How To Value A Minor League Franchise

Every business is unique, and Minor League Baseball franchises are no different. However, there are certain business-valuation approaches and methods that are accepted within the business community and judiciary systems. A Minor League Baseball franchise is almost always owned in a closely held small business. A closely held small business is not traded in an active public market whereby market value quotations are available at any given date. Therefore, business valuation professionals must consider the approaches, methods, and factors to determine an estimate of value for a closely held business.

Internal Revenue Service, revenue ruling 59-60 is the guiding principle for valuing closely held businesses.  Fair market value is the most common standard for estimating value for the most frequent purposes; gift and estate tax purposes, purchase or sale of businesses, and divorce. IRS Rev. Ruling 59-60 defines fair market value as:

The price at which property would change hands between a willing hypothetical buyer and a willing hypothetical seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell and both parties have reasonable knowledge of all relevant facts.

Business valuations are prepared for many reasons. Some of the more common reasons are; buying or selling all or part of a business, marital divorce, estate and gift tax planning, determining value in a buy/sell agreement, financing, litigation, and shareholder disputes. The purpose of the business valuation will determine the valuation approach and methods.

A company’s value is the present value of its future benefits to the owners. An investor would only invest if they believed that the future benefits are greater than the current value or price. All investors require a rate of return on the investment and the rate of return is determined by certain risks associated with the investment. The greater the risk, the larger the required rate of return and vice versa.  All companies have unique risks and earnings potential, so there is not one single approach or method that can be applied to estimate the future benefits. The prominent business appraisal organizations utilize three business valuation approaches: asset, market and income. Within each of the three approaches there are several methods.

Asset approach: This method considers the underlying value of the company’s assets less the liabilities adjusted up or down to the current fair market value. For example, accounts receivable would be adjusted for collectability; inventory would be adjusted for obsolescence; land, buildings and equipment would be adjusted to the current appraised value. This approach is used when the company’s value is equal to the value of its tangible assets less its liabilities, such as in a liquidation.

Market Approach: This method espouses the idea that there are comparable transactions in the market place. The transfer of real estate is the most widely recognized use of the market approach. There are two significant reasons why this approach is difficult to utilize when valuing closely held small businesses. One, there are so many valuation variables that make it difficult to accurately compare small businesses in the same industry, to one another, such as size, market, management and competition. Second, because almost every closely held small business transaction is private, there is no reliable source of the significant facts of the transaction. Those familiar with the buying and selling of Minor League Baseball franchises know that the market approach is the primary approach.

Income Approach: This method estimates the future benefits in the form of net income or cash flow. The common methods are to calculate the capitalized net income or cash flow or to calculate the discounted net income or cash flow. An investor must determine their acceptable rate of return for the risk associated with the investment. If the company is mature and its net income or cash flow has been historically stable and the investor believes that to be the future; the value can be determined by capitalizing the past results. If the investor believes that the future will be significantly different than the past for a multitude of reasons, the value can be determined by forecasting the future net income or cash flow and discounting it back to the present value.

Unlike publicly traded securities, the value of closely held small businesses is often adjusted for premiums and discounts. If the appraiser is estimating the value of a controlling interest in the company, a premium may be appropriate to reflect the power of control. Conversely, if the appraisal is for a minority interest, then a discount for lack of control or a minority interest discount may be appropriate. An owner of a publicly traded security can know at all times the market value of his holding. He can sell the holding on virtually a moment’s notice and receive cash net of brokerage fees, in a few days. Closely held small businesses are not publicly traded and a discount for lack of marketability is often applied to the value to reflect the costs of liquidating their investment. This is a large area of debate and concern within the IRS and the judiciary systems regarding the appropriate discounts that may be applied to the estimated value of closely held small businesses.

Minor league baseball, like any industry has it uniqueness and within the industry every franchise has its own unique characteristics that affect its value. The business appraiser will analyze these characteristics or factors, and the weight of each one, to determine the final estimated value of the franchise. Here are just some of the factors to be considered:

• Historical profitability and cash flow
• Experience and quality of management
• Stadium and concessionaire lease terms
• Opportunities to enhance the stadium and grow the revenue
• Local economy
• Competition
• Quality of the equipment
• Current Player Development Contract
• Pricing
• Parking restraints
• Customer contracts and relationships

Value is defined as the present value of future benefits, these factors and characteristics must be considered to determine the risks and expected returns associated with an investment in a minor league baseball franchise.

After all of the analysis, the value of a closely held small business to an investor is determined by the future cash flow, rate of return and risk. However, our more than 25 years as advisors to the minor league baseball industry tells us that this is not the case with professional sports franchises. Most owners and investors start their analysis by comparing a franchise to other franchises in their level and their league. This is the market approach discussed earlier. Historically, Triple-A values are greater than Double-A and A-ball. Although in recent years, the industry has seen examples where A-ball franchises have sold for more than Triple-A franchises, due to the characteristics and factors discussed in the previous paragraph.

There is a certain inherent value—stick value—due to supply and demand. There are just 160 affiliated Minor League Baseball franchises. Many franchises have very little or even negative cash flow. Additionally, there is a certain excitement that causes investors to want to be owners of sports franchises. Affiliated Minor League baseball franchises have been bought and sold at a price that allows entrepreneurs to gain entry to the industry for which they have a strong love and passion. Relocations and construction of new stadiums by more sophisticated businesspeople have kept the values of franchises on an upward trend over the past 30 years.

This is a sponsored post from Resnick Amsterdam Leshner