Growing sports franchises present emerging investment opportunities

As investors seek emerging markets and new opportunities, the sports industry is gaining strength driven by customer engagement, new media contracts and sports teams’ rising valuations. Sports franchise valuations are soaring across all leagues, with NFL franchises increasing by 18% in 2022 after rising by 14% in 2021, according to Sportico. Internationally, soccer team valuations also continue to rise; Sportico estimates a 14% increase in the value of the top 20 soccer clubs worldwide, on average.

Historically, institutional investors were much more risk averse when it came to sports franchise investments; there is often inherent uncertainty when it comes to player injuries, and a mediocre season can strongly affect in-season and future revenues. However, rising valuations are attracting new investors, including private equity (PE) firms; global funds focused entirely or partially on the sports industry raised $23.65 billion in 2022, according to the Wall Street Journal. Family offices continue to remain some of the strongest investors, but PE’s dry powder provides an excellent option for liquidity events to capitalize on asset appreciation at various intervals.

Revenue sources

For potential investors in a sports franchise, it’s critical to understand the franchise’s revenue streams and dependence on each source as a component of net profits.

Here are some revenue sources that are typically unique to such organizations:

Media rights and league-wide licensing revenue

The largest professional leagues derive substantial revenue from lucrative media rights deals such as network broadcasting, streaming and other league-negotiated licensing deals. While streaming services search for the path to profitability, sports dominate live television and present services with new sources of subscribers. The NFL has successfully secured multibillion-dollar agreements with the largest networks and media providers for game broadcasts. Buyers should have a thorough understanding of league revenue allocation methods and expected league-wide revenues. 

Sponsorships

Leagues and teams continually explore opportunities to capitalize on their popularity by selling stadium naming rights, stadium ad inventory and other advertising rights. For amateur sports such as minor league baseball, selling ad inventory and naming rights can be as critical as ticket sales. Investors should understand key contracts and licensing agreements to properly assess the sustainability of sponsorships and the potential for additional revenue. 

Game-day revenue

Investors should analyze revenue earned from ticket sales, concessions, parking fees and other sales to understand average ticket prices, the elasticity of prices as compared to secondary ticket market prices, and revenue earned per fan in attendance, inclusive of concessions and other sales.  

Transfers

In soccer, teams can earn significant revenue from trading player contracts. Investors should understand a team’s analytics department, success in developing and valuing players, and its track record of transfers. Strong player development can also positively affect team performance in other sports, leading to stronger performance and, concurrently, increased revenues.

Other considerations

Of course, the decision to invest in a given sports franchise should take into account numerous factors beyond the organization’s direct revenue streams. These include:

Location, location, location

As designated market areas (DMAs) can vary widely, investors should understand local fan engagement and its impact on media rights, ticket sales and the potential for growth; the most valuable sports franchises are unsurprisingly found in the largest DMAs in the United States. Qualitative factors such as team loyalty can set a revenue baseline, but local population, presence of other sports options and wider popularity of the sport provide fertile opportunities to increase sponsorships, game day revenue and other ancillary revenue streams for the franchise.

The stadium

Investors should understand the team’s stadium status, in particular the age and condition of the stadium, as aging stadiums can require extensive capital investment. Investors should also conduct due diligence on the team’s relationship with local government as a potential funding source for stadium venues and surrounding infrastructure. As stadiums typically do not appreciate in value at the same rate as a franchise brand, investors can anticipate consistent cash flows from stadium operations and other development opportunities surrounding the stadium, such as real estate developments.

Ownership groups and financing

All leagues have rules on the structure of ownership groups and limitations on debt financing; however, with rising sticker prices, prospective investors require large conglomerates to invest the necessary upfront cash to acquire these franchises. Some sports leagues such as the NBA have loosened the requirements to allow PE funds to become investors, which can make accessing capital easier. Moreover, proper tax structuring is essential to minimizing tax exposure and effective cash flow at acquisition. Ownership structures can also align acquired assets to benefit minority owners; for instance, allocating real estate development rights to real estate-focused minority investors.

Other financial obligations

In addition to ownership rules, debt limits and financial fair play regulations ensure all teams and clubs maintain solvency for the good of the league. Franchises are typically subject to certain revenue-sharing obligations such as payments into free agency pools and pension and health obligations. Furthermore, teams can incur potential future obligations such as player or staff bonuses and commercial contingent agreements based on team performance. As these obligations can create significant debt and cash flow implications, an investor should make sure to understand these potentially material agreements.

To address these areas, investors should perform proper financial, tax and commercial due diligence to understand a team’s financial position, risk areas and sources for potential growth.