Sports Franchise Valuation & Appraisal Services
Although most sports franchises are privately held (versus publicly traded) concerns, they can be valued using generally accepted valuation methods. The most widely used method for determining sports franchise value is the guideline transaction method. The valuation process entails an analysis of the relationship between the price paid for a franchise and a relevant measure of team performance, typically revenue. This relationship between price and performance is evidenced in an implied valuation multiple, which is the ratio of price to revenue (or some other performance measure, such as earnings or cash flow). The selection of appropriate valuation multiples is a function of the specific facts and circumstances extant at the valuation date. By way of illustration, we provide a brief example of a major league baseball (MLB) franchise valuation performed by Appraisal Economics, including a discussion of the recent history and trends bearing on the valuation. Also, please see a power point presentation on valuing player contracts.
As of the start of the 2016 season, MLB has enjoyed over 20 years of labor harmony, with the last players’ strike occurring in 1994. This marks the longest period of labor relations stability since the inception of free agency in 1975. Annual attendance for all 30 teams has been fairly stable over this decade at historically high levels, with the past ten years witnessing the ten highest attendance figures of all-time. Although attendance has fallen some 7 percent from the all-time high of 79.5 million in 2007, it has been fairly steady, ranging between 73.2 million and 74.0 million over the past six seasons (2010-2015). Six teams moved into new ballparks over the past decade (2006-2015), which has spurred attendance due to the so-called “honeymoon” effect; that is, the novelty factor associated with a new venue.
Sponsorship and media deals, sports networks in particular, have been a boon to MLB’s profitability, as has MLB Advanced Media, baseball’s digital arm offering an array of digital products to over 3.5 million subscribers, including MLB.TV and MLB.com’s At Bat mobile application.
The robust fiscal health of MLB, which reported nearly $10 billion in revenue in 2015 (an increase of $500 million from 2014, and a nearly 50 percent increase from 2008), may explain why there were no franchise sales over the past three years (2013-2015), an unprecedented span of inactivity. Since 1978, nearly 40 years ago, there has been no team sales for only a single two-year period (1987-1988). This quiescence may also be the result of more stringent screening of prospective owners by MLB, which must approve any team sale.
Since 2008, only five teams have been sold outright, including the Chicago Cubs in 2009 for $845 million; the Texas Rangers in 2010 for $593 million; the Houston Astros in 2011 for $610 million; the Los Angeles Dodgers in 2012 for the record-setting price of $2.0 billion (excluding $150 million for land around Dodger Stadium); and the August 2012 sale of the San Diego Padres. The total price of $800 million for the Padres suggests an estimated franchise value of approximately $400 million, excluding the estimated value of the team’s interest in MLB Advanced Media of $200 million and an estimated $200 million for the up-front cash associated with the team’s lucrative new television rights agreement with Fox Sports San Diego.
This year’s sale by Nintendo of the majority of its 55 percent interest in the Seattle Mariners to a group of existing minority owners marks the first franchise sale in four years. The transaction price of $661 million for a 45 percent interest implies a total franchise value in excess of $1.4 billion.
The following figure shows the transaction prices paid for MLB franchises over the past ten years.
PURCHASE PRICES FOR MLB TEAMS
(Amounts in Millions of U.S. Dollars)
Note: Seattle Mariners franchise value reflects gross-up of transaction price of $661 million for 45 percent interest.
As evidence of the robust health of MLB, the median franchise value for all 30 teams entering the 2016 season was $1.1 billion, according to Forbes’ estimates, with the average team worth five times revenue.1 Five franchises, or 20 percent of all teams, are valued at over $2.0 billion, led by the New York Yankees ($3.4 billion).
These unprecedented values have been buoyed in part by profits, as 27 of the 30 teams posted operating profits in 2015. Only the Los Angeles Dodgers, Philadelphia Phillies, and Washington Nationals reported losses.
Franchise Valuation Issues
The market for sports franchises is a distinct market, one in which the buyers are typically wealthy individuals for whom the attraction of franchise ownership is not based on conventional return on investment considerations such as future earnings and cash flow, but rather by its perceived “ego” or “trophy” value. These buyers often have the means to finance the acquisition out of personal sources not available to other types of investors. Given that ownership is usually by individuals, franchise sales occur infrequently, often triggered by life events such as divorce or death. Based on the history of franchise sales, MLB franchise values have continued to steadily increase in value, independent of general economic conditions.
Teams are not bought and sold based primarily on operating profit or cash flow (at least in the short term), given the substantial payments associated with the seven and eight figure player contracts that have become commonplace. Payroll expense (salaries and benefits) are usually the single largest expense for a professional sports franchise. Hefty player payrolls exert a depressive effect on profits. Therefore, it becomes problematic to attempt to estimate franchise values based on such conventional investment measures as profits or cash flow.
Sports franchises often generate minimal levels of earnings, as revenues are reinvested in the team in the form of better players and a more appealing stadium. Such investments typically generate a substantial return that is only realized upon the sale of the franchise, which is best captured using the guideline transaction method.
Notwithstanding the uneven nature of franchise profits, total team revenue can serve as a useful valuation metric. Profits ultimately derive from a team’s ability to generate top line revenue from various sources including radio and television rights, game receipts, advertising, stadium rights, and concession and novelty sales.
Over the past decade, MLB franchises have been sold for prices that equate to between approximately 1.5 and 3.0 times total revenue. Teams in larger metropolitan statistical areas (MSAs) with higher levels of average disposable income, lucrative long-term cable television contracts, and new stadiums where the team has significant rights to stadium income (naming rights fees, concession sales, etc.) will command multiples at the high end of the range. Conversely, teams in smaller MSAs, with less lucrative media rights contracts, and older stadiums, typically fetch multiples at the lower end of the range.
Determining an appropriate revenue multiple for a franchise entails the analysis of not only the historical and prospective growth of aggregate revenue, but also the composition of total revenue, as teams are becoming increasingly dependent on lucrative media rights deals as the most significant component of total revenue. Teams in larger metropolitan markets can typically command higher fees for broadcast rights than teams in smaller regional markets.
Teams in markets with more favorable demographics (e.g, higher population growth and average household disposable income, higher cable television penetration rates, etc), all else equal, will fetch higher multiples of revenue than teams with less favorable demographics.
An additional factor bearing on team value is the stadium venue. Stadium economics, including the actual investment required to construct a new stadium and the anticipated return on such investment can have a significant impact on franchise value. Financing of new stadiums is often subsidized by local, county, and/or state government agencies that issue tax-exempt bonds to fund all or a portion of the total stadium cost, which can exceed $1 billion. To the extent that the new stadium is publicly financed, there may be limitations imposed on the team such as restrictions on ownership transfer or team relocation over a certain time frame, with financial and other penalties should the team opt to relocate. Such penalties may take the form of phantom ownership, whereby the debt-issuing government agency is entitled to a portion of the sale price. The extent to which the franchise bears all or a portion of the total cost, and holds rights to various sources of income from the stadium, can have a major impact on value.
Appraisal Economics valued a MLB franchise located in a mid-sized MSA. The team held significant economic rights to income from a yet-to-be built stadium, which was set to replace its current venue which had significant levels of functional obsolescence that were viewed as hindrances to future growth in attendance, gate receipts, and associated income. The team’s broadcast rights were the largest single source of total income, eclipsing gate receipts by a narrow margin. The economic rights which the team held included stadium naming rights fees and income from rental of luxury suites. The team had modest but consistent levels of operating income. However, the team had recently signed long-term contracts with several key players that would suppress operating income in future years. Furthermore, there were financial penalties should the team be sold to a third party within 10 years after completion of the new stadium.
Based on our analysis of historical MLB franchise sales and the specifics of the franchise’s ownership rights to stadium income, we concluded that a revenue multiple of approximately 2.5x current revenue, in the mid-range of recent multiples for MLB franchise sales, was appropriate. We separately analyzed the economic impact of the team’s rights to certain income streams from the future stadium. Based on this analysis, we concluded that these rights provided incremental value of approximately 10 percent. We evaluated the stipulations concerning the financial penalties that would be imposed upon a third party sale, and concluded that such penalties would be mitigated or altogether circumvented, given that the most likely buyer was considered to be a related (versus third) party.
Although the above example may be adequate for valuing a MLB team, it may not be the best method for minor league teams or other professional sport leagues. For example, football’s salary cap on player payroll makes it more conducive to consider using an income approach. Also, as the cost of a new stadium can be more than the franchise value of the team it houses, stadium economics can play havoc on the valuation process. Stadium rights, covenants, and construction debt all need to be considered when determining a sports team value.
INDEPENDENT VALUATION EXPERTS
Appraisal Economics is a trusted industry leader, providing a wide array of services for a variety of businesses across many different industries. We stand out among valuation firms catering to the sports franchises because we have the skills and credentials required to support and stand behind our valuations. Our clients expect a high-level of service from our experienced, knowledgeable professionals, and we strive to provide timely and supportive valuations.
Please take a moment to browse our site, or for more information contact Joseph Kettell at 201-265-3333 or JKettell@ae-us.com at any time.
1 The Most Valuable MLB Teams 2016, Mike Ozanian, March 23, 2016, www.forbes.com.