Comparing Business Valuations to NFL Franchises by Vital Miranda, CVA, ABV
Posted on September 18, 2023
by
Vital Miranda
With football season underway, the NFL and its franchises are gearing up for another display of skill and competition. However, beyond the game itself, the financial landscape surrounding the NFL continues to evolve.
With each passing season, NFL teams have seen their values increase to unprecedented levels. For instance, in July 2023, NFL owners unanimously approved the sale of the Washington Commanders for $6.05 billion. This was the latest NFL team transaction since the Denver Broncos sale in 2022 for a purchase price of $4.65 billion. Meanwhile, Forbes listed the Dallas Cowboys as the most valuable sports franchise in 2022 at $8.0 billion. However, since NFL franchises are not publicly traded, how do teams determine their trading values? Generally, valuing a sports franchise relies on many of the same fundamental approaches as valuing any other privately held operating company.
Income Approach
The income approach to valuations converts a stream of cash flows into an indicator of value. With the discounted cash flow (DCF) method under the income approach, an identified level of cash flow is estimated for a finite period of years. Annual estimated cash flows and a terminal value (i.e., the estimated value of the company at the end of the projection period) are then discounted to present value at an appropriate discount rate to reflect the time value of money as well as the associated business and economic risks of the company.
Market Approach
The market approach estimates value by comparing the subject company to sales of businesses in the same or similar industries. With the guideline transaction method (GT Method) under the market approach, a sports franchise looks at other team acquisitions completed within a set period of years to determine the purchase price ratios to other financial variables, such as revenue, EBITDA, cash flow and book value. Once the appropriate multiples are determined, they are applied to operating statistics for the subject company/franchise to indicate value.
Other Considerations
Whether applying the income approach or the market approach to the valuation of an NFL sports franchise, analysts must look at additional factors that may impact the risk of the investment and future cash flows. These factors may include the following.
Broadcast and Media Rights
One of the main revenue drivers of NFL franchises is the league’s broadcast and media rights deals. Not only do these agreements provide cash flows, but they also help to ensure a widespread and loyal audience for the league.
Fan Engagement and Global Reach
Fan engagement and team brand awareness can play significant roles in increasing the value of a franchise. For instance, consider that the Dallas Cowboys is one of the most recognized sports franchises in the world and is consequently one of the most valuable at a whopping valuation of $8.0 billion.
Sponsorships and Partnerships
NFL teams benefit from a diverse range of sponsorships with various brands and businesses. From jersey sponsors to exclusive naming rights for stadiums, these collaborations can be additional sources of revenue for teams.
Stadium Infrastructure and Offseason Events
Many NFL franchises have invested in state-of-the-art stadiums that offer enhanced fan experiences and various revenue-generating opportunities. Such upgrades attract more fans and create additional revenue streams through premium ticket sales and event hosting. For example, many teams host concerts in their home stadium during the offseason.
Player Acquisition and Team Performance
Player salaries are one of the primary expenses of NFL franchises. Star players can increase fan engagement and help teams reach the playoffs, thereby creating significant income for each post-season game.
Scarcity and Exclusivity
With only 32 teams in the league, NFL franchise ownership comes with a sense of prestige. Limited supply also creates a competitive environment for potential investors, whereby team acquisition values are driven by supply/demand determinants rather than cash flow fundamentals. This could lead to negative risk premiums in the discount rate used in the income approach or higher than usual trading multiples under the market approach.
In determining the value of privately held businesses, such as an NFL franchise, professionals should stay up to date on the ever-changing landscape of valuation as well as the industry of the company being valued. The Forensic Advisory Services practice with Berkowitz Pollack Brant CPAs + Advisors has a diverse team of professionals who can assist in the valuation of privately held businesses across multiple industries.
About the Author: Vital Miranda, CVA, ABV, is a senior manager in the Forensic Advisory Services practice of Berkowitz Pollack Brant, where he provides business valuation services for matters involving estate and gift taxation, financial reporting, employee stock ownership plans and litigation. He can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
Sources
https://www.espn.com/nfl/story/_/id/38043528/nfl-owners-approve-605b-sale-commanders-harris-group
https://www.espn.com/nfl/story/_/id/34060289/most-expensive-sports-franchise-sales
https://www.forbes.com/sites/mikeozanian/2022/09/08/the-worlds-50-most-valuable-sports-teams-2022/?sh=5c64d9ff385c
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