VALUATION OF A SPORTS FRANCHISE

Christina Vogel

Law & Valuation
Professor Palmiter
Spring, 1999

Abstract
Text of Paper



Abstract

Buying a sports franchise can cost up to several hundred million dollars, even though the business may not appear to be worth that much. Valuation of a sports franchise is not an exact science, and experts disagree on whether valuation should take into account the psychological value of owning a professional sports team.  This paper examines how a court valued the Chicago Bulls in a suit claiming interference with a contract to purchase the franchise.  Fishman v. Estate of Wirtz  (D. xx 1984).

ISSUES

  • Should only tangible assets be included in valuation of a sports franchise or should a court include the "ego" factor?
  • Why do buyers pay more for a franchise than accepted valuation methods suggest is fair market value?
RULES
  • The court in Fishman v. Estate of Wirtz focused on tangible assets, thus disregarding intangible factors relevant to buyers of sports franchises.
  • Buyers perceive they are buying more than a business and may pay more depending on how they might  exploit the franchise.
  • ANALYSIS

    In  Fishman v. Estate of Wirtz plaintiffs were members of Illinois Basketball, Inc. (IBI) and sued to recover damages from  Chicago Professional Sports Corporation (CPSC) for allegedly preventing IBI from purchasing the Chicago Bulls franchise in 1972.  The court found CPSC’s actions prevented IBI from closing the contract to acquire the Chicago Bulls, and the main issue was damages.

    IBI argued that the damages should be measured by the lost appreciation value of the Chicago Bulls franchise -- the difference between the appraised value of the assets of the Bulls in 1982 and CPSC’s costs of purchasing and operating the Bulls since 1972.  IBI also claimed it was entitled to the basketball assets of CPSC.

    CPSC argued that damages should be measured by the difference between the fair market value of Chicago Bulls stock in 1972 and the 1972 price IBI negotiated for the stock.

    The court chose IBI’s method, which required it to determine the financial benefits realized by CPSC while operating the Bulls franchise.  The court calculated CPSC's financial gain as the net value of CPSC’s business in 1982 minus the business value of the net amount of money contributed to CPSC by its shareholders.  The court then determined the present value of the Bulls’ assets. The court listed several factors to determine FMV, including the value indicated by actual sales of other NBA teams and trends in profits and losses both by the NBA and by the Bulls.  The court found five comparable sales of NBA teams, but didn’t rely exclusively on these, because of the differences between teams.  So it made adjustments for certain differences, such as pay TV, arena availability, and tax laws.  Also, the court chose not to include player contracts, because although valuable assets, each contract is unique and not comparable.  The court did not include the ego factor -- the owner's ego satisfaction and publicity of owning a major league sports franchise -- since a corporation could not enjoy such a benefit.  The court set 1982 FMV at $11,500,000 for the Bulls franchise.

    Some commments:

    • The court did not consider revenues generated by the Bulls, even though this is how other valuators arrive at franchise value.
    • The court disregarded the ego factor, even though numerous franchise owners hail it as a major motivation for their purchase.
    • The court determined FMV by looking at the team's balance sheet, even though some buyers are also interested in media distribtuion rights. 
    Other valuators look at franchise revenue -- including venue revenue, ticket revenue, merchandising, television fees, and more.  Financial World Magazine developed a methodology that looks at the team’s average revenues for the past 3 years and uses a multiplier to arrive at franchise value.  This multiplier takes into account many factors, such as the venue where the team plays, any debt which it has, and the market the teams plays in.  Forbes Magazine also based franchise value on revenues.  These magazines believe that revenue is a better measure of value than net operating income since operating expenses, such as from signing bonuses, can cause big swings in operating income.

    Even using these methods for valuing a franchise, purchasers seem willing to pay a significantly higher value than these methods suggest.  In particular, media companies are willing to pay more for a sports franchise so  they can own content as well as distribution, and thus have full control of all rights to the games (such as advertising and pay-per-view).  By cutting out middlemen, media buyers are willing to pay a higher price to gain the franchise.



    Text

    Introduction

    Do you want to buy a sports franchise?  Well, you better bring your checkbook and them some.  The pending sale of the Washington Redskins for a record $800 million, has raised the question, is a franchise really worth that kind of price.  How does someone interested in purchasing a franchise determine that $800 million is a fair price.  What does a purchaser look at when valuing a team.  Does the purchaser look at just the tangible assets or is there some intangible that makes a franchise worth $800 million.

    This paper will examine how some experts value a sports franchise and why, in some cases, a purchaser is willing to pay far above it value.


    A court’s approach to franchise valuation

    What factors would a court consider when valuing a franchise.  There are not many cases in which the valuation of a sports franchise was a core issue.  One case in which a court was forced to address the question of valuation was Fishman v. Estate of Wirtz, 594 F. Supp. 853 (1984).[1]In Fishman, the plaintiffs, members of Illinois Basketball, Inc. (“IBI”), brought suit to recover damages resulting from acts of the defendants, and Chicago Professional Sports Corporation’s (“CPSC”), which prevented IBI from purchasing the Chicago Bulls franchise in 1972.[2]

    The court ordered a bifurcation of the trial with respect to liability and damages.  According to the finding of facts, the CPSC’s actions prevented IBI from closing its contract to acquire the Chicago Bulls from the Rich group.  IBI was therefore prevented from realizing the benefits for which it had bargained.  The court also found that IBI was prevented from entering the business of presenting professional basketball exhibitions in the Chicago metropolitan area through ownership of the Chicago Bulls.  This prevented IBI from enjoying all the anticipated economic benefits.[3]  After unsuccessful settlement negotiations, the damages portion of the trial was conducted in 1983.

    IBI argued that damages should be measured by the “lost appreciation value” of the Chicago Bulls franchise, measured as of May 31, 1982.  According to IBI, these damages should be calculated using the “basic yardstick measure of damages.”  “Yardstick” essentially means the difference between the appraised value of the assets of the Chicago Bulls as of May 31, 1982, and CPSC’s costs and expenses of purchasing and operating the Bulls since 1972, with certain adjustments to reflect IBI’s hypothetical ownership of the Bulls.  Additionally, IBI argued that it was also entitled to the basketball assets of CPSC in exchange for $4.3 million, which represented the sum of CPSC’s purchase price for the stock of the Bulls and the liabilities that CPSC assumed in 1972.[4]  The defendants argued that damages should be measured by the lost benefit of the IBI’s bargain as of 1972, i.e. the difference between the fair market value of Chicago Bulls stock in 1972, and the 1972 purchase price IBI negotiated for the stock.[5]

    The court concluded that the best method of calculating damages was the method advocated by IBI.  To the end, the court decided that since CPSC had acquired the Bulls and operated the franchise in the same geographic market as IBI would have and had similar investment objectives as IBI, that it was appropriate to use the actual financial experience of CPSC.[6]  The calculation of damages entailed determining the financial benefits realized by CPSC while operating the Bulls franchise.  These benefits flow from (i) increasing the going concern value of the business and (ii) from the cash generated from operations.  These are the same sources the NBA owners attempt to exploit and are the same as IBI had intended to exploit.[7]

    According to the court, the best method to calculate the financial gain by CPSC from August, 1972 to May 31, 1982 was to determine the net value, market value of assets less liabilities, of CPSC’s business as May 31, 1982 minus the business value of the net amount of money contributed by CPSC by its shareholders, which is money contributed less money distributed.[8]

    The first step was to determine the present value of the Bulls assets.  IBI’s expert offered testimony that the fair market value of the assets was $15,000,000 in 1982.  In rebuttal, CPSC offered expert testimony that the fair market value of the assets was $8,250,000. In trying to determine the fair market value of the assets, the court listed a number of factors that it would consider.  The most important of the factors was the value indicated by actual sales of other NBA teams.  Other factors that court considered were: (1) the trend in value of NBA clubs as shown by past sales; (2) profits and losses of NBA clubs, and the trend of profits and losses; (3) profits and losses of the Bulls, and the trend of profits and losses; (4) testimony of NBA owners and other experts; (5) changes in tax laws making ownership more or less desirable; (6) recent developments in pay TV; (7) changes in availability of arenas; (8) changes in free agent rules.[9]  If the number of sales of NBA clubs is small and if the difference between the clubs are great, the listed factors will be given greater weight.[10]

    After listening to testimony from the both the IBI’s and CPSC’s experts, the court decided that there were five comparable sales of  NB teams.  IBI and CPSC greatly differed in their respective approach to the computation of the sales price.  IBI contended that sales price should be calculated by adding the cash, present value of notes taken by the seller and all liabilities assumed by the buyer to determine the value of the asset purchased.  CPSC contended that cash and present value of notes should be added but did not agree that the liabilities should be added.  They also argued that deferred compensation liabilities and other liabilities should be excluded, otherwise the value of the franchise could be increased by increasing liabilities.[11]

    The court agreed with IBI in that the player contracts, which were included by IBI as deferred compensation, were valuable assets.  However, the court did not agree with IBI’s assumption that the asset values could be used directly to calculate the value of Bulls.  This was primarily due to the unique structure of player contracts, which may not be comparable to other player contracts of otherwise reasonably comparable team sales.  Therefore, in comparing the sale of the Bulls to the other five NBA franchise sales, the court eliminated the deferred compensation.[12]

    Although the court was able to find sales of comparable clubs, it decided not to rely exclusively on these sales.  The court felt that there was enough of a difference between the teams to require it look at the other factors listed previously in determining the value of the Bulls.Most significantly, the court made an upward adjustment for pay TV, differences in arena availability, and downward adjustments for changes in the tax law and free agent rules.[13]

    After careful consideration of all the evidence presented by both IBI and CPSC, the court concluded that the value ofthe basketball assets of the Bulls was $11,500,000.  This value did not include the player contracts.[14]

    One factor that the court did not include in its calculation of the value of the Bulls franchise was the “ego” factor.  The ego factor refers ego satisfaction and publicity inherent in the ownership of a major league sports franchise. During the trial, various NBA owners testified as the existence of the ego factor.William Putnam, owner of the Atlanta Hawks at the time, testified that the ego factor, not financial or tax considerations, was the most important factor in the value of the a franchise.[15]  IBI’s expert testified that the “pride of ownership” or psychological factor overshadowed economic considerations of ownership.[16]  CPSC’s expert also testified that since the Bulls, at that time, were not economically viable, an individual is really paying for the emotional aspect of joining the NBA.[17]

    Despite this testimony, the court concluded that since IBI was a corporation, it could not enjoy the “ego” satisfaction.  Therefore, the court did not consider the ego factor in the valuation of the Bulls franchise. The court’s exclusion of the ego factor may be questionable.  Although a corporation, such as IBI, may not be able to enjoy the ego satisfaction, at the very least the majority shareholders of IBI certainly could have enjoyed the ego satisfaction.  As may be evident from later sales in other sports, such as football and baseball, this ego factor may be one the primary reason that an individual would purchase a franchise that may be doing poorly from an economic standpoint.

    Another point in reviewing the court’s method of valuing the Bulls franchise, is the it gave very little consideration to the Bulls revenues.  The primary focus of its valuation was to try to determine the value of the Bulls balance sheet.  Generally, items of the balance sheet are recorded on a historical cost basis and do not reflect the current values.  In this case the court, by using recent sales of comparable NBA franchise, tried to value the balance sheet at the most recent fair market value.  However, it seems questionable as to whether the balance sheet was the best indicator of the franchise’s value, or would revenues or some other aspect of the franchise a better indicator.


    Valuation of a Sports Franchise - An Updated Approach

    Instead of applying a balance sheet approach to valuing a sports franchise, perhaps a better method would be to look at a franchise’s revenues.  In 1997, after seven years of research, including speaking with consultants, bankers, league executives, union representatives, media representatives, venue personnel and, in some instances, team owners, Financial World Magazine (“FW”) complied an extensive database on each teams revenues, expenses, venue and debt.[18]  Using this information, FW has developed a methodology for valuing a sports franchise.  This methodology has gained FW a reputation as an expert on sports franchise valuation.

     Using FW’s methodology, franchise values are calculated using the team’s average revenues for the past three years.  A multiple is applied to the average revenue to arrive at the franchise value.  The multiple represents such factors as the venue the in which the team plays ( including whether the team has favorable lease terms), the debt the team is carrying, and the market the team is playing in.  A team with a favorable lease and not too much debt are given the highest multiples.[19]

    FW is not the only financial magazine which believes that a teams’ revenues and it venue are the best indicator of a team’s value.  In its December, 1998 issue, Forbes Magazine examined the same question, how do you value a sport franchise.[20]  In their analysis, Forbes also based franchise value on revenues.

    The first question, why use revenues rather than operating income.  Both FW and Forbes believe that revenues are a better indicator of long-term values than operating income.  Items such as signing bonuses can cause big swings in operating expenses which can reduce operating income, but not necessarily long-term value.  For example, in 1997, the Detroit Lions paid out $20 million upfront to sign Barry Sanders and Scott Mitchell to multiyear contracts.  As a result of these payments, the Lions reported a $21 million loss for the 1997 year.  Using operating income to value the Lions would have presented a distorted picture.[21]
    If revenues are going to be the cornerstone in valuing a sport franchise, it is important to understand the different types of revenue.  Franchise revenues may include venue revenue (suites, concession, parking and advertising), ticket revenue, venue naming rights, team merchandising and television fees. Owners generally exclude venue naming rights, advertising, luxury suites and team merchandise revenues, which is why some owners are able to cry poor.  Although these revenues are not as big a piece of the revenue pie as ticket sales or broadcast fees, they can be very profitable.  Approximately one-third of the sport franchises have corporate sponsorship.[22]  In addition to corporate sponsorship, venue naming rights can add a significant amount of revenue to a sport franchise.  For example, in Philadelphia, Corestate Bank, now First Union, is paying $40 million for the 29-year naming-right agreement for the First Union Center, home of the Philadelphia 76ers basketball team and the Philadelphia Flyers hockey team.[23]  In calculating franchise values, both FW and Forbes included revenue from continuing operations in their calculations.  This would exclude proceeds from the sale of personal seat licenses, and entry fees paid by expansion teams.
    With an accepted methodology for valuing sports franchises, why then would a purchaser pay up to 97% more than the value of a franchise.  Is this the ego factor at work?  Not necessarily.  To some individuals, like Rupert Murdoch, a sports franchise represents more than just the purchase of a team.  In 1998, Murdoch purchased the Los Angeles Dodgers from the O’Malley family for $311 million.  According to FW, the Dodgers 1997 value was $180, Forbes had valued the Dodgers at $236 million in 1998.  Why then would Murdoch pay so much above the franchise’s value.  Is the ego factor that valuable or was FW and Forbes calculations that far off.  Essentially, the problem wasn’t with the methodology used by both FW and Forbes.  The problem lies more with what was being valued, in this case, a baseball organization, a stadium on a parcel of land and a training complex with some undeveloped land in Vero Beach Florida.  However, to Murdoch, chairman of News Corp, which owns Fox Networks, the Dodgers represent much more.[24]
    In the Dodgers, Murdoch gained a guaranteed audience, at least 162 days a year, in Southern California for his cable sports TV station.  Additionally, there is the possibility that the Dodgers brand can be exploited by his other sports shows and even his Fox movie operations.  There are also expectations that the Dodgers’ surplus land in Los Angeles may become home to a football stadium and a new NFL team.  It is also possible that the undeveloped parcel of land in Florida could be used for the development of a theme park for 20th Century-Fox and Fox Sports.  These are some of the reasons why the Dodgers were so valuable to Murdoch and why he was willing to up to 97% more than the current value of the team.[25]

    Murdoch isn’t the first or only media company to own a sports franchise.  Others include Cablevision, which owns the New Knicks and New York Rangers, Comcast Corporation, which owns interests in the Philadelphia Flyers and 76ers, The Tribune, which owns the Chicago Cubs, Walt Disney, which owns the Anaheim Angles and the Mighty Ducks and of course Ted Turner, owner of the Atlanta Braves.[26]  What does the purchase of a sports franchise give these media companies.  It allows them to own content as well as distribution. By owning a team outright, these companies can, in most instances, control all the rights to games without paying someone for them.  In essence, they are cutting out the middleman.  This is the same logic that has pushed networks to create their own TV shows.[27]

    What else is it about sports franchises that have media companies bidding far above the franchise’s actual calculated value.  In sports programming, companies have a fail-safe tool for holding audiences captive for predicable periods of time.  More specifically, sports programming allows media companies to hold the attention of 18-to-49 year old males, the rich core of television demographics.  Advertisers will pay a premium to reach this group of consumers.  Additionally, sports viewers are also the most likely to pay for see games on a pay-per-view basis.[28]

    Considering these factors, is it really a surprise that Murdoch bid $ 1 million for England premier soccer team, Manchester United.  Murdoch’s bid was a 50% premium above the price Manchester United dictated in the stock market before his bid was made.  Murdoch isn’t really interested in the sport of soccer.  His goal is to own Britain’s premier team for its broadcast rights, to pipe through his broadcasting system, charging fans whatever he wants.  He can also use the games as an opportunity to promote other programming in a manner similar to that in which he had Bart Simpson promote other Fox shows during US football games.[29]  It is widely thought that Murdoch would love to make many of Manchester United’s games pay-per-view events.  Many industry watchers believe that with the popularity of Manchester United, pay-per-view events would be like coining money.  It is also widely thought that Murdoch’s purchase of Manchester is only the beginning of an even greater plan.  Suspicions are that Murdoch would like to use his ownership of Manchester to gain leverage to organize a pan-European “super” soccer league.[30]


    What Now?

    So the question remains, how do you value a sports franchise.  As the old saying goes, its worth is whatever someone is willing to pay for it.  But this value is likely to be different for each purchaser.  A purchaser like Murdoch is likely to value the franchise higher because he has many ways to exploit its value.  Is the methodology used by both FW and Forbes, relying primarily on revenues, flawed or is the best method to value the balance sheet as the court did in Fishman.  The methodology advanced by both FW and Forbes is generally accepted as the best in terms of valuing a sports franchise. Although the market is part of the multiple used by FW and Forbes, it is only a small part of the calculation. As a result, the market factor may not be given enough weight in the value calculation.  This methodology probably works fine for a team such as the Montreal Expos, who play in smaller market.  But for teams, such as the Dodgers, which play in a much bigger market, it really doesn’t tell the true picture.  Franchises in bigger markets will commanded higher prices because the larger market will give the owners more avenues through which they can exploit the franchise.  To really ascertain the true value of a franchise, the market factor should be given more weight in the multiple or use maybe use a separate multiple for the market factor.  Another factor to consider may be the purchaser.  For someone such as Murdoch, the value of a franchise may be higher than the value to an individual owner, such as billionaire businessman Alfred Lerner who recently paid $530 million for the NFL expansion team in Cleveland, or the value calculated through the use of formula.  Media companies view sport franchises as a valuable part of their business.For this reason, they are willing to pay far above the current value.


    The most recent sale - The Washington Redskins
    The purchase of the Redskins is a stock sale of Jack Kent Cooke, Inc, which is the holding company for the assets of the late Jack Kent Cooke.  In 1998, the Minnesota Vikings were sold in a similar stock deal for $230 million.  Some experts have stated that if the Redskins sale was an asset transaction, the sale price would have been valued at approximately $1 billion.  In 1998, billionaire Alfred Lerner paid $530 million for the Cleveland Browns in an asset transaction.  As is evident, the sale prices for sports franchises are all over the board.

    So, are the Washington Redskins really worth $800 million.According to FW, the Redskins franchise value isn’t $800 million.  FW valued the Redskins at $200 million in 1997, representing a 32% change in value from the two previous years. Applying a 32% growth for the years 1998 and 1999 would result in an approximate value of $348 million.  Why then would a group pay $800 million for the franchise.  One of the reasons why the sale price of the team may be so high is that it is the result of an auction.  Jack Kent Cooke, the owner of the Redskins until his death in 1997, directed in his will that his estate be liquidated and the proceeds placed in a foundation for the distribution of scholarship to graduate students.  The trustees of his estate held an auction to sell the team.  The winning bid, $800 million.  Other factors to consider is that sale includes the two-year old stadium, with a seating capacity of 80,116, and the cash flow of the team is approximately $55 million per year before taxes and debt, one of the highest in the NFL.[31]  Are any of the factors really the reason the why the Redskins sale price is $800 million.  Or could it be an intangible reason, such as the fact the lead investor, Daniel Snyder has been a lifelong fan of the Redskins and as a child growing up in Bethesda, Maryland, wore a Redskins belt buckle to school.  For Snyder, purchasing the Redskins is dream come true.[32]  Can you really put a price tag on a dream?


    Conclusion

    What’s the best why to value a sports franchise.  Despite reliable methodologies, recent sales of sport franchises far exceed values as well as people’s expectations.  The sale of the Redskins is only the latest of these sales.  The bottom line, a franchise is worth whatever a purchaser is willing to pay.  For some purchasers like Rupert Murdoch, who are looking to enhance their already existing business holdings and Daniel Snyder, who is realizing a dream, a franchise is more worth than can be valued by any methodology.

     

    [1]Fishman v. Estate of Wirtz, 594 F. Supp. 853 (1984).
    [2]  Id.
    [3]  Id. at 857.
    [4]  Id.
    [5]  Id.
    [6]  Id.
    [7]  Id. at 860.
    [8]  Id. at 861.
    [9]  Id. at 861.
    [10]  Id.
    [11]  Id. at 862.
    [12]  Id. at 863.
    [13]  Id. at 872.
    [14]  Id.
    [15]  Id. at 859.
    [16]  Id.
    [17]  Id.
    [18]  Michael K. Ozanian, Valuation, FINANCIAL WORLD, June 17, 1997, at 46.
    19]  Id.
    [20]  Michael K. Ozanian, Sports Team Valuation: Methodology, FORBES, Dec. 14, 1998, at 124.
    [21]  Id.
    [22]  Michael K. Ozanian, Selective Accounting, FORBES, Dec. 14, 1998.
    [23]  Jennifer Fischl, Private Parts, FINANCIAL WORLD, June 17, 1997.
    [24]  Michael Santoli, King of Sports: Why Rupert Murdoch is paying so much for premier athletic teams, BARRONS, Sept. 21, 1998.
    [25]  Id.
    [26]  Id.
    [27]  Id.
    [28]  Id.
    [29]  Id.
    [30] Id.
    [31] Thomas Heath, Milstein, Snyder Buy Redskins for About $800M, The Washington Post, January 11, 1999.
    [32] Peter Behr, Snyder: A “Killer” Salesman’s Dream Come True, The Washington Post, January 12, 1999.