Ready, Set, Hut! Investing in America’s Favorite Pastime

Abstract

The research question is “How can we value an NFL Franchise for private equity investment and what are the key levers to determine their value?” Changes in the structure of the league allow for a new frontier for six white-listed private equity firms with no experience about how to value an NFL franchise. Much of the previous literature hasn’t been able to view this as a possibility, leading to mostly incomplete analysis that provides no color for a private equity firm to use in an investment thesis. Working backwards, the simplest way to describe a franchise’s value, no different from any other business, is as a multiple of revenue. However, for these teams, we must start from the ground up. The foundation of each franchise is the team it fields every season. How can we model salary allocation and concentration to provide the best winning potential each season? By building a complex regression-based decision tree and using percentage of salary allocated by position as a proxy for ability, we see left tackle, higher salary concentration, and quarterback as the most important features. Correlating winning percentage to local revenue reveals that team success leads to increased local revenue. The clear path between team performance and team revenue makes sense, as when the team performs better and wins more games, fans are likely to pay a premium to attend games, sponsors are willing to pay more to be associated with the team, and corporate entities are willing to pay extra for luxury suites. Investigating a venue premium as an additional asset for franchises revealed its existence when included as a dummy variable in our regression. The analysis represents how well a team utilizes its local market beyond the league’s annual revenue distribution. In addition, I used average residual to better understand which teams have significant revenues outside of winning percentage and a venue premium which could represent a strong brand appeal or additional stadium development. Finally, how do we model franchise value as a multiple of revenue and determine a premium on transaction prices related to the multiples? Looking at each team’s revenue to value multiple, regardless of market size, brand power, or on-field success, there is a consistent value across all franchises. Through these findings, a firm must decide how they view their investment; as an investment in the league as a whole and an increase in the league’s national revenue streams or in a franchise’s ability to improve its team performance, build a new stadium, or optimize its revenue streams in their local market. Moreover, multiples in previous transactions have tripled in the last decade, representing the investment potential in this new frontier for institutional investors.