NFL Team Values and Phantom Profits

[PitBull]

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:

http://www.forbes.com/2007/09/13/dallas-cowboys-stadium-
biz-07nfl_cx_mo_0913nflintro.html

(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

 

[SteveB]

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.

 

[PitBull]

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.

 

[bigunreal]

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.

 

[Maple Leaf]

Pitbull:

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.

 

[SteveB]

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

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.

 

[James]

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?

 

[Maple Leaf]

Maybe

 

[cslewis1]

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.