Research Paper: Franchise Valuation

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Research Paper: Franchise Valuation

Analysis of the economic determinants of professional sports franchise value

Professional sports are great business opportunities for investors. However, it is prudent to acknowledge the economic value of any professional sports franchise before an investment decision is made. The advancing activities in professional sports have induced numerous scholarly researches on the economic determinants of professional sports franchise values. Most professional sports teams are privately owned and do not publish annual audited financial data to the public (Reddy, Stam, & Agrell, 2015). Valuation of a professional sports franchise is further complicated by the fact that sports deal in intangible assets whose value cannot be easily determined. The involvement of intangible assets in sports franchises makes a valuation, and future cash flow predictions using the replacement and reproduction cost approaches difficult (Humphreys, & Nowak, 2015). Some of these intangible entities are relationships with fans, broadcasting agreements, venue agreements, and player contracts. The broadcasting revenue is a determinant because it dictates the number of spectators attracted by the sport. An increase in the broadcasting revenue emanates from advancement in the popularity of a team that attracts more broadcasting agencies (Humphreys, & Nowak, 2015). Therefore, sports frequently televised have high franchise values due to an increase in the number of television contracts. However, there are principal economic determinants that can be used to value a sports franchise.

The hedonic approach uses a comparative model that relates sports franchise values to the observable characteristics of the leagues and the sports market they play in to determine franchise value variations. Leagues that attract investors include; the National Football League (NFL), National Basket Association (NBA), National Hockey League (NHL), and Major League Baseball (MLB) (Humphreys, & Nowak, 2015). The professional leagues NFL, NBA, MLB, and NHL, can be valued by the venue, ticket price, concession sales, broadcasting, revenue, attendance, and the performance (Forbes, 2015). The disposable income of residents and population of the region of location of the team fetched higher franchise values (Humphreys, & Nowak, 2015). Similarly, the performance of teams enabling them to finish in the final standings and availability of new stadiums increased the professional sports franchises values. The capability to frequently play in private stadiums has positive hedonic effects on the franchise value of a team. Private stadiums have high charging rates for entry ticket fees. Therefore, the revenue of teams participating in leagues played in private stadiums shoots up immensely. According to the Forbes, revenue is an important determinant of the franchise value of professional sport. The NFL, NBA, MLB, and NHL leagues are ranked based on their aggregate annual revenue. For instance, the Real Madrid had the highest revenue in all of the sports at $ 746 million in 2014, and this increased its franchise value (Forbes, 2015).

The demographic factors, as well as the franchise age, are important determinants of sports franchise value. The size of the population dictates market size while market income would determine the value of a particular franchise on its location. The characteristics of the sports facilities such as the age and physical appearance also affect franchise value. The age of the facility contributes negatively to the franchise value while the age of the franchise increases the franchise value because of the trust attributed to the number of previous successes. There has been an explosion in new facility construction in professional sports since the early 1990s (Humphreys, & Nowak, 2015). The importance of new facilities can be realized in Forbes report that asserts that it was a hard economic hit for Real Madrid when the court shot down the club's plan to expand its stadium (Forbes, 2015). The emphasis on new facilities is important to heighten the experiences of fans and cheering squads when the sight lines, seats, and amenities are improved. The main economic variable affecting the construction of new stadiums is the prices of construction materials (Forbes, 2015). However, the public usually supports such projects to enhance their experiences. Furthermore, the incentives offered by the government are indispensable. Therefore, franchise value is closely related to the on-field success of a team. The more the final winnings a team makes, the more its franchise value increases.

Franchise Valuation of the Nation Football League, NFL: Dallas Cowboys

Nation Football League is one of the most valuable leagues in North America. More specifically, the Dallas Cowboys has markedly contributed to the success of NFL. Consequently, the Dallas Cowboys is the most valuable sports franchise in the world with a value of $4 billion (Patoski, 2012). The observable characteristics considered in ranking Dallas Cowboys the first franchise globally include and not limited to its championships; the price paid, revenue, operating income, and revenue per fan.

According to the Forbes report, Dallas Cowboys has a total of five championships that has immensely increased its value. The championships of five increase the probability of Dallas Cowboys to win in the succeeding games. Fans like to be spectators to unpredictable games between popular teams. The high Championships of Dallas Cowboys have ensured its popularity in the local region as well as in the global world of sports. Therefore, Dallas Cowboys is likely to draw the attention of multitudes and hence increasing the income earned when sports activities involving the team are organized. Smith further observed that an additional championship wins in the history of a team increases its revenue by 4.6% (Humphreys, & Nowak, 2015). The price paid of $ 150 million is enough to acquire the seat and large stadium services required to contain the fans. The $ 150 million deal ensures the franchise fetches premium seats and premium stadiums that can contain a maximum number of attendances. Also, the Dallas Cowboys have revenue of $620 million that is a record for a United States sports team. The Dallas Cowboys' revenues emanate from ticket sales, sponsors, concessions, non-football events, and luxury suites. The increase in broadcasting revenue also portrays that the Dallas Cowboys team is more popular in the social media and more broadcasting agencies pay to broadcast their games. Therefore, the television contracts will also increase.

The profitability of Dallas Cowboys is also anchored on its operating income that is way above the average operating incomes of other Nation Football League members. According to the Forbes’ report on 2014 leagues, the Dallas Cowboys team’s operating income was $ 270 million while the average Nation Football League operating income was $ 76 million (Forbes, 2015). Therefore, the earnings from the Dallas Cowboys are better compared to other teams. The Dallas Cowboys team also has a debt of 5% only. The low debt attracts franchise investors because they will have less income being used to settle the debts. Closer franchise attracting investors include New England Patriots, Washington Redskins, and the New York Giants that have 7%, 8%, and 18% debt respectively (Forbes, 2015). The Dallas Cowboys use $ 148 million for player expenses that translate into better salaries for the players (Forbes, 2015). Therefore, the quality of the contracted players for the Dallas Cowboys team is higher compared to low paying franchises like Dallas Mavericks that spent $ 82 million on players. The players are highly competent in sports and increase the chances of the franchise to win another championship. The high remuneration scheme also enables the franchise to attract, retain, and train the best players worldwide.

Dallas Cowboys charge $94 million gate-fees that are high enough to enable the franchise to generate more revenue from the charges. Dallas Cowboys also have a high Wins-to-player cost ratio of: 175 that show that they have at least 75% more victories per dollar spent on its players than an average team. Therefore, spending on a Dallas Cowboys player is more profitable, efficient, and cost-effective. The Dallas Cowboys franchise also fetches high revenue because it creates more revenue per fan compared to other teams. The franchise earns $ 59 per fan while New York Yankees and Los Angeles Lakers get $ 53 and $ 45 per fan respectively (Forbes, 2015). Dallas Cowboys also have a metro area population of 6.9 million, third largest NFL metro area population. This population size is above the average population of other NFL teams since Green Bay has 0.3 million while New York has a population of 19.0 million. This high metro area population ensures Dallas Cowboys have a sustainable sports market with more fans. The more viewers will popularize the franchise and enable it to make more money.

A combination of all these factors demonstrates that the Dallas Cowboys franchise is a highly profitable investment that will not put investor under the pressure of paying debts. The players are effective, and the probability of winning championships is high. It ranks top in the global sports market due to its high revenue of $ 620 million.