Financial Aspects Midterm
Income Statement
A financial statement showing the revenue and expenses for a fiscal period.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Multiple owners/private investment syndicate model
An ownership model in which individuals pool their resources to purchase a franchise and incorporate as a partnership, LLC, or the like. The most common model of team ownership, because of rising costs of teams and the publicly trading option has many downsides compared to being private and one league (NFL) doesn't allow it.
Single owner/private investor model
An ownership model in which one individual owns the firm. Usually a very wealthy owner who has enough capital to invest in a team. Ex. Steve Balmer the owner of the clippers purchased the team for 2 billion dollars back in 2014.
League Pool
Because the risk of an individual franchise is greater than the risk of an entire league (this is similar to the risk of an individual asset being greater than the risk of a portfolio), leagues borrow to create loan pools that provide capital to affiliated franchises at reduced cost. The NBA, for example, created its loan pool in 2003 and renewed the $1.96 billion debt in May 2009. Seventeen NBA teams borrowed from the fund. Due to the condition of the credit markets in 2009, the cost to borrow from the pool rose from 75 points over LIBOR to approximately 175 points over LIBOR (i.e., by 1%). The NBA was fortunate, however. When the credit markets froze after the collapse of Lehman Brothers in September 2008, the NFL and MLB were unable to renew their loan pools (Lombardo & Kaplan, 2011).
What competitive balance means and how leagues achieve this? What does the league control?
Competitive balance means making sure that one team does not hold an unfair advantage over another. Do this by: player drafts, salary cap, free agency, CBA, salary arbitration, luxury tax, revenue sharing, media revenue
The five ways to finance operation of sport industry
Debt, Equity, Retained Earnings, Government funding, Gifts
Deferred compensation
Deferred compensation, or deferred salary, is salary whose payment is delayed under contractual terms. In the National Football League, teams structure contracts with deferred compensation due to strict salary cap rules that limit the amount a team can spend on player payroll in a given season. In other leagues, teams sometimes take a "buy now, pay later" approach and use deferred salaries to do so. One of these teams, the Arizona Diamondbacks, nearly went bankrupt as a result. Negotiation of player salaries are affected by many different aspects.
Discretionary Income
Disposable income available for spending and saving after an individual has purchased the basic necessities of food, clothing, and shelter
Distributed club ownership (league model)
Each individual team in a league is owned by a single individual, group, or publicly owned. (most common in US). Appealing because it helps a league to be able to expand easier. Can not be good for competitive balance in league.
Multiple owners/publicly traded corporation model
Franchise is governed by a board of directors who are elected by shareholder vote, board of directors then appoints the team's senior management. This is not used in the US with the one exception being the Green Bay Packers. Used by soccer clubs including Manchester United, and they are traded for example on the NYSE (one of many markets).
Gifts
Gift financing includes charitable donations, either cash or in-kind, made to an organization. Gift financing is a primary source of operating and investing income for major collegiate sports programs. It is also a supplemental source for minor college programs and non-profit sport organizations. According to Wolverton and Kambhampati (2015), colleges received $1.26 billion in athletic department donations during 2014. Of this total, the top 20 athletic departments received over $700 million, with Texas A&M collecting the most of any department. See Exhibit 1.3 for athletic donations to the universities in the Southeastern Conference.
Level of Risk
Level of risk is a comparative evaluation of risk, determined by comparing the risk of one asset or firm to that of another. For example, the risk associated with an NFL franchise is much less than that of a franchise in another major professional sport league. This is true because a high percentage of the league's income is guaranteed via long-term television contracts and because the league has strict rules that control its largest expense, player salary.
Measurement of Risk
One way to measure risk is to determine the chance of making a profit or loss by investing in a project or asset. The simplest way to do this is to break the risk into two components: level of risk and risk of time.
Retained Earnings
Organizations can finance operations or the acquisition of assets through the reinvestment of prior earnings. The portion of earnings that a firm saves in order to fund operations or acquire assets is termed retained earnings. The reinvestment of retained earnings is generally considered a type of equity financing, as this financing method is often used by publicly traded companies, when they choose to reinvest earnings rather than pay them to shareholders as dividends. However, in sport, financing through the reinvestment of retained earnings should be considered separately from equity financing, because organizations in the industry—with the exception of sporting goods manufacturers and retail stores—are typically privately held. Although earnings may be distributed to team owners, in sport they are often used to finance the acquisition of players, improve operations, or make other investments. Green Bay Packers reinvest retained earnings to maintain a competitive and successful football operation and to preserve the franchise and its traditions. However, because the franchise is owned by its shareholders and not a single, wealthy individual, the organization is at a disadvantage when reacting to business challenges.
Which teams have declared bankruptcy
Pittsburgh Penguins, Phoenix Coyotes, Baltimore Orioles
Expansion Fee
Price the owner of a new franchise will have to pay; the price is set by existing owners and the fee is divided among them.
How did the collective bargaining agreement (CBA) form? (essay maybe)
The first CBA gave the players the right to be able to unionize and to negotiate the standards to which they wanted to be employees to the WNBA under. They were able to establish security for themselves in the form of increasing the rookie minimum, gaining year-round health coverage, fully guaranteeing contacts and earning a share of league licensing income. For players entering a startup league these benefits were crucial in being able to attract the best players to come and play.
Equity
The owners exchange a share or portion of their ownership for money. The organization, therefore, obtains funds for operations without incurring debt and without having to repay a specific amount of money at a given time. A drawback is that ownership interest will be diluted and the original owners may lose control as additional investors are added. Stephen M. Ross used equity financing to raise capital after he purchased the Miami Dolphins in 2009. He sold minority interests in the team to several partners, including singers Marc Anthony and Gloria Estefan (Talalay, 2009).
Risk of Time
The second component of risk is the risk of time, the fact that risk increases as the length of time funds are invested increases (Groppelli & Nikbakht, 2012). Exhibit 3.3 illustrates the impact of time on risk. In this table, the risk-free rate is 0.02%, which was the auction rate of 90-day Treasury bills on June 1, 2015. As all of the securities in the table are issued by the federal government, the differences in interest rate, which reflects total risk, are attributable to the risk of time. As the length of time between issue date and maturity date increases, the risk premium increases. This increase reflects the risk of time.
Territory Rights
When a franchise is being sold with an exclusive territory this means that the franchise agreement will contain details of an exclusive area in which the franchisor will not set up another franchise to compete with the franchisee that holds that territory.
Single Entity Ownership
When a single individual (or group) owns the league and all the teams in that league. New leagues formed as a single entity are appealing as they constrain costs―contracts and salaries are negotiated with the league. It is debatable if leagues need to move away from this structure. MLS continues to grow and has been successful as a single-entity league. The WNBA began to move away from the structure when the NBA team owners (the collective owners of the WNBA) became frustrated with the lack of financial success of the league or lost interest in operating franchises in the local marketplace. Also helps to keep competitive balance on the same playing field.
Debt
When an organization borrows money that must be repaid over a period of time, usually with interest, debt financing is being used. Typically in sport, teams issue bonds or borrow from lending institutions (or in some instances their league) to finance operations through debt. The New York Yankees financed the new Yankee Stadium in this way. The team borrowed $105 million from a group of banks, including Goldman Sachs, to pay for cost overruns. The team also borrowed more than $1.2 billion through the tax-exempt and taxable bond markets (Kaplan, 2009).
Government Funding
it is common for private organizations, such as professional sports teams, to receive funding from governmental sources. In addition, public high schools and universities typically receive a portion of their financing through direct or indirect government funding, and this funding may support sport programs at these schools. For all sport organizations, government financing may be provided by federal, state, or municipal sources and may include land use, tax abatements, direct stadium financing, state and municipal appropriations, and infrastructure improvements.
