Lessons from sports team deals that can be applied to buying a business

Buying a sports team, in many ways, is similar to the purchase of any other business: Buyer and seller negotiate the price, lawyers do the due diligence and prepare the acquisition agreement.

“The difference, especially with major league teams, is that there is a limited supply — they don’t often come on the market,” says David Lowe, shareholder and director at Sherrard, German & Kelly P.C., who has worked on both major and minor League sports team acquisitions that include the Florida Panthers, Texas Rangers, Buffalo Sabres and Buffalo Bills. “And when they do, there can be fierce competition for them. That competition can result in prices that don’t seem to make any sense if you apply the traditional valuation metrics used in most other acquisitions.”

Smart Business spoke with Lowe to get a behind-the-scenes look at the unique process of buying a sports team and lessons that can apply to other business purchases.

What are some of the unique conditions that apply to the purchase of a sports team?

One primary difference between buying a business and buying a sports team is that buyers of sports teams are applying to be members of an exclusive club. League owners must approve any potential new team owners, and buyers can be surprised by the league rules. For instance, most leagues have limitations on the amount of debt an owner can have on its books. That can limit the ability of a buyer to finance the purchase with a bank deal because it requires that more equity be put into the purchase than might be typical in other industries.

Sometimes it’s a group of owners that want to buy a team, which is not uncommon since the prices are so high. However, all owners must go through the vetting process, which includes extensive background checks and review of assets and liabilities. If approved, there are restrictions put on the owners’ ability to transfer ownership of the team. Every time there’s a transfer, there’s a vetting process.

Many leagues require owners to sign a guarantee that they will, in addition to their equity, put in additional money to pay the team’s bills, creditors, or otherwise keep the team operational. Some of the leagues have more ability to control individual teams than others. The NHL requires all owners to grant the league a proxy on their ownership interest in the team, which allows the league to take control of a team under certain circumstances.

What are potential buyers looking for in sports team deals?

Sports team acquisitions tend to focus on stadium or arena lease terms and what rights the team owner has to control events at that location to generate revenue. Sponsorship contracts, suite and ticket sales and concession vendor contracts are important and are key areas of focus in the due diligence process. New team owners also examine player contracts for guaranteed money obligations.

Media contracts are also important in leagues in which local media contracts are negotiated by individual teams. NHL, MLB and NBA teams can generate significant income from media contracts or by setting up regional sports networks to broadcast their games locally. In the NFL, conversely, the league negotiates most of the media deals.

Buyers of sports teams, as opposed to other types of businesses, are not necessarily looking for year-over-year generation of net profit return. While that’s a consideration, the real upside is in the increase in valuation of the team over time. There currently doesn’t seem to be any abatement in the increase in value of sports teams, especially in the NFL, MLB and NBA where there recently have been high prices paid for teams. Owners can expect, after seven or 10 years, to make quite a bit of return in a sale.

What lessons from buying sports teams can be applied to buying a business?

With the acquisition or purchase of any business, hire lawyers and advisers who are familiar with the industry of the entity being bought. They’ll bring an understanding of the unique features of the business and the industry. They can more easily steer buyers through the process and identify the key business and legal issues more readily than generalists.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.