Are NBA Franchises Smart Investments?
Have you ever dreamed of buying your favorite sports franchise? Well, I have.
Of course it's a long shot, but my favorite NBA team, the New Orleans Hornets, is currently looking for ownership.
The trick is it would require quite a few other investors to help me cover the $285 million that Forbes says the team is worth. A guy can dream, right?
Where's the Value?
Five NBA teams were sold in 2010 (including the Hornets, which were purchased by the league) and one was sold in 2011.
Surprisingly, each owner paid more for teams than what Forbes reported they were worth, though purchase prices can include assets that don’t always factor into the team value.
One example is the Washington Wizards, which sold for $550 million in 2010 after previous owner Abe Pollin died. Forbes listed the Wizards' worth at $322 million, suggesting the team was sold at too high of a price.
The Golden State Warriors were also sold for $450 million, even when Forbes said they were worth $315 million.
Those two teams lost 70% of their games the two seasons before the sale and yet new owners were still willing to pay a premium for them. The other teams sold in the past two years weren’t any better. In fact, the only franchise that was sold in the past two years that wasn’t in last place in their division was the Charlotte Bobcats, but only because they were second-to-last behind Washington Wizards. The Bobcats boast the worst record in the league this year.
The new owners seemingly overpaid for bad teams while the majority of NBA owners claimed to lose money during 2009-2010. During the lockout, the NBA claimed that 22 of 30 teams were losing what amounts to $370 million per season.
Not Every Team is in the red
Forbes even claimed that the NBA collectively made money last season with a report that NBA teams were worth an average of $393 million each in 2011, up 6.5% over the previous year.Teams like the Los Angeles Lakers, Golden State Warriors and Boston Celtics can thank television deals for their increase in value. Media companies like Time Warner Cable (NYSE: TWC), TNT and Walt Disney's ESPN/ABC will shell out hundreds of millions for sports programming -- mostly because sports are an easy sell to advertisers.
So obviously, not every owner is making multi-million dollar investing mistakes. That would be hard to believe, considering that out of 30 NBA owners, 10 are billionaires. Businesspeople with that kind of success couldn't be making stupid financial decisions.
A report by WR Hambrecht + Co showed that the average value of an NBA franchise increased by 78% over the last 10 years (see page 26).
Even in the short term, in the case of the Wizards and the Warriors, the investments increased in value the season after they were bought. By 2011, the Wizards' value had increased 3% to $322 million, and the Warriors made a huge jump of 15% to $363 million. While these figures still fall well short of the original purchase prices, they are healthy increases and may be the start of something larger down the road.
There's another reason these owners bid high for the two teams in the first place. They knew an even better situation was on the horizon. Sure enough, a year later, the new collective bargaining rules helped all team owners stay more viable by lowering the percentage of basketball related income assigned to player’s salaries from 57% to 51.15% for the 2011-2012 season.
The percentage will stay roughly the same for future seasons as well -- so the upcoming years look even better for the owners who will get to keep a higher percentage of revenue.
Sharing the Wealth -- Small Teams Prosper, Too
Additionally, there is an increase in the amount of revenue shared through the "luxury tax," a tax teams have to pay if their salaries exceed the cap. The luxury tax increased under the collective bargaining agreement, and when a team does get hit with the luxury tax, that revenue is distributed among the teams that stayed below the salary cap.
Some details of the agreement have yet to be made public, but it is estimated that amount of shared revenue will triple in the new plan. So now when the Los Angeles Lakers, New York Knicks, Dallas Mavericks or another profitable team with a rich owner splurges and goes over the salary cap, the smaller, less profitable teams will prosper.
The Luxury Factor
We can't forget the emotional appeal of owning a sports franchise. There are a limited amount of franchises, so joining the elite club of team owners and the notoriety that follows appeals to many who already have everything money can buy.
CEO Larry Ellison is inquiring about purchasing the Memphis Grizzlies and hauling them to his home state of California. Plus, like everyone else, many of these millionaires and billionaires are die-hard fans and would like nothing more than to own their favorite team. I certainly fall into that category.
[InvestingAnswers feature: Don't Mess With Larry Ellison]
The Investing Answer: Owning an NBA franchise is often an emotional investment. For some investors, like Dallas Mavericks owner Mark Cuban, owning an NBA franchise can be very profitable. But that's not always the case.
Similarly, everyday people can be tempted by potential investments that have an emotional tug, like purchasing property near the beach where you honeymooned, buying an expensive piece of art or opening a dream business.
But it's important to look at the big picture. Is your decision based on a desire for notoriety or prestige? If you won't get a return on your investment, will the emotional value of owning that sculpture, luxury car or beach house be worth the financial cost? Be sure your financial decisions are based on thorough research, rather than impulsive desires.