by Tommy George, the Sports Advisory Group
As the baseball season heats up, so does the interest from buyers and investors in acquiring a baseball franchise. This is the time of the year when our partners get calls every day asking, “What do I need to do to buy a Minor League Baseball team?”
The first step for prospective owners is to understand Minor League Baseball, including valuations, revenues, the Player Development Contract, and more.
Minor League Baseball (MiLB)
Minor League Baseball (MiLB) includes 14 leagues (Triple-A, Double-A, Single-A and Rookie League) across North America with 160 member teams, and serves as the backbone of America’s pastime. Minor League Baseball is an intricate network of teams that are affiliated with one parent club from Major League Baseball (MLB). The affiliation agreement between the Majors and the Minors gives way to player development and enhancement, while also serving as a support system for each team.
Each team operates under an affiliation contract, known as a Player Development Contract (PDC), binding a Major League team and Minor League team to each other for a specific term (normally two to four years). The PDC is a standardized and non-negotiated contract which commits the Major League team to supply a manager, coaches and players to the Minor League team. In turn, the Minor League team commits that it will provide a suitable / approved stadium and a membership in an approved Minor League for the team to play its games for the duration of the PDC. There are no direct monetary considerations provided for in the PDC. Under the PDC arrangement, the Major League Baseball teams pay salaries and benefits for players, coaches and trainers, as well as equipment like bats, gloves, etc. The MiLB franchise owner / operator pays for items such as in-season travel, operational expenses, etc.
MiLB franchises trade at values ranging from $6 million to $50 million+, depending on the League, level of play (Single-A, Double-A, Triple-A, etc.) and financial performance of the franchise. MiLB franchise valuations are more greatly influenced by comparable transactions within the respective League, as compared to traditional economic valuations using traditional EBITDA multipliers. Forbes annual report of MiLB valuations provides great insight on the most profitable and highest valued teams within MiLB.
Revenue streams for MiLB teams are similar to MLB clubs: ticket sales, sponsorships, concessions, souvenirs and web / media. The remaining revenue for these enterprises is derived from licensing deals, MiLB generated revenues from BIRCO (Baseball Internet Rights Company; manages the digital and interactive media rights of its member Minor League Baseball clubs and leagues), stadium concessions, merchandising, and “other” ancillary sources. Retail sales of licensed Minor League Baseball merchandise have more than doubled over the last ten years. The “other” category may include a wide variety of services, such as parking, catering, luxury box seats (not included in ticket sales), amusements, and the rental of facilities, equipment and / or other goods. Many teams also host ancillary events at their ballparks throughout the year. These can include concerts, flea markets, beer and wine festivals.
Typically full / controlling interest transactions within Minor League Baseball take place in the off-season although due diligence and negotiation for the deal can certainly be completed during the season. Some teams are owned outright by one person, and some operate with numerous shareholders. Minority shares of MiLB franchises are often available. You can expect teams with shares available will want to sell a minimum 5% interest in the team. Sales of a controlling interest are rare. These deals can be completed at various points of the season, depending on the team, League, and % being sold.
Minority partners / shareholders in Minor League Baseball franchises receive many of the same ownership perks that apply to a controlling partner, including tickets / ownership suite access, player access, and perhaps some connections at Spring Training with the MLB parent club. However, minority partners / shareholders will typically not have a direct say in team operations, management, etc.
The obvious lure to MiLB ownership is the direct connection with MLB clubs, and future MLB stars. Since 1996, only two players have gone straight to the Major Leagues with no professional baseball experience (Xavier Nady – San Diego Padres, 2000; Mike Leake – Cincinnati Reds, 2010). Every other MLB player since then has gained professional experience before taking the field in the Majors, with the overwhelming majority coming from MiLB (others have come from professional leagues in foreign countries, or independent professional leagues). These players include Bryce Harper, Mike Trout, Kris Bryant, Clayton Kershaw, and hundreds more of today’s MLB stars.
Once an owner / ownership group gains an understanding of Minor League Baseball, the key is to focus in on geography and/or League. What makes sense for ownership? What are your financial parameters? Is it a franchise that is within close proximity to the managing partner? Does geography not necessarily matter? Is a franchise near an airport the key ingredient, for accessible travel? Due to the limited availability of teams to purchase, most ownership groups place higher value on the opportunity versus geography.
Turn-Around or Turn-Key
Owning a professional baseball team is a major acquisition. Ownership requires hard work and effort, financial resources, professionalism and creativity. At the Minor League level, most franchises employ highly capable sales, marketing and operations staffs. Hands-on management of the day to day operations by is typically not required by ownership. These teams can be successfully run by absentee owners (although they are certainly keeping their “eyes on the store”).
Owning a team can also be a great deal of fun and offers a highly visible role within the local community. It is typically viewed as a much more conservative investment than say stocks or bonds. Ownership will most likely want to be able to attend games with relative ease. Being able to take friends, family, clients and co-workers, etc., to games will probably be a top priority for ownership.
For some buyers / investors, a turn-key operation is extremely attractive when pursuing the acquisition of a franchise. Strong operations and a successful financial performance on an annual basis means that new ownership will have to do very little to continue the success of the team. These ownership opportunities are typically higher priced from a valuation perspective than other franchises. However, for first-time owners, or ownership groups with other business ventures that require their attention and time, these teams are extremely attractive.
For successful operators and many entrepreneurs, a turn-around opportunity is extremely attractive. Since most teams employ solid staffs, these types of situations do not come with much frequency. Turn-around opportunities provide ownership the ability to implement new business strategies and practices, perhaps some financial reengineering, all in an effort to improve the financial performance. Ultimately, the goal is the successfully cultivate a change in the business of the team, and improve the team’s finances – both on an annual basis and long-term appreciation in valuation of the franchise.
Milb has established geographic footprints for all of their leagues. In addition, teams are provided geographic exclusivity within their primary markets which prohibits franchises from relocating too close to another team’s primary drawing area. As a result, teams wishing to relocate their franchise can only consider markets that fall within these guidelines. An attractive market may seemingly come available but if it doesn’t fall within the above parameters, it can be rejected by Milb. That said, relocation can provide significant upside. It can rejuvenate a franchise offering revenue and cash flow potential simply not achievable within the current market. Patience can be a virtue here but he rewards can be significant.
The final step is assuring that your ownership group has its funding in place. Professional sports ownership requires that buyers / investors come to the table with their monies in-hand. Financial contingencies are typically a non-starter in negotiating for a team. Bank financing in regards to sports ownership is rare. Milb teams typically trade at multiples to cash flow significantly higher than banks are comfortable with. Milb controls the amount of debt an owner may carry. Most transactions are all cash at closing. Buyers are vetted by the seller and Milb. As a result a buyer / investor typically needs to have their monies in place, and is serious, before they can pursue the acquisition of a team. It is important to remember there are only 160 opportunities to own a Milb team. And very few franchises change hands each year. Demand typically outstrips supply.
What to Expect
Investing in a Milb team is more closely akin to holding shares in a money market fund. You typically are not going to see big pops in price or the downside risk you see with stock investing. Milb investing tends to be a steady, conservative investment. Most ownership groups understand that the return on investment will come in the long-run, not on an annual basis. Many successful ownership groups take annual profits or returns and immediately re-invest those funds into their franchise. These monies are typically spent on revenue generating investments, such as marketing, facility improvements / upgrades (electronic displays, kid’s play areas, concessions areas, etc.), or staffing.
Over the past 20 years, most franchises have appreciated between 2-5% per year, regardless of cash flow or annual financial performance. Those franchises with a strong financial performance on an annual basis can have much higher appreciation rates. The long-term payout of ownership is truly where investors will make their money – especially with successful operations. Most teams are held for a minimum of five plus years. As mentioned above, minimal supply and strong demand continue to fuel price appreciation. There are only a few opportunities available each year to own a franchise.
A wonderful example of the buy and hold strategy is seen with the Columbus Clippers. The government of Franklin County, Ohio purchased the Clippers in 1977 for $25,000. After years of successful operations, strong community partnerships, and a history of players who went on to MLB stardom, the team and County were able to secure funding to construct the brand new, state-of-the-art Huntington Park for $70 million. In 2016, Forbes valued the Clippers at just over $41 million, with the team producing over $13.5 million in revenue and an operating income of over $4 million. All-in-all, not bad for $25,000…even if it did take 40 years.
Most investors obviously will want a quicker timeframe than 40 years though regarding an investment, which is fair. Most teams now recognize that further developing the fan experience at the game can have a major effect on revenue generation. Providing highly creative concessions, selling stadium and field naming rights, offering unique game day promotions, adding carnival style games and amusements, luxury boxes, and crafting a wider variety of sponsorships are just some examples of ways teams are driving revenues much higher. Milb is a business, which is why Leagues are looking to executives and professionals with business-world experience to become owners / operators.
The partners at The Sports Advisory Group can assist you in finding and fully analyzing an ownership opportunity that meets the criteria of your ownership group. The Sports Advisory Group is the nation’s leader in the sale, acquisition and investment in professional sports franchises, with experience across all levels of baseball, minor professional and junior hockey, E-Sports, professional soccer, the NBA C-League, NASCAR, and more. The team at The Sports Advisory Group can assist with all types of ownership transfers, big or small, and has the experience needed to ensure the deal meets the needs and expectations of both the Buyer and the Seller. For more information, contact Tommy George, President, (240) 409-6297; firstname.lastname@example.org.