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Financial Valuation

Forbes valuations of sports teams suggest (by way of illustration and not exhaustion) the following questions:

  1. The most highly valued team was valued at $3.26 billion. This number was based on enterprise value of equity plus debt (based on current stadium deals). How is the value of a dollar of equity equivalent to the value of a dollar of debt? What are the expected effects of holding debt versus holding equity? Does it matter to a prospective buyer whether the team enterprise value is comprised of 50% equity + 50% debt values; is this equivalent to a team enterprise value comprised of 5% equity + 95% debt values? How do these numbers and considerations affect a prospective buyer of a minority interest? Was the accumulated equity value largely obtained many years ago or accumulated more recently? What are the terms of the debts for the sports teams; are there financial guarantors and guarantees (and other commitment and contingencies that could materially and adversely affect valuation)?
  2. Its most recent annual revenue and profit were $746 and $171 million, respectively. These numbers suggest that it would take an investor that paid $3.26 billion today would need approximately 19 years of profitability at the most recent annual rate to obtain a complete return of investment (ignoring, among other factors, discounting for the time value of money, a factor that would increase the number of years as a dollar today is conventionally worth more than a dollar 19 years from now). What were the revenue and net income streams of the past five to 10 years? Are there embedded financial values to owning a sports team beyond bottom line profitability (for example, how does control over the team affect the selection and remuneration of highly compensated employees, agents, and service providers?)
  3. All of the top ten teams (if not most or all of the remainder) are not publicly traded. What are the effects of not submitting for public review and analysis periodic financial reports (for example, audited annual financial statements)? Is a dollar of enterprise value for or a dollar of profit from a closely held corporation equivalent to a dollar for and from a publicly held corporation? What are the effects of reduced transparency (consider asymmetry of information)? How does privacy of disclosure requirements affect enterprise value? How does the absence of a national exchange for ownership of these teams affect the exit strategies of current (and prospective) buyers?

My point is not that the Forbes’ valuations are wrong. It is that valuation is a process founded on many stated and unstated assumptions about the past and future. Corroborating evidence may be in the public domain and subject to wide discussion and analysis (for example, the economic prospects as examined in the financial and risk analyses of Goldman Sachs, a publicly traded and highly visible corporation) or they may not be. While 2 + 2 = 4 everyday, the real inquiry is whether 2 = 2 herein.

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