Sports Finance Essentials: Valuation, Economic Impact, and Funding

Posted on Jun 5, 2025 in Business Administration and Management (BAM)

Sports Finance and Budgeting Fundamentals

Budgeting Systems in Sport

Preferred Budgeting in Sport

Question: Which form of budgeting is preferred in sport, as it begins with a floor of expenses while also using cost behavior and cost identification techniques?

Answer: Modified zero-based budgeting.

Program Planning Budgeting Systems

Question: This budgeting system is associated with output budgeting, in which specific goals and objectives form the framework for a strategic, goal-oriented budgeting process.

Answer: Program planning budgeting systems.

Public Finance and Bonds

Revenue Bonds in Public Finance

Question: Which type of bond is a form of public finance paid off solely from specific, well-defined sources such as hotel taxes, ticket taxes, or other sources of public funding?

Answer: Revenue bonds.

General Obligation Bonds for Facility Financing

Question: Historically, which bond was the most common method used for facility financing?

Answer: General obligation bonds.

Understanding Sin Taxes

Question: Which items are typically subject to sin taxes?

Answer: Alcohol and cigarettes.

Equity and Efficiency Principles in Public Finance

Question: Define the equity principle and the efficiency principle in public finance.

Answer:

  • Equity: Refers to the fairness of a tax.
    • Vertical Equity: As income increases, so does the tax burden.
    • Horizontal Equity: Individuals with similar income pay the same tax.
  • Efficiency: Refers to the simplicity of the tax, its ability to be collected, difficulty to avoid, and low cost of collection.

Capital Budgeting Essentials

Payback Period Definition

Question: What is the number of years required to recover the initial capital investment of an organization?

Answer: Payback period.

Net Present Value (NPV) Method

Question: Which discounted cash flow method compares the present value of a project’s future cash flows to its initial costs?

Answer: Net present value.

Modified Internal Rate of Return (MIRR)

Question: As facility projects can often lead to non-normal cash flows, which method is recommended when developing a capital budget?

Answer: Modified internal rate of return.

Final Step in Capital Budgeting

Question: What is the final step in the capital budgeting process?

Answer: Conduct a post-audit analysis.

Defining Capital Budgeting

Question: Define capital budgeting.

Answer: Capital budgeting is the process of evaluating, comparing, and selecting capital projects to achieve the best return on investment over time.

Capital Expenditure Explained

Question: What is a capital expenditure?

Answer: A capital expenditure is the use of funds to acquire capital assets that will help the organization earn future revenues or reduce future costs.

Capital Budgeting Process Steps

Question: What are the steps in the capital budgeting process?

Answer: The process of capital budgeting involves four key steps:

  1. Determine the initial cost of the project.
  2. Determine the incremental cash flow.
  3. Select the capital budgeting method.
  4. Conduct a post-audit analysis.

Capital Budgeting Decision Rules (NPV & IRR)

Question: What are the decision rules for Net Present Value (NPV) and Internal Rate of Return (IRR) in capital budgeting?

Answer:

  • Net Present Value (NPV):
    • NPV > 0: Accept the project.
    • NPV < 0: Reject the project.
  • Internal Rate of Return (IRR):
    • IRR > Discount Rate: Accept the project.
    • IRR < Discount Rate: Reject the project.

Discount Value Model Calculation (NPV)

Question: Create a discount value model (calculate the NPV) for an organization with net cash flows of $150,000 in year 1, $160,000 in year 2, $175,000 in year 3, $175,000 in year 4, and $180,000 in year 5. The discount rate is 10%, and the perpetual growth rate is 3%. The NPV should include the terminal value.

Formulas:

  • Present Value (PV) = Cash Flow / (1 + Discount Rate) ^ Year
  • Cash Flow of Extra Year (CFn+1) = Last Year’s Cash Flow (CFn) * (1 + Growth Rate)
  • Terminal Value (TV) = CFn+1 / (Discount Rate – Growth Rate)
  • Net Present Value (NPV) = Sum of PVs + PV of Terminal Value

Steps for Calculation:

  1. Calculate the Present Value for each year’s cash flow (Years 1-5).
  2. Calculate the Cash Flow for the year after the last projected year (Year 6) using the perpetual growth rate.
  3. Calculate the Terminal Value using the Cash Flow of Year 6, discount rate, and growth rate.
  4. Calculate the Present Value of the Terminal Value.
  5. Sum all Present Values (Years 1-5) and the Present Value of the Terminal Value to get the total NPV.

Economic Impact Analysis in Sports

Visitor Classification for Economic Impact

Casual Visitor Definition

Question: This type of individual comes to a community for one event while also attending a basketball game. If a university is performing an economic impact study of its basketball team, how would this individual be classified?

Answer: Casual visitor.

Time-Switcher Visitor Definition

Question: This type of individual changes the time he or she is coming to a community to coincide with an event being held in that community (e.g., a University of New Haven basketball game). If the university is performing an economic impact study of its basketball team, how would this individual be classified?

Answer: Time-switcher.

Economic Impact of Casual Visitors and Time-Switchers

Question: Of the following statements regarding economic impact, which is true?

Answer: Incremental spending of casual visitors and time-switchers should be counted in an economic impact analysis.

Identifying Time-Switchers in Surveys

Question: When constructing a survey to measure direct spending at an event, the following question is designed to determine the type of visitor: “Does this visit to Houston replace any other past/future visit to this area?”

Answer: This question identifies a time-switcher.

Multiplier Effect and Overestimations

Measuring the Multiplier Effect

Question: What does the multiplier effect measure?

Answer: Both indirect economic impacts and induced economic impacts.

Accounting for Reverse Time-Switchers

Question: Overestimations of economic impact occur because most analyses do not account for __________, those local residents who leave town during the event period because of the event.

Answer: Reverse time-switchers.

Displaced Spending Defined

Question: Define displaced spending.

Answer: Displaced spending is spending by local residents on an event that would have been spent elsewhere in the local economy if the event had not occurred.

Core Principles of Economic Impact

Defining Economic Impact

Question: What is economic impact?

Answer: Economic impact is the net economic change in a host community resulting from spending attributed to an event or facility.

Most Important Economic Impact Principle

Question: What is the most important principle regarding economic impact?

Answer: The most important principle is to measure new economic benefits that accrue to a region that would not occur, or would not have occurred, without the project or event.

Sports Facility Financing and Benefits

Benefits of New Stadium Construction

Team Benefits from New Stadiums

Question: How do teams benefit from the construction of a new stadium?

Answer: Teams benefit from increased revenues through:

  • Tickets (due to increased capacity and higher ticket prices)
  • Luxury suites
  • PSLs (Personal Seat Licenses)
  • Naming rights
  • Sponsorships
  • Concessions
  • Merchandise
  • A rise in franchise value

League Benefits from New Stadiums

Question: How do leagues benefit from the construction of a new stadium?

Answer: Leagues, and not just their individual teams, desire new stadium construction because all members benefit through revenue sharing of increased ticket sales.

Fan Benefits from New Stadiums

Question: How do fans benefit from the construction of a new stadium?

Answer: Sport fans gain from new stadiums with enhanced offerings and better amenities, such as improved restrooms and food options. Although ticket prices typically increase in new stadiums, more fans attend games in these modern facilities.

City and Community Benefits from New Stadiums

Question: How do cities and local communities benefit from the construction of a new stadium?

Answer:

  • Positive Externalities: Benefits produced by an event that are not captured by the event owners or sport facility.
  • Psychic Impact: Emotional effects that prestigious events and sports teams have on their host communities.

Public Funding Strategies

Convincing Cities for Stadium Funding

Question: As the manager of a sporting franchise seeking a new stadium partially funded by the city, what source of public money would you try to convince the city to use, and why?

Answer: The most obvious choice is a sales tax, as it is easy to implement, spreads the financial burden across many people, and can generate significant revenue beyond the expected need.

Tax Abatements for Sport Facilities

Question: What are tax abatements and how are they used to finance sport facilities?

Answer: Tax abatements are exemptions from payments such as property or sales taxes. In sports, they can be used to reduce teams’ costs. For example, if a sports franchise is building a stadium, a tax abatement allows it to pay lower property taxes for several years, making the project more affordable.

Contractually Obligated Income (COI)

Question: When a team has signed multiyear contracts to receive money, these revenue sources can be used as collateral to get loans. This is referred to as __________.

Answer: Contractually obligated income.

Historical Facility Financing (Phase 2)

Question: During which phase of facility construction were sport facilities primarily financed using general obligation bonds?

Answer: Phase 2.

Sports Franchise Valuation

Valuation Methods and Principles

P/R Ratio vs. P/E Ratio for Franchise Valuation

Question: When valuing a sports franchise using market multiples, why do analysts prefer the Price-to-Revenue (P/R) ratio over the Price-to-Earnings (P/E) ratio?

Answer: Analysts use P/R ratios instead of P/E ratios to value sport team properties because earnings are often not reflective of true value. Many owners are willing to tolerate low earnings or even losses if it means winning more games. Additionally, if a team’s earnings are negative, using the P/E ratio would result in an unrealistic negative valuation.

Fair Market Value Criteria

Question: What are the four criteria that must be met to determine fair market value?

Answer: The four criteria are:

  1. A willing buyer and seller.
  2. Neither of whom is under compulsion to buy or sell.
  3. Both having reasonable knowledge of the relevant facts.
  4. And two parties being at arm’s length.

Understanding “Arm’s Length”

Question: What is meant by the term “arm’s length”?

Answer: The term “arm’s length” means that there is no familial relationship, and therefore the parties have no financial relationship that could influence the transaction.

Income Approach (DCF) for Sports Franchises

Question: Why is the income approach (Discounted Cash Flow or DCF method) generally not suitable for valuing sports franchises?

Answer: The DCF method does not apply well to sport franchises due to non-financial reasons of franchise ownership and the prevalence of related-party transactions.

Control Premium in Sports Franchise Acquisitions

Question: Why are sport franchises generally bought at a higher control premium than other industries?

Answer: Sport franchises are often acquired at a higher control premium due to several factors:

  • The owner’s enjoyment of the sport and team ownership.
  • Associated rights and income streams.
  • League revenue sharing.
  • Potential for expansion fees.

Valuation Calculations

Implied Total Value Calculation (Market Transaction)

Question: On April 8th, 2025, 1% of Team X was sold for $7 million. Assuming a control premium of 24%, what is the implied total value of Team X as of April 8th, 2025, based on the Market Transaction Approach?

Calculation:

  • Implied value on a minority basis: If 1% = $7 million, then 100% = $7 million * 100 = $700 million.
  • Implied value on a control basis: $700 million * (1 + 0.24) = $700 million * 1.24 = $868 million.

The implied total value of Team X is $868 million.

Price-to-Revenue Ratio Calculation

Question: For Team V, the transaction price is $200 million, and the estimated annual revenue is $45 million. What is the price-to-revenue (P/R) ratio?

Formula: P/R Ratio = Price / Revenue

Calculation: P/R = $200,000,000 / $45,000,000 = 4.44

The Price-to-Revenue ratio for Team V is approximately 4.44.

Valuing Team A Based on Revenue

Question: Calculate the value for Team A in the same league, based on its revenues. Team A reported $38 million in revenue.

Formula: Value (Team A) = (P/R Ratio) × Revenue (Team A)

Calculation: Using the P/R ratio from Team V (4.44):

Value (Team A) = 4.44 * $38,000,000 = $168,720,000

The estimated value for Team A is approximately $168.72 million.