Monday, January 30, 2012

What's in Daddy Warbucks Lunchbox Anyway? Super Bowl Spawns Big Buck Discussions on Business Values and Sports Clubs Doings

One quote on the price of one Super Bowl Ad is enough to set some fans off on the relative worth of players, coaches and owners. This year's 30-second Super Bowl advertising costs are estimated at $3.5 Million according to Kantar Media who follows such things. Fans are asking themselves where does that money flow.

Politics and religion are often subjects people avoid in normal discussion because rarely do people agree on them. I think the same might be said of player salaries and sports clubs profits. Everyone seems to have a different opinion. If you read much coverage of sports you know that sports owners are often criticized severely. It's been my experience that there is little they can do that will generate any kind of positive press from the media.

Now with the Internet, there are many sources of financial information that are collected and digested for us in a myriad of postings, articles and other sports media spots. There is no end to various positions and opinions that fans and pundits take on many professional sports issues that involve finances. But the data is often questionable.

As far as I can tell, most sports teams are privately owned. Yet, you can find financial data on the Internet that purports to value privately owned sports clubs. The data is usually included in an article. Club owners as far as I know do not release their financials to the public. You know that by player union negotiations with football clubs where each side paints a different picture of their finances. Often union representatives dispute a team representative's assertion that a club is not making much money. Typically, the union suggests that the owners release their financials to prove their position and it doesn't happen.

Teams Valued by Bits and Pieces of Information?

I don't blame the owners for not releasing their financials. At the same time, by not releasing them I am not sure how much criticism they avoid because it appears to me that someone comes up with some data in some fashion anyway.

I suppose some business valuations on sports teams might be compiled by taking bits and pieces of data that must be made public. For example, perhaps there is a way to examine a stadium deal and determine ticket sales revenues based on it? Maybe there is a way to look at a teams salary cap and make some determinations. You might be able to see published TV revenues and determine something from that. But, my guess is that these bits and pieces of the picture are going to give you a rough estimate only.

You do see some attempt from certain media especially to try to provide comparative values of teams. For example, you see sources that state which teams are at the top of the heap. My guess is that such lists may have a relatively accurate pecking list, but the actual numbers may be many millions of dollars off the mark.

Even Real World Valuations Can Be Off the Mark

Having seen several actual business valuations, I can tell you that these things are more complicated than one may ever imagine. A real business valuation takes into account factors the average person may never anticipate. There are professional business valuation standards, certifications and hundreds of books and courses that promote accuracy and objectivity.

Often a business valuator may begin a business valuation by doing a thorough industry analysis. What has been the industry's history of revenues and profits? What are the external factors that might affect it like economic, social, legal, and commercial trends? A valuator will take a hard look at the government impacts and threats. What are the competitive threats--not just from the other sports clubs, but from clubs and entertainment from other venues altogether that may affect attendance or TV viewing? How does the league to which the team belong foster or threaten revenues and profits. What are the trends in sponsorship rules and opportunities? How might existing sponsors be impacted by economic trends? How might trends affect future insurance costs?

Forecasts are a necessary part of the valuation although the one thing all valuators know about forecasts is that they are almost always wrong--just how far off they are is the question. If you read cases about valuations that are done in large estate or divorce cases, it's not uncommon to see two valuations of the same business that vary by huge amounts. Often, expert witnesses are brought in and a judge must sift through reams of data to make a decision. And these are in cases where those who create the valuations are essentially bound to produce objective ones.

A big input in the business valuation of sports clubs must be the relationship and attitude of the host government. How are local taxes determined and what impact might come from tax rate changes or regulations? Stadium leases or financing may be substantial cost factors. For many teams, players' salaries can easily escalate out of control and be the key cost factor.

Rule of Thumb

Business valuations in their most strict sense are necessary in several circumstances such as estate tax valuations, certain stock sales and offerings, ownership disputes, marital settlements, etc. While a professional valuation is necessary in some cases and most helpful in most, it is not necessary in others.

Valuation estimates are often used by Business brokers who help facilitate the purchase and sale of smaller business--these estimates may be accomplished by what is called a rule of thumb. For example if a widget store generates $500,000 in revenue annually, they might suggest that the sales price of the company may be $1.5 Million by using a three times revenue basis or multiplier. The business broker knows the multipliers that are routinely used for such estimates. In this case, the buyer and seller may not want to pay for a sophisticated business valuation. The seller may be required to disclose certain financials from the books, but a private sale often does not require a full valuation. Both parties may be satisfied with really what amounts to as a rough estimate. Of course, the accuracy of the business financials that are used with the multiplier to determine the estimate may be subject to legal actions if deemed misleading or fraudulent.

A more complicated business like a large sports team will likely require a much more sophisticated analysis to come close to value. Of course, in the end, the value will be set by the buyer and the seller. There are some sports club prospects who are willing to pay a premium for certain properties --there may be others who are thinking just the opposite.

The best business valuators are highly trained professionals who have accounting and finance skills as well as detective skills. Often a firm manages the larger valuations and might employ a team of people. Depending upon the rigor with which the seller may have kept their records and other factors, a valuation can easily take several months. Often even a relatively small but complex business might require a valuation that cost in excess of $50,000. I hesitate to even guess what a valuation for a large sports club might cost.

Business valuations are also valid only to the specific use of the valuation. Thus a valuation done for estate purposes will not likely be valid for other purposes.

When I see an article that suggests that a particular team might be worth so much and that team is a privately owned company, unless there are extenuating circumstances, I am likely to take those numbers with a rather large grain of salt. And even when a billionaire buys a team and does his own due diligence with financial advisers, the next thing you know there is a quote from some financial expert who says the buyer overpaid by some huge sum like $200 Million. Then, years later you might hear from other analysts who describe the same purchase as a steal. Thus you can do all the due diligence and the numbers can still be off because it's the point at which buyer and seller come together that sets the actual value.

Internet Tells All?

In today's Internet world, there is no shortage of pundits on most everything and I suppose on some level that's all part of the fun for us sports fans. We can gripe about not only how much the players make when they don't do so well, but also how much the owner is collecting on his own investment. But in most cases we need to understand that much of what we are basing our opinions on, is not likely to be all that accurate. If someone states that a club is worth so much, you might want to determine how that value was calculated before "taking it to the bank."
Copyright 2012 by Sporting Chance Press
Sporting Chance Press is the publisher of The 10 Commandments of Baseball: An Affectionate Look at Joe McCarthy's Principles for Baseball (and Life), Public Bonehead, Private Hero: The Real Legacy of Baseball's Fred Merkle, Sports and Faith: Stories of the Devoted and the Devout, and Maddie Takes the Ice. You don't have to be a billionaire to buy one of these great books!

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