Investing in Professional Sports Teams – How Sports Investments Differ from Traditional Models

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Foley & Lardner LLPOn September 22, 2020, Foley & Lardner LLP’s Family Office and Sports & Entertainment Groups partnered to highlight various aspects regarding investing in professional sports franchises. The discussion was led by Foley’s Sports & Entertainment Group Co-Chair, Kevin Schulz, and Steve Greenberg, the Managing Director at Allen & Company LLC.  Together they discussed various aspects an investor must consider prior to investing in a professional sports franchise, how such an investment differs from investments in non-sports assets, and why this type of investment may be attractive for certain high-net-worth individuals.

Although investing in a professional sports franchise has many similarities to traditional investment models, there are certain distinct differences. From the start of the process to the eventual completion of the purchase of the ownership interest, there are various items to consider, including the following:

  • The actual auction process – Many sales of professional sports teams are set up as auctions. This is where prospective buyers will compete with other buyer groups in order to have their bid selected by the seller. The process from start to finish varies in time but, generally, can be as short as two months or, in some situations, can last longer than a year. Due to the scarcity value of there being so few professional sports franchises, this can often be a very competitive process. Typically, there is an initial vetting process by the current owner of prospective purchasers, and a winnowing of the number of prospective purchasers, based on their initial indications of interest and financial wherewithal. Following that initial narrowing of the field, anywhere from two to five prospective purchasing groups may then submit a more definitive bid during a typical auction process.
  • Obtaining league approval – After a buyer is selected, there is typically a one- to two-month league approval process. This is a unique component of investing in professional sports teams, as a prospective investor will need the league to approve its purchase of a stake in a particular franchise. In addition, the owners of each of the teams will vote on the admission of the buyer as a new team owner. A supermajority vote is typically required (for example, in the National Football League, 24 of the existing team owners must approve the new owner). A distinct difference from a typical investment, a purchaser of a professional sports team must adhere to some league rules that are non-negotiable. As part of this, owners can be held to stringent standards and subjected to fines or other penalties from the league if they are convicted of certain crimes or otherwise act in a manner that violates the rules of the league. Teams themselves also face various rules and restrictions such as limits on the amount of indebtedness. Due to the league oversight and involvement, professional sports is effectively a regulated industry.
  • Background check – As part of the league approval process, a prospective purchaser must go through an intensive background check. Purchasers are also restricted from owning stakes in certain businesses that the leagues view unfavorably such as adult entertainment. Some of these restrictions have been relaxed as leagues’ attitudes have changed over time, however. For example, ownership of a gambling/gaming interest used to be prohibitive for a prospective owner, but those restrictions have been considerably relaxed as sports leagues have started to embrace sports betting in recent years.
  • The selection of an individual control person – Even if a group or consortium purchases a team, pursuant to the applicable league rules, one individual in the group/consortium must be selected as the “controlling” owner for purposes of all team- and league-related matters such as voting on significant team matters, attending league meetings, and voting on items such as collective bargaining agreements, league rules, and the admission of other new owners, as discussed above. That one individual will have the sole discretion to make decisions on behalf of the team at league-wide meetings.
  • Restrictions on transfer – Once a purchaser of a team has been approved, the controlling interest in that franchise may not be sold without the supermajority approval of the other owners across the league, as discussed above. This also means that a team may not be relocated without the requisite approval of the other owners.
  • Return on investment – Typically, profits are invested directly back into the team in order to improve the chances of winning a championship and to enhance the fan experience. For this reason, investors may not realize a return on their investments until the franchise (or their interest in the franchise) is sold. These businesses are driven by long-term capital appreciation rather than year-to-year profits/distributions.

Minority Shareholders

It is common for high-net-worth individuals to acquire minority interests in sports teams. Although these individuals will have to go through much of the same processes as mentioned above, there are additional considerations when investing as a minority shareholder:

  • Limits on number of owners – Per the applicable regulations of the professional sports leagues, there is generally a limit on the number of investors in the ownership group that may own a particular franchise (typically around 15 to 30 individual ownership interests).There may also be a minimum amount that each investor must own.
  • No say in the decision-making process – Minority shareholders are not afforded the same rights as minority shareholders in traditional, non-sports companies. As mentioned above, one individual will be required to serve as the “controlling” owner of the team.As such, that “controlling” owner will have the right to make unilateral decisions on behalf of the team, including with respect to both the business (e.g., naming rights or media rights deals) and the team operations (e.g., hiring and firing of coaches), without the input of the minority shareholders.
  • Capital - There are certain debt restrictions that an owner must abide by when owning a stake in a sports team. Leagues have set stringent limits concerning the amount of debt a team or owner may have when operating a franchise.
  • Additional restrictions on transfer – In addition to the restrictions on the transfer of a controlling interest in the franchise discussed above, a minority investor also must receive the approval of the league office (but generally not the approval of the other owners in the league) before the sale of the investor’s interest.In addition, most team’s governing documents will also require the approval of the team and/or “controlling” owner before a minority investor can sell his/her interest.

Owning a professional sports franchise can be an exciting endeavor. Besides the potential for long-term appreciation of the investment and the prestige of owning a professional sports team, other benefits include specific tax benefits, a potential vehicle for estate planning, the ability to operate a multi-generational family business, and the opportunity to partake in various philanthropic efforts and causes. Having a diversified investment vehicle such as an ownership interest in a professional sports team can potentially be invaluable during times such as the current pandemic as this particular asset has historically held its value during market downturns better than other investments and can act as a defensive asset against negative market pressures. Owning an interest in a professional sports team can offer a meaningful opportunity to give back to the local community and can provide owners with many exciting memories for years to come.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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