Financial Characteristics and Challenges Sport Finance

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Financial Characteristics and ChallengesSport
Finance
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Revenues Expenditures

• In college sport
• Costs exceed revenues for most schools
• Student fees
• Fundraising Needs
• Tuition costs
• Title IX
• Revenue Generation vs. Cost Containment

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Revenues Expenditures

• In college sport
• Are sources being maximized?
• Is spending being managed well?
• College Athletics Arms Race
• The spending gap between rich and poor athletic
  programs appears to be growing
  
• Spending more is not necessarily linked to
  greater profits or more wins in subsequent years.

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Title IX

• Does gender equity cost smaller mens programs?
• Funding for mens programs has risen since Title
  IX
  
• Football Basketball cost much.
• Franklin vs. Gwinnet Public Schools
• Grove City vs. Bell

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Professional Sports

• Spectacular growth over the last 20 years
• Costs increasing due to increasing spending
• Player Salaries
• Facilities Debt

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Scope of Pro Sports

• Sports leagues possess many unique
  characteristics that distinguish them from any
  other industry
  
• How they operate
• How they are allowed to exist
• Few people do not consume the products of the
  professional sports industry in some way.
  
• Many other industries depend upon pro sports for
  their success.
  
• Revenue and profit figures are difficult to find
  for professional sports teams since they are
  largely privately owned firms
  
• Baseball annual revenues of 1.35 billion for the
  1990 season, growing to 2.22 billion in the 1997
  season.

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Definition of Professional Sports

• Sports in which the participants are paid for
  playing, as opposed to amateur athletes.
  
• Types of Payment
• Salary
• Bonuses
• Reimbursement for expenses
• Endorsement fees

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Professionalism

• Popularity has increased through a combination of
  developments
  
• mass media exposure
• increased leisure time for audiences
• Major advantages of professional sport
• increasing the level of proficiency of athletes
• boosting the popularity of certain sports.
• Major disadvantages of professional sport
• diminishes the central ethos of sport, i.e. the
  ethos of being done for its own sake and for pure
  enjoyment, rather than as a means to earning a
  living
• emphasis on outcome, not effort.

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Professional Sports

• Professional sports involves paid athletes,
  competing live, in a sponsored event, in front of
  paying spectators.
  
• Revenue sources
• Gate
• Luxury seating, etc.
• Radio and television broadcasting and cable
• Local TV
• National TV
• Local Radio
• Sponsorship
• Naming rights
• Signage
• Domestic and international sale of licensed
  products (apparel, videos, books, memorabilia

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The Bottom Line

• Sport managers must now be entrepreneurs
• New sources of funding must be found
• Better financial management skills are needed

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Financial Management Overview

• What is financial management?
• Economic forecasting
• Financial planning
• Review of internal and external constraints
• Other?
• What are the biggest sport finance issues?
• Valuation of sport teams
• Financing of sport operations
• Mergers of sport businesses
• Changes in sport sponsorship

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Valuation of Sport Teams

• Values can be affected by numerous variables
• Macro Variables
• What is included in the deal?
• Is it a new or existing franchise?
• What is the leagues financial strength?
• External variables that affect your ability to
  manage the team finances
  
• Micro Variables
• Salary cap regulations
• Loyalty of fan base
• Television broadcast contracts
• Profit margin and total assets
• Internal variables that affect your ability to
  manage the team finances

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Why is valuation important?

• Acquisitions price setting
• Borrowing money
• Expansion fees based on market values of existing
  teams
  
• Forbes publishes valuations of all clubs of the 4
  major leagues and leading soccer clubs each year

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Goldman Sachs Valuation Elements

• Strategic Position
• Historic Team Performance
• Brand Equity and Fan Loyalty
• Economics
• Team Operating Performance
• League Economics
• Upside Opportunities
• Comparable Entity Valuations
• Recent Transactions and Expansion Franchises
• Ownership Issues
• Potential Buyer Universe
• League Rules Restrictions
• Tax Consideration
• Rights of First Refusal
• Trophy Status

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Valuation Methods

• Public Markets
• Stock are a strong reflector of market value
• Acquisition Market
• Recent transactions display high value
• Important to know what was included in obtaining
  the price (can get muddy)
  
• Financial Statement Information
• Difficult sometimes to interpret
• For example, balance sheet value of a player
  contract may not reflect the players true value
  
• Discounted Cash Flow
• Forecast expected future cash flows of an asset

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Profitability as a Measure

• Negotiations of leagues with players or unions
• Negotiations between teams and cities over public
  financing for stadium development
  
• Always involves analysis of profitability of a
  club with private debt scenarios
  
• Ticket price increases and public relations
  management

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Financing of Sport Operations

• How does an organization raise money to pay for
  its operations?
  
• Revenue Sources
• Lending Vehicles
• Asset-backed securities (promissory note with
  collateral)
  
• Bonds
• Public stock offerings
• Government / municipal support

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Mergers of Sport Businesses

• Industry consolidations
• Sport Agencies
• Clear Channel ? SFX ? Falk Associates
• Interpublic Group ? Advantage International
• Broadcasting
• Disney ? ABC / ESPN
• AOL ? Time Warner
• Shoe Apparel
• Nike ? Many small companies
• Adidas ? Reebok