Franchise Valuation
According to Forbes (2015), eleven National Basketball Association (NBA) teams are worth at least $1 billion. The Los Angeles Lakers are worth $2.6 billion, which is an increase of 93% from 2014. It would seem that a team’s value would be related to its success during the season, but this year the Lakers finished their second worst record in franchise history. So, what does determine a professional sports team’s value? In regard to the NBA, the collective bargaining agreement that was signed between the players and the owners in 2011 has been a major reason why there are no teams losing money. This agreement also stopped paying players extremely large salaries. Under the CBA, the players’ share of income that was related to basketball was changed from 57% to 50%. At the same time, revenue sharing to better support the low revenue teams tripled from $55 million to $232 million in one year (Owen, 2006). As a result, only one professional basketball team lost money last year.
This year, the average NBA team had an operating profit of $23.1 million, and the league’s total revenue reached $4.8 billion (Owen, 2006). One reason the NBA has experienced such massive profits is because of its global potential. The league currently has 101 foreign players from 37 countries playing on teams. In addition, there are 300 million people that regularly play basketball in China, which is another potential market for fans.
According to Owen (2006), part of a team’s value can be directly associated to its stadium and ticket sales. Stadiums forecast hundreds of millions of dollars as a result of popular sports franchises, but the stadium values do not necessarily translate to team values. Owen (2006) conducted a contingent valuation survey of professional sports franchises in Michigan and Minnesota. As a result, Owen found that the consumption value of teams was important in determining why some people continue to support the funding of public stadiums. The findings did not explain why cities should spend money on stadiums, but did infer that the economic effect does not necessarily align to the team’s value.
Similary, Ertug and Castellucci (2013) studied how the reputation of a franchise’s success affects the worth of the team. They argued that the team’s players’ reputation and status have different effects on the value of the team. It was argued that the actual quality of a team mediates the effect on team’s value more than status. “Moreover, reputation and status have different effects on how organizations acquire resources: when their product quality is low relative to their aspiration level, organizations will display a preference for recruiting