, so you will be able to enjoy the benefits and savings of solar energy with almost no money down.
  • Even though you will likely be responsible for paying a monthly fee, most problems you experience with your solar panels will be on the third-party owner to pay for and fix.

Cons of Leasing

  • You will not qualify for any government or local rebates or incentives since you do not own the system.
  • You will likely end up paying more to lease your solar panels in the long run than if you would have bought the system yourself.
  • If you try to sell your house before the end of your lease, you may need to buy out your solar panels if the next homeowner does not want this type of financial commitment.

There really is no wrong answer to buying or leasing your solar panels. You get to help the environment while also saving money on your energy bills. If you ever need to get a solar system appraisal, we are here to help!

Financing Against Intellectual Property

Financing Against Intellectual Property

Capital financing efforts have evolved with technological advancements and the rapidly changing business landscape. Investors and entrepreneurs are always ready to investigate the newest forms of investment vehicles and alternative financing options.

The tools of the trade for financing today often include attention to less tangible assets, such as debt instruments and intellectual property. Promising ideas now have a sense of value and can be financed or traded. Leveraging those ideas behind trademarks, copyrights, and patents can result in great opportunities for resourceful individuals and financiers.

Intellectual Property Financing

Intellectual property (IP) rights protect an individual or group from unauthorized infringement on proprietary concepts and details. A creative work, design, or invention can be protected by a number of legal means. The owner of intellectual property also has the right to leverage their IP creation in order to finance prototypes or new projects. The process of turning IP into financing is tricky and comes with a host of benefits, as well as some potential challenges.

Common Benefits of Intellectual Property Financing

Raising capital by using intellectual property as a special form of collateral helps newcomers gain the recognition and funding they need to turn an idea into a product or service that can successfully be introduced to the marketplace. Once overlooked, IP rights are now considered a valuable commodity and are increasingly being traded or considered as a viable investment option.

Individuals and corporations who own an existing patent, trademark, or copyright may be able to leverage their holdings to gain necessary capital for expansion or some other business venture. Utilizing intangible assets introduces new possibilities for startups or even struggling businesses who were unable to obtain sufficient capital funding through traditional lending means.

Potential Barriers to Leveraging Intellectual Property

Although the obvious benefits are enticing, leveraging IP rights is not without risk or potential drawbacks. Raising capital funding through nontraditional means often comes at a higher price and with potential ramifications. An alternative debt financing agreement could lead to financial turmoil if the IP does not result in a usable product or service, or if significantly more research and development is needed before going to market.

Capital contributions leveraged through intellectual property in the form of equity finance also come with a unique set of potential challenges. Since IP such as patents and trademarks represent the idea behind a particular product or invention, there is always a possibility that true ownership could be disputed. This could result in a costly and lengthy legal battle that delays potential profits.

Likewise, patent and copyright permissions are generally timebound. Although they do not expire, trademarks must be renewed at least once per decade. Companies that hold existing IP materials and want to leverage them for capital must consider their ownership rights. Investors may not be interested in IP rights that could be challenged or will expire in the near future.

Intellectual Property Review

Negotiating the sale or transfer of intellectual property is a complex matter that could require legal and tax advice for both parties. IP financing to raise capital in the form of equity or debt also requires a wealth of knowledge and expertise. Our team proudly offers an extensive range of services related to the valuation of intellectual property. Our proven methodologies help investors accurately calculate the potential risks and rewards associated with an investment opportunity that involves IP such as patents, copyrights, and trademarks so our clients can make informed decisions.

The Inflation Reduction Act and Its Impact on Renewable Energy

The Inflation Reduction Act and Its Impact on Renewable Energy

President Biden signed the Inflation Reduction Act into law on August 15, 2022. The Act is intended to offset rising costs across multiple industries, and addresses priority concerns for most Americans. Primarily, the Act makes provisions for wage equity, revitalized manufacturing efforts, affordable healthcare, and clean energy enhancements.

Inflation Reduction and Tax Advantages

By partnering with the Internal Revenue Service (IRS), the Inflation Reduction Act will create new resources toward tax revenue collection. A major transformation within the department will focus on providing technological and human resources that can be utilized by individual taxpayers to ensure the maximum tax advantages are received.

Further efforts within the IRS will provide heightened activity toward corporations and business owners who owe back taxes. A new fifteen percent minimum corporate tax will attempt to ensure equity among the largest corporate entities while still providing tax credits and incentives that support clean energy.

Inflation Reduction and Manufacturing

A renewed focus on American manufacturing is evident in provisions of the Inflation Reduction Act. Under the stipulations of the Act, domestically sourced materials and efforts will be rewarded through tax incentives and bonus credits where applicable. The purpose of this effort is to encourage the creation of new employment opportunities, including union jobs, among skilled trade industries.

Boosting a skilled workforce stimulates the economy in several ways and fits well into the Inflation Reduction Act by providing stability among the manufacturing workforce and creating new jobs for individuals who were previously unable to find gainful employment. Bonus tax credits are aimed toward newly formed organizations that meet specific criteria and industries that bring renewable energy solutions to locations that historically depended on unsustainable energy sources such as coal and oil.

Inflation Reduction and Renewable Energy

Another major impact of the Act is the design to extend, renew, or replace prior tax incentives aimed toward clean energy initiatives. The Internal Revenue Code (IRC) outlines hefty financial motivation to corporations and homeowners who choose to make building upgrades in alignment with clean energy goals. Under the Act, more than three hundred billion dollars is directed toward clean energy and climate stabilization programs. An unusual provision of the Inflation Reduction Act even benefits corporations that are ineligible for the standard incentives available to manufacturers of clean energy sources.

Under the Act, entities that produce or refine clean hydrogen production or offer storage for clean energy resources are also eligible for substantial tax incentives and bonuses. As with the special tax credits associated with manufacturing efforts, these incentives are specifically geared toward corporations who meet the apprenticeship and prevailing wage requirements.

Establishing the Inflation Reduction Act will significantly impact the clean energy initiatives that have been crawling along for several years. The renewable energy industry is expected to grow exponentially over the next decade, and could eventually eliminate the dependence on nonrenewable sources of fuel and energy within the United States.

Valuation of Renewable Energy

Corporations and private investors have shown increased interest in clean energy production and storage efforts. Understanding the valuation nuances within the renewable energy sector requires extensive industry knowledge. Our firm offers more than three decades of demonstrated experience working with some of the largest utilities and power producers in the world. 

Software as a Service (SaaS) M&A Landscape

Software as a Service (SaaS) M&A Landscape

Software as a Service (SaaS) continues to be a rapidly growing option among multiple industry sectors. These packages provide customizable business solutions along with security, maintenance, and upgradeable features. Package deals typically include ongoing service contracts that cement customer relationships.

Like other intangible but necessary business programs, SaaS has undergone a great deal of change over the past several years. Mergers and acquisitions have heightened interest in the field and opened doors for diligent business owners and curious investors.

Key Growth Driver – Virtual Workstations

As the world economy begins to stabilize and even rebound in some cases, traces of the pandemic still abound in the general workforce population. The forced closures and social distancing requirements changed the way the world interacts and does business.

Countless companies and organizations have decided to continue remote operations. These decisions drove the demand for contemporary SaaS solutions, primarily cloud backup tools. Over the past two years, corporations scrambled to find the best and safest software solutions for their unique business needs.

Many of these organizations had not considered the need for virtual training and onboarding, not to mention a large and fully remote workforce. Without time to perform due diligence research or market surveys, executive officers were uncertain about how to navigate this new, virtual workspace.

SaaS companies rose to the occasion with viable solutions and a seamless transition. One of the greatest features of reputable SaaS platforms is the enhanced security that business operators require in order to keep their customer information protected. SaaS technology provides both the efficiency and security that leadership teams desire. As such, the industry gained popularity and created interest among new investors, which continues to grow.

The second half of 2021 indicates a continuance of the first two quarters, with continued growth thanks to continually rising demand.

Merger and Acquisition Activity

The landscape for SaaS merger and acquisition (M&A) activity has been peppered with lots of new, and some unexpected, activity.

Some of the biggest headlines include the Citrix acquisition by Vista Equity, Anaplan by Thoma Bravo, and CloudMed by R1. Just these three examples boast more than thirty billion dollars in M&A activity. Overall, the SaaS mergers and acquisitions throughout the first quarter of 2022 has exceeded six hundred total transactions. In addition to this record high, the industry also capitalized on more than one thousand transactions in the aggregate software sector. The strength garnered throughout 2020 and 2021 is likely to continue throughout the rest of 2022 and beyond.

Record high sales, new ventures, and transactions in the form of mergers and acquisitions have sparked interest in this previously inconspicuous field.

The Future Potential of SaaS

Experienced business owners, investors, and venture capitalists have quickly recognized the importance of SaaS opportunities. Although the market is not new, the recent spike in activity can make it difficult for even tenured investors to evaluate.

We help our clients understand the potential for growth and investment opportunities with SaaS. We conduct multi-phased assessments of database assets, which often complement SaaS company valuations and are useful tools for calculating overall net value. If you’re interested in learning more, contact us today.

Carried Interest Derivatives: An Effective Strategy for Estate Planning

Carried Interest Derivatives: An Effective Strategy for Estate Planning

Investment managers are generally compensated based on the overall performance of a particular fund or series of funds under their management. Higher compensation rates for managers who meet or exceed expected returns have created an increasingly competitive career field among investment professionals.

What Is a Carried Interest?

Incentive compensation for fund managers often comes, at least in part, in the form of a performance fee known as carried interest. If a fund (typically a private equity fund) is able to perform at or above a preset rate of return, investors with a carried interest are entitled to a portion of the profits. Specific provisions involving timing, tiered return thresholds, and potential giveback of prior carried interest (“clawback”) often apply.

Challenges with Transferring Carried Interests

Private equity fund managers and other members entitled to a carried interest payment may find it somewhat difficult to include carried interests in their estate planning documents. Although there is no guarantee of carried interest performance, the value of the carried interest is expected to grow exponentially in value over time. The anticipated long-term growth means it is more advantageous from a tax perspective to transfer these assets to a family member or trust sooner rather than later. Carried interest gift allotments may fall below the allowable annual gift guidelines when the fund is new or fairly new; however, as the fund matures, the value of the carried interest may skyrocket and will become more expensive to gift. 

Carried interests often have time-based vesting provisions, and IRS regulations specify that a gift of an option-like interest such as carried interest is not complete until it has vested.  This means the carried interest will likely have increased in value by the time it vests, frustrating estate planning goals. Further, the IRS may require that a “vertical slice” of the fund be transferred for the gift to be effective, which is often not desired (a vertical slice being the carried interest plus a proportionate share of the invested capital). These issues may be avoided by using a derivative.

What Are Carry Derivatives & How Do They Help Solve the Estate Planning Issue?

A more advanced technique for transferring carried interest is the use of a derivative on the carried interest itself.  Such carry derivatives may help alleviate certain estate planning issues. When selling an option, or carry derivative, the owner utilizes an irrevocable trust account to create a cash settlement for the derivative, which is taxable to the owner of the trust in the present. The contract amount determines how much will be paid into the fund at a future date to represent the fair market value on the return of the carry. Owners may stipulate a floor, or hurdle return rate that must be met or exceeded before funds are due to the trust account.

This workaround had the potential to reduce or eliminate the tax burden on carried interest and may also bypass the generation skipping tax implications of the trust. Our team at Appraisal Economics provides advice and valuation in the area of carried interests and carried interest derivatives, and are happy to assist by answering questions and conducting a performance analysis.

Investment in European Football Clubs: Opportunities, Risks, and Challenges

Investment in European Football Clubs: Opportunities, Risks, and Challenges

As the values of US-based sports franchises continue to escalate, with the $4.65 billion acquisition of the Denver Broncos serving as the most prominent recent example, North American investors have taken a more global approach to investing in sports assets. European football (soccer) clubs, particularly in England, have proven to be among the most appealing targets. At the top end of the market, such investments often complement holdings in the top US sports leagues. In other instances, investors that might be priced out of the market for US sports franchises see opportunity in lower level football clubs that they believe are undervalued.

While European football clubs in many ways resemble US sports franchises, there are several key differences. Investors steeped in the US sports industry must develop a thorough understanding of the European model and calibrate their investment strategies accordingly.  

Opportunity At Home and Abroad

The trends driving valuations of European football clubs are largely the same as those enhancing the value of U.S. sports franchises, namely media rights. Due to the global nature of football, the broadcast rights for the top European leagues (Premier League, La Liga, Bundesliga, Serie A, and Ligue 1) generate substantial revenue abroad. The Premier League has led the pack in this regard, and the league’s international broadcast revenue is set to exceed domestic broadcast revenue for the first time starting with the 2022-2023 season. That’s not to say that domestic media revenue doesn’t remain highly lucrative. Barcelona, one of Europe’s biggest clubs, recently completed a two-stage sale of a 25 percent stake in its La Liga television revenue for 25 years to private equity firm Sixth Street in exchange for a reported €527.5 million. 

The global opportunity extends beyond league broadcast revenue. For example, Manchester United, a pioneer in global marketing among football clubs, claims to have 1.1 billion fans and followers. This fan base appeals to international and regional companies around the world, enabling the club to drive sponsorship revenue growth. The club also monetizes its fans directly through the sales of branded apparel and other licensed products. Digital media offers additional opportunities to offer fans subscriptions to club-specific content. While Manchester United operates on a larger scale than most, other top clubs also seek to build a large global following with similar investments in international tours and other global marketing activities.      

Traditionally, stadium revenue has largely consisted of matchday revenues from ticket sales, concessions, and hospitality. These revenues are naturally more local in nature, but top clubs with global fan bases have increasingly attracted global tourists to matches. In many respects, such attendees can be more lucrative for the club, as they are more likely to pay a premium for tickets and purchase more merchandise than the local fan that comes out for a regular Saturday afternoon.

Whether it is local fans or tourists filling the stands, a club’s economic arrangement at its home stadium is a key financial driver that can take many forms. For example, West Ham is several years into a 99-year lease at London Stadium, which has financial terms that are reported to be highly advantageous for the club. Chelsea, meanwhile, has fallen behind its rivals in terms of its ability to drive revenue from its Stadium, and the necessary investment in Stamford Bridge was a critical aspect of the club’s recent takeover. Tottenham Hotspur’s new stadium opened in 2019, and the club struck a 10-year deal to host NFL games. Regardless of scale, clubs throughout European football face comparable challenges in determining whether it is best to own or lease their stadium and how to leverage the arrangement to best serve the club financially.      

Risks and Challenges

One of the most important differences between U.S. sports and European football leagues is the concept of promotion and relegation. U.S. leagues are closed, meaning that regardless of a team’s performance in any given year, it is guaranteed a spot in the same league the following season (along with the same revenue sharing benefits). Under a promotion and relegation system, teams that finish a season at the top of a lower-level of competition are promoted to the next highest level of competition for the following season, while those that finish at the bottom of the league table are relegated to the tier below. As an example, the promotion and relegation structure for the English football league system is summarized in the following figure.

From a financial perspective, the key implication of promotion and relegation is that a club’s revenues can be highly uncertain, swinging dramatically from one year to the next. While mechanisms such as parachute payments and relegation clauses in player contracts can help soften the financial impact for relegated clubs, a drop from the Premier League to the EFL Championship, for example, will still carry heavy consequences. The revenue gap between the Premier League and the EFL Championship is so pronounced that the final match of the EFL Championship playoffs, from which the winner becomes the final club to be promoted to the Premier League, is referred to as “the richest game in football,” potentially worth hundreds of millions of pounds to the winning side. While a handful of top clubs are essentially insulated from the issues of promotion and relegation, it is critical that investors are realistic about the possibility of both and develop the appropriate financial plan for all scenarios. 

Another key area of differentiation relates to the cost of players, whose salaries typically represent the largest expense for any professional sports organization. With the notable exception of Major League Baseball, most U.S. sports leagues negotiate for some type of salary cap in collective bargaining agreements with their respective players’ unions. While the salary cap in the NFL helps make it almost impossible for franchises to lose money, UEFA’s financial regulations (Financial Fair Play and sustainability regulations) are less stringent and can be subject to greater gamesmanship by clubs.

Ultimately, the competitive market for talent can drive players’ wages to the point where club revenues are effectively just being passed through to the players, and often even further. While some clubs aim to run like traditional businesses, they increasingly find themselves competing with sovereign wealth funds, which have different objectives beyond the bottom line and a virtually unlimited budget with which to pursue them. Wage bills have often driven annual losses for football clubs, which would be unthinkable for an NFL franchise that has the cost controls of a hard salary cap.    

Finally, the financial performance of European football clubs is limited by one of the factors that make them so valuable to begin with: the relationship with supporters and fans. Football club histories often go back more than 100 years, with deep roots in the community. Club owners are largely seen as stewards of a local institution. Clubs often face severe public backlash if they seek to increase ticket prices too dramatically and potentially price out certain fans. Clubs can be so connected to a place that even moving stadiums within the same city can be painful for supporters.

As a result, the practice of threatening a move to leverage local governments for taxpayer funded stadiums, a common practice in the U.S., is rarely if ever seen in Europe. The threat of relocating a club with such deep community ties is not credible, and ownership would likely never recover from the backlash. Fan passion was similarly on full display when a collection of the biggest clubs in Europe recently moved to form a “Super League.” Backlash was so strong that the project was quickly abandoned (at least publicly, for now). 

Every Situation Is Unique

This is hardly an exhaustive discussion of the various factors a North American sports investor must consider when looking at opportunities in Europe. The player transfer market, academy system, and presence of non-league competitions such as the UEFA Champions League all warrant consideration. Further, the circumstances surrounding each individual club are highly nuanced, and the rules (financial and otherwise) applied by various governing bodies are not static. The team at Appraisal Economics is well positioned to provide independent, unbiased analysis of sports investments both in North America and around the world.