Franchise value is a key metric of every major sports league and its respective franchises. The goal is always to preserve, but also to seek out avenues for increasing franchise value. Yet, there’s no simple set of universal valuation metrics that can be applied across the spectrum of leagues and franchises. Of course, traditional valuation metrics including M&A multiples, discounted cash flows, and revenue multiples all need to be assessed, but there are other factors which can significantly impact a team’s value.
Unlike most businesses, a sports franchise can’t be valued in isolation. Every league and team has a unique business model, operates in different markets, serves various demographics, and possesses distinct growth profiles. Each league has a centralized governance structure whose leadership is tasked not only with day-to-day governance, but also in helping to preserve and unlock franchise values. Additionally, each league has its own unique financial guidelines and league-wide programs impacting franchise values across the league. Significant value, however, is still built through the effectiveness of franchise operations.
9 Factors that Impact Valuations
Over the past 30 years, Truist Wealth Sports & Entertainment Group has amassed a deep understanding of the distinctive financial needs of athletes, owners, leagues, teams, coaches, and executives—as well as the industry within which they all operate. During that time, we’ve identified nine key factors which we believe have the greatest potential impact on the current and future value of any professional sports franchise:
Franchise brand loyalty – While not an easily measurable metric, unquestionably there are widely divergent values based on different teams’ brands. In determining a valuation, we look closely at geographic location, historical success, public following, and other key components that go into creating a franchise’s overall brand value.
Team & stadium financing restrictions – Often there are certain league limitations as to how much debt can be accessed (whether at the team level or for a new stadium project). We also examine whether your league will provide franchises with a debt limit waiver when pursuing a new or renovated stadium. Typically, the greater the flexibility, the better the opportunity to increase franchise value.
Existing stadium/arena assessment – Do you own your stadium/arena, and how much of the associated economics are under your control? How old is the venue and what is the status of the public area around your venue? A franchise’s ability to maximize economic value from its venue before, during, and after the sporting event—and into the offseason with ancillary activation—will help to drive value exponentially.
League economics – What does your league’s existing CBA with the players’ union look like? How are player expenses regulated (i.e., is there a salary cap and how is it structured)? What does the league revenue-sharing arrangement look like? Various league economic regulators are put into place to control expenses, but also to support small market teams. These league structures serve to stabilize franchise valuation.
Supply and demand – Sports franchises are assets that are infrequently traded. Because of the associated cost and vetting process, there are high barriers to entry that will tend to impact the pool of potential buyers. Sometimes, however, potential buyers become so enamored with the idea of owning and running a professional team (even if it doesn’t make financial sense for them to do so) that valuation gets tossed out the window.
Market demographics – What does your corporate base look like in your respective market? How many other teams are competing in your market? What do population demographics look like from an average income standpoint? How extensive is other competition for local entertainment dollars? Because demographic metrics directly impact various revenue streams, accurately understanding and forecasting them is an essential franchise valuation component.
Revenue streams – Each league is exposed differently to what is league-generated revenue vs. what is team-generated revenue. Whereas an NFL franchise generates most of its income from league-level revenue streams (primarily due to its national media arrangements), an MLB franchise generates more revenue locally from its RSN agreement and ticket sales. Merchandising revenue also needs to be factored into the assessment, as well as any international exposure. Assessing the exposure and risk to respective revenue streams provides a deeper and clearer insight into franchise valuation.
League strategy – Every league is actively pursuing a host of different strategies to help expand league-level revenues domestically and internationally. From digital media initiatives and league-wide sponsorships to separate marketing companies, the cumulative effect of these initiatives serves to drive overall league and individual team valuations.
Holding companies – An increasing number of owners are creating holding companies at their family or ownership level, enabling them to own other ancillary companies that can provide additional monetization of their franchise. For example, in conjunction with the building of Truist Park, the Atlanta Braves established ‘The Battery’—a wholly owned commercial real estate subsidiary enabling the franchise to capture additional revenue by developing and investing in businesses in the immediate area in close proximity to the stadium. Other related subsidiaries might include sports marketing firms, e-sports, sports networks, and advisory practices.
While investor groups are generally focused on return on investment (ROI)—either in the form of distributions or the future sale of their share at a higher value—lenders are focused on analyzing franchise valuations so they can structure financing within acceptable loan-to-value guidelines. Striking the right balance between prudently managing risk and providing the organization with an optimal financing solution requires a comprehensive and accurate valuation that marries both art and science.
At Truist Wealth, our Sports & Entertainment Group professionals are specialized experts who not only understand how franchise value is created, they can deliver both private wealth and corporate investment banking capabilities all under one roof. Isn’t it time you had a financial organization working with you that truly understands the subtleties and nuances of your organization?