Determining the value of sport franchises: NCAA FBS programs Ryan Brewer, M.B.A. Indiana University-Bloomington Advisor: Paul M. Pedersen, Ph.D Scholarly Conference on College Sport

My interest in the study Value assessment of sport franchises Forbes (Van Riper, 2009) – NFL (1998) – NBA, NHL, MLB (1999) – NCAA FBS Football Programs (2007) – NCAA D-I Basketball Programs (2008) – Magazine’s valuation methods include value attributions deriving from four self-defined areas The sport The market The stadium The brand management

My interest in the study Current system of NCAA Division I football championship (“FBS”) is controversial.. The BCS has been given considerable media attention for its commercial (broadcast & sponsorship) spotlight

Purpose of this study To value FBS college football programs using theories and practices of classic financial economics To test for differences between results if this study and the results generated by Mike Ozanian of Forbes magazine

Determining value in FBS Issues  Current FBS valuations may exclude important factors in assessing value  Current FBS valuations may not have applied valuation theory in assessing value  A lack of competing alternatives generally exists in assessing sport franchise valuations

Current Practice Considerations included in the algorithm for current valuation of FBS programs: 2007 (Forbes’ inaugural valuations): 1.Team contribution to athletic department 2.Team contribution to university 3.Incremental spending in local metro-area during home games 2008 (2 nd year valuations): 1.Team contribution to university 2.Team contribution to athletic department 3.Team contribution to conference 4.Incremental spending in local metro-area during home games

Forbes Valuation Results (2008?) 1.Notre Dame $101 million 2.Texas $92 million 3.Georgia $90 million 4.Michigan $85 million 5.Florida $84 million 6.LSU $76 million 7.Tennessee $74 million 8.Auburn $73 million 9.Alabama $72 million 10.Ohio State $71 million

Current Practice: Valuation Theory Pricing of [future expected] uncertain income streams is key to valuation (Rubinstein, 2005) The Capital Asset Pricing Model is intrinsic to the modern approach to determining value of anticipated benefits (Treynor, 1961) Value drivers are useful in determining the value of assets sold in the open markets (Pratt, 2000) A build-up model of the discount rate is an alternative to the CAPM, especially for organizations not traded in the securities markets (Pratt, 2000)

What’s Missing from Current Practice?  Discounted cash flows  Capitalization of cash flows  Assessment of similar franchises sold recently in the open market

Valuation Requirements Specify the date of value (e.g., Pratt, 2000) Specify the relationship between hypothetical buyer and seller, neither of whom are under compulsion, both of whom are reasonably knowledgeable of relevant facts (IRS Revenue Ruling 59-60, 1959) Assess the capacity to earn dividends (IRS Revenue Ruling 59-60, 1959)

Financial Analysis (cont.) Specify the… – Standard of value (e.g., Pratt, 2000) – Premise of value (e.g., Uniform Standards of Professional Appraisal Practice, 2008) – Uses of the valuation (e.g., Trugman, 2004) Assess the discount rate (e.g., Brealy & Meyers, 1998) – WACC – CAPM – Build-up method (Pratt, 2000)

Financial Analysis (cont.) Forecast cash flows using… – Historical financial data – Current economic information – Adjustments made from the characteristics of marketability Either to cash flows, risk level, or both, as appropriate

Brewer’s Proposal 1.Locate financial data on a sufficient sample of the 119 FBS programs  Revenue data  Expense data 1.Assess Cash Flows 2.Using relevant publicly available characteristics inuring to FBS programs, develop a risk model. 3.Using cash flows, quantitative risk assessment, and growth forecast, develop a capitalization model under currently accepted financial economics theory to value FBS programs.

Publicly Available Characteristics Dividend paying capacity… – Program adjusted cash flow (cf) Risk… – Turnstile attendance (a) – Program historical FBS rankings (r) – Proximity to and association with nearest “major league” town and franchise (t) – School reputational quality (q) – Power conference affiliation (c)

Most Valuable FBS Programs BREWER MODEL 1.Texas $379million 2.Georgia $355 million 3.Michigan $306 million 4.Notre Dame $281 million 5.Ohio State $277 million 6.LSU $261 million 7.Florida $257 million 8.Alabama $233 million 9.Auburn $206 million 10.Texas A&M $185 million

A Contrast of Results Brewer Model 1.Texas $379million 2.Georgia $355 million 3.Michigan $306 million 4.Notre Dame $281 million 5.Ohio State $277 million 6.LSU $261 million 7.Florida $257 million 8.Alabama $233 million 9.Auburn $206 million 10.Texas A&M $185 million Ozanian Model 1.Notre Dame $101 million 2.Texas $92 million 3.Georgia $90 million 4.Michigan $85 million 5.Florida $84 million 6.LSU $76 million 7.Tennessee $74 million 8.Auburn $73 million 9.Alabama $72 million 10.Ohio State $71 million

A Contrast of Results Are the values significantly different? – YES (p-value = ) Is the first-order linear measure – the slope of value drop descending the ordinal ranking – significantly different? – YES (p-value = )

A Contrast of Results

What’s the Difference? ∆ Brewer Uses adjusted cash flow generated by programs (Value to program owner). Incorporates historical performance, turnstile attendance, and other idiosyncratic factors to develop a risk profile for each school (risk to program’s future). Ozanian Uses cash flow to academics and overall (value to university academics). Includes analysis of the impact to the community (value to community). Includes element of contribution to the conference (value to conference)

Questions…