NFL Team Values and Phantom Profits

Discussion in 'NFL' started by PitBull, Jan 4, 2008.

  1. PitBull

    PitBull Guru

    Oct 20, 2006
    While doing a bit more research on the financial side of the NFL (in order
    to understand what is really going on), I found another very interesting
    article by Forbes magazine on the amount of profit an NFL team makes
    each year:

    (Sorry about not hyperlinking it--for some reason, if the address is more
    than one line long, the Forum Code doesn't work right. I don't know how
    to fix that).

    The most important point:

    The NFL is... the richest sports league in the world (the average team
    is worth $957 million,
    7% more than last year) as well as the most
    profitable (mean operating income in 2006 was $17.8 million on
    $204 million in revenue).

    Mean operating income is before-tax profit. So the average NFL
    team makes a whopping 1.9% before-tax profit. Wow! What a
    huge money maker! No wonder everybody wants a piece of the action!

    Once you see figures like this, you realize that the only lucrative thing in
    the NFL is the overall value of the team, which seems to rise much faster
    than its profits. Since the profits from the year to year running of the
    club are so low, you would think that NFL franchises owners would cash
    out every few years to get at the real profits that are made on team
    ownership--franchise value. But for some reason, they do not.

    NFL teams do not turm over very frequently at all. One team may be up
    for sale every 3 or 4 years. Half of the NFL teams have been owned more
    than 20 years. And 14 out of the 32 teams have never been sold since
    inception, with the Chicago Bears staying in the Halas/McCaskey family
    since they were formed in 1919.

    This is a very strange situation for a couple of reasons. The first is that it
    would be very easy to make 8-10% on that billion dollars outside of the
    NFL, which is 4 to 5 times what an owner is making in the league, or 60
    to 80 million dollars a year. That's hell of a lot of money each year.
    What could possibly motivate someone to ditch that kind of money--
    prestige, the vanity of winning a championship? I highly doubt it. We
    already know that playoff teams actually lose money for the owner. Very,
    very strange.

    The second very odd thing about this is why Forbes magazine would
    value the franchises that high to begin with. If a normal return on
    investment is 7-8% a year, that means that the value of an NFL franchise
    should be 12 to 14 times the before-tax profits of 18 million, or only
    210-250 million dollars. Forbes is well aware of how to calculate a
    normal rate of return, and how normal prices for an investment are
    derived. Why would they inflate the value of an NFL franchise to 4 times
    its true value based on profits? Do they know something we don't? Do
    they know about some sort of phantom profits that exist, but are not
    reported by the teams?

    Yes, the existence of phantom profits would explain a lot. It would
    explain why owners don't sell a billion dollar investment that only yields
    2% instead of cashing in to make a lot more money. It would also explain
    why Forbes seemingly throws its normal standards for evaluating an
    investment out the window--in reality they aren't doing that at all. Since
    owners don't publicly disclose their books, they must be feeding Forbes
    information that the rest of us don't get--and more precisely, they are
    feeding any prospective bidders for an NFL franchise inside information
    as to how much money they make under the table. Of course, these
    sources of revenue are not revealed.

    But I can make a guess as to what the source of the phantom profits is.
    And it won't even require a roll of the dice. Illegal gambling, anyone?Edited by: PitBull
  2. SteveB

    SteveB Mentor

    Apr 27, 2005
    I am just talking off of the top of my head, but my guess is that owners use the football franchise as a tax writeoff for their other businesses. People that own mega businesses do this with multi million dollar yachts, jets, etc. They take a loss or no profit on the football team to offset the profits from their other businesses.

    The football franchise can also be used for entertaining customers of these other businesses, so there are many fringe benefits to the owner. Tax avoidance is a game with the government. Someone told me a few years ago that if you want to avoid paying income tax, you need to own more businesses.
  3. PitBull

    PitBull Guru

    Oct 20, 2006
    Well SteveB, that might be true of some owners, but for a many of the
    owners, the NFL franchise is the only business they own. Jerry Jones sold
    his natural gas company to buy the Cowboys. In fact, he spent 300
    million dollars of his own money to build the new Cowboys stadium.
    Robert Kraft, who owns the Patriots, has almost all of his net worth
    derived from the Patriots franchise. The list could go on and on.

    As far as tax write-offs, I've never understood that. Why would losing a
    dollar be better than paying 35 cents in taxes?

    I'll tell you a little secret. Lots of marginal and losing businesses are
    bought by people who aren't necessarily looking to get a tax write-off,
    but to have a way to launder money, or simply to avoid paying taxes
    altogether if the business is an all-cash or mostly cash one.
  4. bigunreal

    bigunreal Mentor

    Oct 21, 2004
    Great post, PitBull! Your astute analysis begs the question of why allegedly brilliant capitalists would hold onto businesses that bring them less profit than a simple savings account would annually. Certainly, the competitive urge might explain a Jerry Jones or Daniel Snyder, but how do we account for someone like a Bill Bidwell or William Clay Ford? Those owners have proven conclusively that they could care less if their team ever wins, so what could possibly be their motivation?

    This is like the ads on t.v. and in print that do nothing to make the audience remember what kind of product that's being advertised, let alone the name of the company. Why would greedy corporate heads decide to pay lots of money for advertisements that don't feature their product, or even their name, front and center? The answer, imho, is that they aren't trying to sell their product in those ads. They are trying to sell something else. For those interested in this subject, check out Wilson Bryan Key's excellent trilogy of books on subliminal suggestion in advertising. I think the first one was titled "Subliminal Seduction."

    I think that, like those companies selling more than brand name products, NFL teams might just be selling more than the success (or profitability) of their own individual teams. That certainly would be the only thing that truly explains something like the Caste System.
  5. Maple Leaf

    Maple Leaf Mentor

    Mar 19, 2006

    Your posit is provocative and may have considerable validity. But, without primary sources, or sources closer than a magazine article, we may only speculate.

    That mean operating income seems low for a gross profit of over 200 million. Other than payroll and financing costs these franchises do not have any other sizeable expenditure in comparison. I'm sure the figures are much brighter than what Forbes is making it appear.
  6. SteveB

    SteveB Mentor

    Apr 27, 2005
    It is pretty simple actually. If the owner has multiple business, he can setup an umbrella corporation for all of the businesses. If business X makes a large profit and the sports franchise business takes a loss, then under the umbrella corporation, the net gain is zero or a very small profit. Businesses only pay taxes on the profit.

    The owner still pays himself a salary which shows up on his personal tax return and he pays income tax only on his personal income, thus avoiding paying tax twice (once on his personal and once on the business). This also would apply to those owners that have only the sports franchise as their sole source of income.

    As I said, tax avoidance is a game with the government. The owner can play many games with the amount of personal income that he takes from the business to lower his personal income liability. Things like private jets, cars, etc. can be owned by the business and counted as a business expense, thus lowering the profit of the business and lowering the amount of income tax paid. He can use the business assets for personal use if he does some business while using them. For example, he could use the private jet to fly to Hawaii for the Pro Bowl (a legitmate business expense), but if he takes his family and they spend a couple of extra days in Hawaii for a vacation, then the use of the jet can still be counted as a business expense. There are IRS rules that limit how many days the vacation portion of the trip can last, which I won't bore you with, but you get the idea.

    I know it doesn't sound fair, but that is the law.
  7. James

    James Newbie

    Nov 6, 2007
    How many other businesses can get taxpayers to provide them with a brand new place of employment (stadium) and afford to pay $1.5 million in guaranteed money in signing bonuses to new employees who are untried and inexperiencedin the job?
  8. Maple Leaf

    Maple Leaf Mentor

    Mar 19, 2006
  9. cslewis1

    cslewis1 Guru

    Aug 8, 2006
    Good topic Pitbull. I'd be interested in hearing what you do for work.

    I am surprised you all are overlooking the vanity of it all, to be an NFL football owner. Imagine how many people kiss your butt all day long.

    Why would these people run for various political offices, including President, knowing full well they can't win and yet they still take lines of credits against their homes for campaign cash? They're vain. They like the attention and the power. And yes, there is power in being an NFL owner. Politicians, non profit presidents, bank executives will kiss your butt to be seen with you, when they host their corporate parties and fundraisers.

    Buying an NFL team is a sure way to get attention and now you don't have to worry about your quarterly financial reports, or whether or not to cut your divident, or lay people off or any of the other hassles that come with being a businessman, and yet you can still cut yourself a mutlitmillion dollar paycheck each year, partly financed by the taxpayer.

    not too shabby.

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