How do you Valorize a Sports Team?

As you all likely know, sports are a form of entertainment with an insane quantity of money in it, and NFL is the sports league with the highest amount of profits. On the list of the top 50 (or rather 21) most valuable sports teams in 2017, more than half are NFL teams, with the Dallas Cowboys – the most valuable sports team in the world – leading the list. For this year’s list, the well-known business publication has set a threshold of $1.75 billion. The Dallas Cowboys are the most valuable sports team for the second year in a row, unseating Spanish soccer team Real Madrid, that held the top spot for three years.

But how do you put a monetary value on a sports team, on the enthusiasm of fans, and the loyalty of players? Let’s take a look.

Sports teams are basically businesses

Sports teams are basically businesses, with expenses like salaries paid to everyone from executives to cleaning personnel, and revenues received from a variety of sources. Among the recurring revenues for teams, we’ll find the cut they receive from the leagues’ “national revenues”. Last year, the National Football League – NFL – had “national revenues” of almost $8 billion distributed among its 32 teams. The majority of this revenue comes from TV deals, of course, but they also have other sources, like individual licensing deals, and even relocation fees – last year, the Rams and Chargers reportedly paid the rest of the teams $650 million when moving to Los Angeles.

So how do you evaluate them?

According to Appraisal Economics, an independent valuation expert, the most widely used method to evaluate a sports team is the “guideline transaction method”, where the relationship between the price paid for a certain franchise and the relevant measure of its performance – usually its revenue – is analyzed. Other performance measures, such as cash flow, and earnings, are often also used.

When selling or buying a team, as Appraisal Economics points out, profit and cash flow are rarely the best factors to take into account. Instead, the evaluators use the franchises’ revenues as the most relevant number. Payroll expense – salaries and benefits – usually represent the largest expense for a professional sports franchise, and – given the often seven-figure contracts – these expenses can leave a mark on the teams’ profits. Besides, the profits made by these franchises are most of the times reinvested into better players or a more appealing stadium.

Usually, there is no general “rule of thumb” when it comes to evaluating sports teams – according to Appraisal Economics, MLB teams have been sold for anywhere between 1.5 and 3 times their total revenue.