Deal qualification process for Sport organisations

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sports teams are often bonfires of cash yet they still change hands for billions of dollars how can that be [Music] pro sports are hotter than ever we've seen acquisitions of the nfl's denver broncos english soccers chelsea fc and italy's ac milan check out this chart the 15 billion dollars of deals completed in pro sports by august 2022 were already more than any full year on record part of that's to do with it having been easier to borrow money when interest rates were low coupled with the soaring value of broadcast rights but even then how do the new owners of chelsea a team that regularly loses more than 100 million dollars a year decide it's worth more than three billion dollars it's a particularly challenging question in european soccer when you try to decide how much a business is worth you tend to look at how much money it's going to make over the next few years and work back from there if you're confident you can predict how much a company will make in 10 years time and that's a high number then the company gets a high valuation if you can only predict two or three years out and it's a low number the valuation is far far lower too in soccer accurately predicting how much money you're going to make is an all but impossible task get relegated to a lower division or fail to qualify for the lucrative champions league and you might take a 100 million dollar hit to your annual revenue sell a star player and you might get a one-off hundred million boost to your revenue just look at how annual sales have shaped up at the italian giant juventus over the past decade it's a veritable roller coaster nfl teams in stark contrast enjoy far more stable predictable earnings the league shares merchandising and broadcasting revenue pretty evenly across the league so the teams have good visibility on how much money they're going to receive at the same time there's a salary cap so they've also got a good sense of how much money they're going to spend that's why nfl teams get such high valuations soccer teams are trickier but there is a solution of sorts it's known as the markham multivariate model named after this guy tom markham who developed it a decade ago as a phd student it's a kind of complicated equation that looks like this it starts by looking at the value of the club's assets it's playing squad it's stadium and other facilities and how much money it's able to generate from those assets but it then adds in a few other variables that help gauge how well-run the club is and how popular it is by looking at what percentage of the stadium is filled in an average game you can get a sense of how well the club is managing to attract fans a higher percentage means it's more popular and perhaps better run therefore it generates a higher valuation the percentage wage ratio meanwhile looks at how much of the club's income is used to pay the playing squad a higher percentage means the club may not be run very efficiently so its earnings may not be as sustainable and therefore generates a lower valuation is this a perfect solution no but it is a formula that a lot of would be sports team owners use ultimately the answer to the question what is a sports team worth is well whatever somebody is willing to pay for it but in order to get to that number you need a starting point and that's what the model provides [Music]