Laidig Speaks: Part II: The Benefit of Division 2 Experience Before Entering MLS

impactFootiebusiness Contributor Dave Laidig offers Part II of his two part masterpiece with a look at the climb from the lower divisions of American soccer to MLS.  For more on Dave, and to look at a small sample of his always excellent work, click on the “Contributors” tab on the top of the page.

In Part 1, we calculated the benefit – in terms of attendance – of entering MLS after competing in the Second Division (currently, the NASL).  And once we have quantified the D2 Effect, we can forecast what the revenue consequences would be with the additional fans.

4

Revenue enhancement for a D2 to MLS expansion is estimated at $2,879,385 per year.

D2 Effect – Discounted Cash Flow Value

The value of D2 effect on MLS teams depends on the circumstances surrounding the transition from a lower division to becoming an MLS expansion team. Obviously, there are costs associated with a D2 team.  For one, MLS indicates that running a D2 team is not required to become an MLS expansion team.  Thus, the costs associated with obtaining a D2 team should be offset by gains in the MLS, otherwise the decision is not justified.

Here, we look at the present value of the future cash flows for a hypothetical situation of a team spending three years in the second division (the NASL), and then entering the MLS as an expansion team.  The overall annual cost for an NASL team is reportedly in the $2-3 Million range.  While NASL teams generate some revenues to offset the costs, conventional wisdom holds that most NASL teams operate at a loss each year.  This analysis does not have reliable figures for NASL revenues; consequently, the conservative figure of a $2 Million loss each year while in the NASL is used.  The $2 Million loss represents an effort to limit costs, and zero revenues.  Obviously, most teams should be able to outperform this annual figure, but we move forward with this as a very conservative estimate.

The MLS data include the D2 Effect of $2.9 Million, based on the data above.  Further, the values for future MLS seasons are not increased for inflation, in keeping with the conservative nature of this projection.  And in order to isolate the D2 effect, MLS expansion fees and relative costs are not considered on the assumption the fees would be the same whether an MLS expansion team has a D2 predecessor or not.

Finally, the cash flows are adjusted to 2013, the start of our hypothetical scenario.  The following table reports estimated present value of future cash flows with several discount rates.

5

As a result, the present value of the D2 effect in the hypothetical three-year run in the NASL prior to entering the MLS is $1.22 Million to $490K.  As with any projection, small improvements can yield large gains.  For example, in the applying the above calculation, the ability to improve the annual loss in the NASL would result in significant improvements over time.

6

This data provides a range of possible financial outcomes in our hypothetical scenario.  All of these results indicate that the net value of this hypothetical scenario is positive.  In other words, spending three years in NASL, without expecting much monetary benefit there, would be paid back with 3 years of MLS pay through higher attendance levels.

And some considerations that are too speculative to capture here, should be mentioned.  The cost of acquiring a D2 team is unknown, and would be a significant added cost for an ownership group focused on entering MLS.  However, other considerations may increase the value, above and beyond the benefit stated here, of a D2 period prior to joining MLS.

For example, the prospect of joining MLS may allow a team to increase sponsorship revenue, or persuade players to take a little less in pay.  This would reduce the estimated NASL losses, thus increasing the net value of the D2 effect.  Nor does this hypothetical consider that a new team may reasonably obtain higher ticket prices, or concession revenue.  Or that there may be parking or other ancillary revenue sources which are not estimated here.

In addition, the valuation of a potential MLS expansion team – once it enters the league – is greatly influenced by the revenue stream it generates.  Thus, the ability to add an extra $2.9 Million in annual revenue increases the overall value of the team, measured as a factor of its EBITA.  And this added value could be realized should a sale of the team, or a partial sale of an ownership interest, occur.

But to return to our basic conclusion, even with zero revenues projected for the NASL team for three years, and aggressive discounting of future cash flows, the net value of future cash flows is still positive.  In short, spending time in the Second Division makes good business sense for those considering a MLS ownership interest.

twinn

About these ads

3 Responses

  1. I couldn’t enlarge the graphs so my question may have been answered in them, but what were the discount rates that you used and how did you derive them?

  2. True, the graphs are illegible. We’ll see what we can do about that.

    I selected a range of discount rates; 6%, 8% and 10%. The range was chosen and revised after discussing the issue with an investment banker, and considering my experience running thousands of profit models for businesses (different industry, but similar math).

    An investment group would likely choose their own discount rate, based on what they feel adequately incorporates future risk. But I believe the 6-10% range would cover most people. A lower rate indicates a low risk investment (doesn’t quite sound like sports) and a higher rate indicates that future revenue is unreliable. I have seen some attempt to use a 14% rate in litigation, but it seems rare (at least it was before I left the law firm).

  3. That’s about the range I was expecting to see. It would be interesting to see how these rates vary across the different professional sports.

Comments are closed.

Follow

Get every new post delivered to your Inbox.

Join 70 other followers