Should your client buy a sports franchise?

Is your rich client a diehard fan of a team that’s up for sale? You can help him buy it. Like any investment, the decision should be based on individual goals, risk tolerance and the vagaries of the market.

Brad Rangell, managing director and team leader for Citi Private Bank’s Sports Advisory Group, says sports franchises are a substantial financial commitment requiring at least eight figures of liquidity.

“[People] don’t want to have to lose money,” he says. So help your clients figure out where the team generates revenue.

“There could be a new stadium to build, [or] there could be a new media company exploiting their local media rights in a more efficient way.”

If the team isn’t doing well, it could be a chance to buy low. “Some teams may be in distress and could sell at a discount,” he says. There can also be substantial tax benefits. “In some instances, a buyer might amortize the purchase price over a ten-year horizon, which can be favourable relative to other investments.”

CELEBRITIES with SPORTS INVESTMENTS

• JON BON JOVI: Owns Arena Football League’s Philadelphia Soul
• W. BRETT WILSON: A leading investor in Derby County Football Club in the U.K.
• WARREN BUFFETT: Triple-A PCL Omaha Storm Chasers stakeholder
• SERENA and VENUS WILLIAMS, MARC ANTHONY, JENNIFER LOPEZ and GLORIA and EMILIO ESTEFAN: Co-own National Football League’s Miami Dolphins
• MALCOLM GLAZER: Owns Manchester United, an English Premier League club
• ED ROSKI: Stakeholder in NBA’s Los Angeles Lakers, and NHL’s L.A. Kings

Source: People.com, sportsbusinessdaily.com

But these are not passive investments. Owners must be actively involved.

“How [the league] supports the team, how it generates revenues and shares it amongst its clubs, what the collective bargaining agreement is—all those requirements are placed on the new owner, because the owner has to guarantee the operations of the team personally.”

Due diligence requires an understanding of league-specific elements, so Rangell says the process of buying a team takes 12 to 24 months—or longer. “There’s a learning curve, and there’s limited opportunity. Professional sports franchises are rare; [there are] 122 in the entire U.S. in the four major leagues.”

Like any passion investment, it’s easy to get caught up in hype. It falls to experts to ensure reason prevails. “We look at comparable sales in that league in similar markets, and we are sometimes able to lower the net purchase price by adjusting cash consideration for things like contingencies, working capital deficit or other extraordinary items,” says Rangell.

Finally, the investor has to be vetted by the league, so being well-networked can go a long way. Usually, you need a friend who’s an owner to invite you to buy, says Rangell.

HASSLE FACTOR

To be a controlling owner you need eight to nine figures of liquidity. Money needs to be earmarked to fund capital expenditures, operating losses, and other needs.

It’s an active, not a passive investment.

Owners need to understand the nuances of the league and its management.

• Ownership options
• Own the entire team
• Buy a fractional ownership

Facts and Figures

• $6 MILLION TO $8 MILLION: the cost of a Class A team in the California League (minor league baseball)
• $2.125 BILLION: highest price paid for a sports franchise (New York Knicks, 1997)
• $1.2 BILLION: highest price paid for an NFL franchise (Miami Dolphins, 2009)
• $889.5 MILLION: highest price paid for an MLB franchise (Chicago Cubs, 2009)
• $575 MILLION: highest price paid for an NHL franchise (Montreal Canadiens, 2009)