Sports franchises are a very lucrative category of business. According to Forbes, NFL teams are valued in the hundreds of millions even billions of dollars. The Dallas Cowboys, ranked the highest in value of NFL teams, at $3.2 billion. The sports teams that are valued the highest do not always show the most profits; so what is sports franchise valuation based on?

What Is that Price Based On?

As with many business ventures, the revenue earned by a team and the value of that team are very closely related. Many factors go into how much money is earned by a team. Gross revenue source factors include the number of households who tune in to watch the games on television, the number of tickets sold to live events, the price per ticket, revenue from concessions, and officially licensed team merchandise. Some sports share branded revenue for the entire league, such as the NFL. All official merchandise for NFL teams will have the NFL logo as well, and the profits will benefit the NFL as well as the individual team.

In other professional franchises such as Major League Baseball, profits are less important as team value is more closely related to winning percentage. To improve wins, MLB team owners tend to invest profits into better players, thereby increasing payroll expense and reducing profits. This contrasts the NFL where the Salary-Cap can support large profits.  Other factors affect the valuation of a team, such as stadium rights, merchandising, and sport channels. Real Madrid became the world’s most valuable sports team, even though it has lower net revenue than teams such as the Dallas Cowboys.

Can a Team’s Value Change?

The value of a sports team can—and does—change based on a variety of factors. Essentially, it all comes down to popularity and revenue: if either grows or diminishes over an extended period of time, the team’s value will reflect this change.  A new stadium can change the team’s valuation overnight. This is especially true when the local municipality funds the stadium construction, with most of the financial benefit going to the team owners. The lowly Montreal Expos became the Washington Nationals, but not until a new stadium was constructed by the county, did the team become one of the most valuable baseball teams in the nation.

A team’s value is based largely on its popularity and its’ earning power, but an experienced professional appraiser is almost certainly involved behind the scenes. Whether you’re valuing a sports franchise and its assets for acquisition, estate tax planning, litigation or other reasons, contacting Appraisal Economics Inc. for guidance is always an excellent choice.