Teams' value rises as owners' split grows

The league’s assertions that they are losing upwards of $300 million per season have been met with skepticism from the players association and fans alike. After being given the opportunity to examine the league’s books, the union admitted the league was losing money, but said the losses were closer to $100 million than $300 million.

The union also believes the league has up its sleeve a few extra ways of squeezing out a profit. One of these is an ancillary benefit associated with negotiating a more favorable split of basketball related income (BRI) with the players. Business valuations are tied to revenues and expenses. By negotiating the players down from 57 percent of revenues to 50 percent (and counting), the league is ensuring the teams a decrease in expenses – and therefore an increase in projected profits. This will drive up franchise values.

How much will franchise values increase? It’s hard to say. There are a lot of factors that go into determining the value of a business, and a number of ways to do the calculation. A conservative estimate might be a $3 million to $12 million average increase in franchise values for each percentage point in revenues the league wrests from the players. Decreasing the players’ split of BRI from 57 percent to 50 percent therefore might be worth $21 million to $84 million per team.

The owners will only see this money when they sell their teams. But when they do sell, none of it is shared with the players.

The reason the range is so large is because the franchise values don’t increase in a straight line with a drop in the players’ revenue split, and there is a lot of variation from franchise to franchise. Interestingly, the worst franchises stand to appreciate the most.

“Think of a gold mine with lots of ore reserve,” said Edward Gleason, a Boston-area CBA and one of my advisers on labor issues related to the lockout. “But the ore is so poor in quality that it doesn’t make business sense to mine it – the mining costs are more than the gold is worth. Now suppose the value of gold shoots up, and the ore can now be extracted at a profit. The value of the mine shoots up dramatically. A mine with high quality ore would appreciate too, but not as much.”

So in addition to the direct savings from paying the players less, the owners stand to make more when they eventually sell their teams. That’s a win-win situation for them.

But there’s a potential downside to this increase in franchise values. It’s common for a new owner to finance a portion of the purchase price of a team, and the league counts interest on this debt as part of its stated losses. If a franchise is worth more it will sell at a higher price, more of the purchase price will be financed, and the interest payments will be greater. This will affect the league’s bottom line – a few years from now the league may once again say it is losing money, and once again say it needs the players to take less.