Football franchise pricing – Finding the right valuation method while factoring in potential investment motivations

Abstract

Sports franchises are mostly privately held businesses whose financial data does generally not match the quality standards of conventional businesses as they are not subject to audit and other accounting regulations. In this context, it remains unclear how investors proceed in order to find reliable franchise value estimates since a valuation method standard has yet to be established in this field. It is also unclear what motivations drive investors to buy lossmaking franchises at large premiums. In other words, I am investigating in this paper how analysts value football clubs and why they are actually incentivized to make the investment. After analysing possible valuation methods from a theoretical standpoint and projecting them on football franchises, I have tested their applicability in this field and find that the income approach is the most reliable valuation method if data requirements are met, followed by Vogel’s updated approach at second place. I also find that asset-based valuation methods are not suited for football clubs as they are unable to capture business skills and therefore significantly understate franchise value. Furthermore, the valuation results demonstrate the importance of data reliability and completeness by displaying the differences in valuation precision of public and private clubs’ financial data. I have also developed a hedonic price index where global popularity, represented by “Facebook fans”, and “Stadium capacity” turn out to be statistically significant value drivers. The index can be used to quantify the value of franchises’ option-like features and thereby enhance the final value estimate by adding features that were not captured in the initial valuation. Last but not least, this paper provides alternative factors that may justify the large premiums paid by looking at tax advantages, soft power, the prestige of ownership, branding and marketing efforts or simple market dynamics such as the winner’s curse of a bidding competition. This thesis advances the field of sports franchise valuations through three points: First it points out the theoretical and practical applicability of potential valuation methods such that investors can find the best suitable valuation method before proceeding with a franchise valuation. Second, it extends Humphreys and Mondello (2008)’s hedonic price model with new variables that I consider missing in their paper. Third, the paper provides alternative explanations to why the gap between value estimates and actual transaction prices can be so large. This gives a completer picture of franchise valuation. As a conclusion, this paper points out the most efficient way to obtain a solid value estimate for a franchise while simultaneously emphasizing on the subjective nature of such investments.