Thread by @CashNSport

In today's #ThursdayThoughts thread ⬇️ the valuation of football clubs.

According to Statista, @AlAhly is Africa's most valuable club at €25.53 million with @Masandawana being SA's most valuable at €18.98 million (R376 million)

Here's how these values are arrived at.

This review cites the various valuation models used but mostly looks at the Multivariate Model which is most commonly used worldwide and was developed by Tom Markham in 2013.

We begin with the other models and how they work.

Market capitalisation:

A company’s share price
is multiplied by the number of shares in issue to provide the market capitalisation or company
valuation

An obvious problem is only clubs floated on an exchange can be valued reliably using market capitalisation.

ie ⬇️

Discounted Cash flow (DCF):

The value of an asset is calculated by obtaining the present value of the expected future cash flows. These cash flows are discounted back to the present day using a discount rate in-line with the perceived risk of the investment

The issue with the DCF model is that it requires consistent cash flows. Most football clubs are perpetually loss making and therefore do not have any positive future cash flows to discount back to today’s value.

This is especially the case here in South Africa.

Revenue multiples:

It measures a company’s value relative to its turnover. The valuation is calculated by multiplying an organisation’s annual revenue by the appropriate multiplier . Different to DCF in that revenue multiples
only requires a turnover figure

Broker valuation:

The broker will assess the assets and liabilities of a club before assigning a value or guide price for the club in consultation with owners and advising on realistic figures the owners can look to charge prospective buyers.

Onto the Multivariate Model

It is a variation of the Revenue Multiple approach, with the underlying principle being that a sports franchisee’s ability to make money in the future determines its valuation.

The model uses audited accounting
data and industry KPIs to provide a bespoke valuation method designed for the football industry.

The calculation ⬇️

Club value = (Revenue + Net Assets) * [(Net Profit + Revenue) / Revenue] * (% stadium filled) / (%wage ratio)

The key to this model is Revenue + Net Assets (Equity) : Revenue includes the cash generated in a financial year. Adding net assets to revenues helps determine the club’s current and future cash generation capability.

(Net Profit + Revenue) / Revenue: This ratio examines a club's profitability in comparison to its revenue. Thus, for profitable clubs, the Revenue + Net Assets will be multiplied by a number greater than one, enhancing the valuation.

(% stadium filled) / (% wage ratio): The numerator in this ratio, i.e. the average utilization percentage, illustrates how effectively a club is using the stadium, its core differentiating asset. Higher the stadium’s utilization, higher the valuation.

The wage ratio displays the club’s ability to control its major expenditure, player costs. Higher the player wages, lower the ratio and vice versa.

Wage ratio and percentage of stadium filled jointly determine nearly one-third of a football club’s value and are the most relevant indicators of the management’s ability to control costs and exploit assets.

So what are the other major revenue generators?

Commercial: Football clubs monetize their global brand via sponsorship and retail, merchandising, apparel & product licensing. Commercial revenues are largely controlled by the club and, hence, less dependent on market cycles.

Brief detour ↗️

A common myth is "clubs make millions off shirt sales" myth.

Kit manufacturers usually take 80–90% of all revenue from shirt sales. Clubs in return receive large, ‘up-front’ payments from their kit manufacturer even if the club have their own store.

Onramp ⬇️

Broadcasting: It is derived from the global television rights. In addition, certain clubs earn from their wholly own television channels.

The broadcast rights manifest themselves in shared value to the clubs through the monthly R2 million grant, etc.

Matchday Revenue: It is a function of the number of games played at the club’s stadium, size and occupancy, and prices of tickets. A significant driver of revenue under this category is the number of home games played at the club’s stadium.

To add to the stadium matter, owning a stadium allows one to have additional revenue from leasing for events, having restaurants or family activities hosted there or other commercial ventures such as selling naming rights.

Sadly, none of our local clubs can tap into this

Another asset or liability is the players

The value of a player can dramatically change overnight based on an injury or a star performance in a game. In addition, transfer fees paid by football clubs to acquire the services of players have skyrocketed in recent times

Valuing players is a tricky business and coming to the wrong value for a player can prove costly.

Factors such as previous transfer value, age, team contribution, image rights and the state of the market all influence this.

We will dive deeper into player values another time.

As I'm not directly involved in deals I cannot confirm that any of the above are used locally but we can glean some learnings from an interview @SukaziTim had in September 2020.

When asked about the value of the "big 3" one would have to pay "maybe even R1 billion"

From the interview, Tim suggested that the value of clubs in South Africa is mostly down to the buyer and seller although there is science incolved and mentioned

- Grants
- Player or squad value
- Goodwill of the club

He claimed a small club could be valued at R60 million

The goodwill element in a club valuation is extremely subjective. How does one value history?

Requires specialist brand valuation companies to do it properly. In most cases thought its a pride based estimate not based on science.

That's today's #ThursdayThoughts thread. If you're seeing my work for the first time, hit the follow button, I drop two threads and a podcast every week.

Key tags - #KnowYourOwner, #CashNSport & #ThursdayThoughts

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