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The Economics of Business ValuationTowards a Value Functional Approach$

Patrick Anderson

Print publication date: 2013

Print ISBN-13: 9780804758307

Published to Stanford Scholarship Online: September 2013

DOI: 10.11126/stanford/9780804758307.001.0001

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APPLICATIONS: FINANCE AND VALUATION

APPLICATIONS: FINANCE AND VALUATION

Chapter:
(p.295) 17 APPLICATIONS: FINANCE AND VALUATION
Source:
The Economics of Business Valuation
Author(s):

Patrick L. Anderson

Publisher:
Stanford University Press
DOI:10.11126/stanford/9780804758307.003.0017

Abstract and Keywords

The author argues that start-up firms, distressed firms, and near-bankrupt firms are the exception, not the rule, in the modern economy. This raises the question of whether such firms, which are commonly small and financed largely by the entrepreneurs involved, have value. The chapter also discusses the applicability of traditional valuation methods for such firms, compared with the novel value functional or recursive method. The author concludes that, when properly evaluated, start-ups and distressed firms do have value.

Keywords:   Start-up firms, entrepreneurial finance, bankrupt firms, distressed firms, business value, sports franchises, traditional valuation methodologies, failure of, value functional method, recursive method

OUTLINE OF THIS CHAPTER

In this and the following chapter, we frequently refer to techniques and theories presented in the earlier parts of the book. Careful readers will ensure that they have reviewed those chapters before plunging into the valuation of, say, their local professional sports team.

Start-Ups and Bankrupt Firms as the Typical Case

Remember that small firms, start-ups, and distressed firms are the rule, not the exception! Thus, one can view a discussion of these firms as a discussion of the typical firm. In this chapter, we do the following:

  • Pose the question of whether start-up firms have value.

  • Discuss the applicability of traditional valuation methods to start-up firms.

  • Discuss valuation methods applicable to firms in and near bankruptcy.

Franchises and Sports Teams

We also discuss application of valuation techniques to an interesting subset of companies: franchises (including franchisees and franchisors) and sports teams. In particular, we discuss the following:

  • The definition of a franchise, a franchisor, and a franchisee.

  • The key drivers of value for franchises.

  • How different valuation methods can be used to estimate the value of franchised companies.

  • Major league sports franchises and their market values.

(p.296) START-UP FIRMS

Do Start-Up Firms Have Value?

We reviewed in Chapter 5, “The Organization and Scale of Private Business,” the empirical evidence on business creation and destruction. We found that half or more of new firms in the United States go out of business within the first five years of their existence, and most new firms in European countries (where data are available) seem to disappear within about five years as well. We also noted strong evidence that most recently started firms lose money, and that entrepreneurs often work for reduced pay—and dip into their family savings—to keep operating.

Despite these apparently grim statistics, entrepreneurs continue to start firms and work long hours to keep them going. Furthermore, “being your own boss” remains part of the American dream, as well as the dream of many people the world over. Clearly, entrepreneurs throughout the world strongly believe that the fledgling firms they start have value.

Valuing Start-Up Firms: Comparison of Methods

How can entrepreneurs believe that start-up firms have value, when empirical evidence suggests that most of these businesses will lose money and go out of business? This question is an important test of valuation methods.

In Table 17.1, we consider how each of four different methods would estimate the value of a newly formed business with the common attributes of a start-up firm, including no profits, only one or two employees, and significant start-up expenses. The table summarizes

TABLE 17.1 Comparison: Valuation of start-up firms using different methods

Type of firm

Asset

Market

Income

Value functional

New inventor firm (no saleable intellectual property yet, but promising technology under development; no sales revenue or royalty income yet

Zero or small value

Value would become positive only after a contract or revenue was produced

Zero or small value

Intellectual property may have small market value independent of inventor

Zero or small value, unless heroic forecast made

With a contract, could forecast income that establishes basis for positive value

Small positive value in the market; significant positive value to inventor given faith in abilities and desire to work in this manner

New consulting firm (firm with two experienced employees, a handful of con-tracts, but not yet profitable when salaries are accrued)

Positive, though small

Owners could manipulate estimate by adjusting salaries

Close to zero, unless owners are valuable as employees of another firm, or if firm acquires valuable market position

Positive, though small

Proper application of method requires adjustment for salaries

Positive value that probably exceeds that estimated under either the market or income approach

Value functional recognizes growth potential and benefits of “being own boss”

Assumptions: Naive application of each method to classic example of first-year firm of each type.

(p.297) the likely conclusion of a straightforward application of the traditional asset, market, and income approaches, along with the value functional approach, all done without subjective adjustments.

Observations on Methods: Theoretical and Practical

Table 17.1 also illustrates how the traditional methods are aligned with the dire side of the aggregate statistics about business survival: they consistently show little or no market value for a typical start-up firm. The value functional methodology, however, is aligned with the optimistic side of those same statistics: it consistently shows some value for such firms. This matches the opinion and decision of actual entrepreneurs.

As these entrepreneurs are actually financing and starting firms, and a share of these are also receiving financing from others, a superior method would recognize the value that the market itself has confirmed. At least theoretically, the value functional method is superior to the traditional methods in this respect.

In practical cases, the facts often dictate that one valuation method is better than others, especially given data limitations and the knowledge of the person doing the value estimation. Based on both theoretical and practical consideration, I offer the following advice on valuing start-up firms:

  • An income approach may be useful if the new business has sound projections of business income and evidence supports the projections. Of course, the mere existence of a business plan or cash flow projection can be meaningless if the plan or projection is divorced from the facts.

  • Accounting records rarely establish future earnings potential, but they can establish convincingly the amount of effort and investment put into the new business by the entrepreneur and other investors. They also can show the strength of the business management (or reveal its inadequacies).

  • Market methods are unlikely to produce a sound estimate of the value of a new business, except in the unusual case where actual market transactions for comparable firms (or offers for the subject business) are available. However, a market method may provide an upper bound or other indication of the plausible range.

  • Since the success of most new businesses is based heavily on their ability to exercise real options, real options methods should be considered. However, guard against double-counting the value arising from real options and that arising from natural growth.

  • The value functional method is the closest match to the actual tension of an entrepreneurial firm. Furthermore, it correctly recognizes the importance of management control. Hence, if the information necessary is available and the expert is capable of using the method, it should be considered.

  • The skill and knowledge of the person estimating the firm’s value will probably be critical. His or her professional judgment may, in the case of relatively few hard facts, be the most important factor in the valuation.

  • (p.298) The plausible range of potential market values is likely to be relatively large compared to the range for established firms.

  • Management always matters in a business valuation. When management decisions can result in the life or death of the enterprise, management means even more.

    A large firm can often survive an incompetent CEO for a few years. A small firm usually cannot.

DISTRESSED AND BANKRUPT FIRMS

What Is Bankruptcy?

It is important to define bankruptcy in order to properly understand the value of firms that may be in, or near, bankruptcy. We define, in general terms, bankruptcy for a firm as follows:1

  1. A firm is bankrupt when:

  2. a. It is an operating firm.

  3. b. Its financial obligations exceed its ability to satisfy them under its existing business and operational structure.

  4. c. It declares bankruptcy under the applicable laws of the state in which it operates.

  5. d. That state has adopted a bankruptcy code.

This definition incorporates the institutional factors of limited liability for stockholders,2 a bankruptcy code,3 and the economic definition of the firm. These are all important topics themselves.

Going Concern Principle

An important accounting convention has largely been adopted, in practical terms, by the economics, finance, and professional valuation communities: the going concern principle. This is a presumption that the company can function without fear of liquidation for the foreseeable future, which is often interpreted to mean at least one year. Such a premise is implicitly incorporated in nearly all analytical models in economics and finance. Without this premise, it would be difficult for other parties to contract with the firm, and for lenders and investors to finance the firm.

The going concern presumption allows the firm’s financial affairs to be presented using normal accounting rules, including the rules for accruing income and expenses. These normal accounting rules also allow for the calculation of book value or accounting net worth of the firm, which is the excess of assets over liabilities. Such a calculation does not predict the market value of the firm, but it does provide investors with a useful indication of the firm’s solvency under the relevant accounting rules.

Value of a Distressed Firm

A distressed firm may no longer fulfill the premise of a going concern, although the issue is often a matter of some ambiguity. However, we focus on the value question: does a formerly profitable firm that has become distressed still have value?

(p.299) The answer for most such firms, at least conceptually, is clearly yes. In general, distressed firms have valuable assets, they have the potential to become profitable again, and they may be attractive acquisition candidates for investors or competitors. Valuation methods used for distressed firms should recognize these facts.

Value of a Bankrupt Firm

Now consider a bankrupt firm, where the ongoing concern premise is not fulfilled and where the company has filed a bankruptcy petition indicating that it is insolvent and can no longer operate in a normal fashion. Could such a firm have any value?

From an accounting basis, the firm has negative net worth. However, such a bankrupt firm could have business value, because such a firm (or a successor firm that acquires its key assets, employees, or technology) could earn profits in the future from replicable business processes it possesses.

Situations in Which Bankrupt Firms Often Have Business Value

There is an identifiable set of business situations in which bankrupt or distressed firms often have significant business value. These include the following:

  1. 1. Failed expansion; successful core. Consider a firm that operates profitably for many years. It has an opportunity to dramatically expand and believes that such an expansion is likely to result in higher future profits. The expansion carries risk; the management of the firm weighs the risks and proceeds ahead. Unfortunately, the expansion effort encounters large unexpected costs, and the firm becomes unprofitable. It cannot sustain the expanded operations but could sustain the core operations that preceded the expansion. It files a bankruptcy petition and seeks to reorganize, shedding the expanded operations.

  2. 2. Successful expansion; failed core. The converse example also occurs with some frequency. Consider a firm that extends its operations into new markets. The new markets develop nicely, with the support of the core operations. Eventually, the core operations fail and push the firm into bankruptcy. The firm tries to radically change its core operations and retain its new-market operations. If that fails, it may shut down its core operations entirely, and reorganize to focus on its new-market operations.

  3. 3. Catastrophic business events. A firm may operate profitably for many years and then suffer a catastrophic event that causes losses beyond its capacity to absorb. In such cases, the firm may have some value once the source of the disaster is removed from the corpus of the firm.

  4. 4. Strong brand, bad business. A firm that created a strong brand, but whose business practices and costs had failed to allow it to operate profitably, may have some value even in bankruptcy. Such firms may have a customer base that, even though diminished by bad business practices, still is connected to the brand.

Bankruptcies Without Good Prospects of Emergence

There are also examples of businesses that fail without a clear basis for ongoing business value. Such firms may fail, not because of any extraordinary event, but because of a funda (p.300)

TABLE 17.2 Advice on methods for valuing distressed firms

Method

Advice

Traditional asset

May be useful if assets are separable and all have identifiable value

Traditional income

Rarely usable unless dramatic adjustments are made

Market

Rarely useful for specific assets; can be useful in plotting exit from bankruptcy

Value functional

Usable, though difficult, if reliant on information from other methods

mental imbalance between costs and the market price, the inability of the firm to achieve the necessary scale, the inability to attract investors and lenders, the failure of a promising invention or idea to prove viable, or the loss of key employees. They may also fail because of a fundamental change in the market or economy that causes a large number of previously valuable firms to simply disappear.4

In such situations, there is often little prospect that the firm can emerge from bankruptcy as an operating company.

Advice on Valuing Distressed and Bankrupt Firms

In Table 17.2, we provide advice on methods that can be used to value distressed and bankrupt firms. Note that institutional factors—including the bankruptcy code and the particular agreements between key employees and the firm, the firm and its lenders, and the firm and its customers and suppliers—are always critical features of a proper valuation of a distressed or bankrupt firm.

FRANCHISES AND SPORTS TEAMS

What Is a Franchise?

An Introduction

A franchise is a business model in which specific branded products or services, and a specific mode of operation, are replicated among many businesses. These businesses contract with each other through a set of franchise agreements.5

Franchises dominates certain sectors of the U.S. economy, such as automobile and truck retailing, fast-food restaurants, hotels, alcoholic beverage distribution, automobile rental, and copy centers. In a franchise, one business (known as a franchisor) creates a brand identity for a product or service, outlines a method for providing the service, and appoints separate companies (known as franchisees) to provide the goods and services. In exchange for these services, the franchisor receives some type of fee, royalty, or license payment from the franchisees.

The underlying economics of the franchise is critical to the value of franchisees and franchisors. The study of franchises also highlights particular aspects of the value of all businesses and helps isolate value components in nonfranchise businesses.

(p.301) Essential Elements of a Franchise

The three essential characteristics of a franchise system are as follows:

  1. 1. Trademark. The franchisor creates a brand identity for a product or service. This brand identity normally includes trademarked symbols or names.

  2. 2. Significant control. The franchisor exercises significant control over the franchisees’ operations. This typically includes following certain standards for service, product delivery, and overall representation of the brand.

  3. 3. Required payment. In return for the use of the trademarked product or service and other benefits of being part of the franchise system, the franchisee pays a royalty, license payment, or other fee to the franchisor.

Other Typical Characteristics of Franchises

In addition to the three essential elements, many franchises share the following characteristics:

  1. 4. A written agreement between the franchisor and franchisee that outlines the obligations of the franchisee and franchisor. This may be called the distribution agreement, sales and service agreement, or franchise agreement.

    While this may seem a commonsense requirement, our experience indicates that many business arrangements that are clearly franchises operate without a comprehensive written franchise agreement.6

  2. 5. The franchisee is normally granted the primary or exclusive right to represent the brand within a certain area, subject to performance and market standards. This territorial grant is an important aspect of traditional franchises.

    However, the degree to which the franchisee truly has exclusive rights to represent the brand varies considerably. In practice, customers are almost always free to purchase a product or service from a franchisee of their choice, regardless of whether they are located in its designated market area.

Statutory Requirements for Franchises

Franchise as an Economic, Not Legal Concept

The franchise business model is fundamentally an economic model, not a legal fiction. Governments often impose specific requirements on businesses that meet their definition of a franchise. In the United States one of the most important is the FTC Franchise Rule. This rule uses the three-element test described earlier to define traditional franchises, and subjects them to disclosure requirements.

Valuation Factors for Franchises

At the top level of analysis, a franchisee business is no different from any other. It purchases products and resells them, hopefully at a profit. In franchisee businesses, however, there are certain specific factors that must be considered, and an additional set of risks.

(p.302)

TABLE 17.3 Key franchise elements in valuation

Element

Franchisor valuation

Franchisee valuation

Notes

ESSENTIAL FRANCHISE ELEMENTS

Trademark or “brand”

Very important

Very important

Both parties share in the cultivation of the brand.

Valuation should consider the durability and risk associated with the brand itself, which may not be the same as the business risk of either party.

Quality control

Important

Important

Quality control is important for both parties; however, franchisees are vul-nerable to abuse through “control” requirements.

Fee

Very important

Important

Fee revenue is the dominant source of earnings for the franchisor, and a smaller part of the franchisees’ expenditures. Structure of fee is often as important as amount.

OTHER ELEMENTS

Number of locations (for sales, service, or distribution)

Very important

Important

Size of franchise system is important to both parties, as strength of brand is critical to both parties.

Advertising and other brand support by franchisor

Low to high importance, depending on product or service

Low to moderate importance

Varies significantly by product category.

Product development

Low to high impor-

Low to moderate

Varies significantly by product category.

by franchisor

tance, depending on product or service

importance

Very important for new products; less important for well-established products.

Competing franchises

Important

Very important

For traditional retailers of developed products, local competition with competing franchisees may be a dominant factor in their market.

New franchisors may find it difficult to compete against established sales and service networks of existing franchisors.

Ability to designate new locations or control franchise in that area

Important

Very important

This “growth option” can be valuable for a franchisee; franchisors typically rely on motivated franchisees to grow and hence are reluctant to cede control in this area.

The key factors that should be considered in franchised businesses include the following:

  • Control, or lack of control, over product pricing

  • Quality control of the product across the entire franchisee network

  • Extent of the network and strength of marketing efforts

  • Benefits of the brand or brands associated with the franchise, and landscape of competing brands

  • (p.303) Any growth option in the brand or variants of the brand

  • Any growth option for new franchisees, such as rights to emerging markets

  • Risk that the brand itself may decline or the franchisor may cease doing business

The relative importance of these elements is discussed in Table 17.3.

SPORTS FRANCHISES

Private Businesses and Civic Institutions

Most sports franchises are private businesses. However, many occupy a place in American society quite close to civic institutions. This status has given major league sports franchises access to direct and indirect taxpayer subsidies, and even a de facto exemption from the major antitrust laws.

Major revenue sources of a sports franchise are ticket and luxury suite sales; advertisement and sponsorship income; media rights; sales of licensed products such as jerseys, hats, and T-shirts; and other royalty income. Major expense items of a sports franchise are salaries of players, stadium and other facility costs, nonplayer employee salaries, advertising, and meal and travel expenses.

Some authors assert that the value of sports franchises is not determined in the same manner as that of other businesses. For example, Soonhwan Lee and Hyosung Chun presented this argument in a 2002 article in Sport Journal:

Unlike industrial or financial business, which is generally valued on cash flow and assets, sport franchises are valued on their revenues. There are two reasons for this. First, in the long term, the operating expenses within each league are about the same for every team. Second, revenues most closely measure the quality of a team’s venue and track athletic performance, ultimately the two most critical elements in team evaluation (Ozanian, 1994). Professional sport team values have risen over the past decade and are expected to rise to unpredictable levels for the next few years. The reasons for this rise are the revenues from the leagues, including gate receipts, broadcasting right fees, luxury boxes, club seats, concessions, advertising and membership fees. (Lee and Chun, 2002)

Other economists reject that argument, at least implicitly. For example, Phillip Miller (2006) makes a conventional claim that the value of a sports franchise is simply the discounted expected future stream of profits.

Suppose the owner and prospective buyer are negotiating over the sale price of a team. Both seek maximum profits and both have perfect foresight. The owner would not rationally accept less than the present value of the team’s future profit stream and the prospective buyer would not rationally pay more than the present value of the team’s profit stream. If the owner and prospective buyer discount future returns at the same rate and the revenues and costs are the same under either ownership group, the sale price of the franchise equals the present value of its profit stream. Under the assumptions, the team’s franchise value measures the present value of its profit stream.7

(p.304) There are, however, substantial vagaries in these declarative statements, including whether the value in question is merely a rule of thumb for discussion purposes or an actual market value.8 To some extent, the looseness of the term value when applied to sports franchises is simply an extension to the general vagueness of the term we lamented in Chapter 1, “Modern Value Quandaries.”

Estimates: Forbes Values

Two well-known publications have published estimates of sports franchise values on a regular basis in the United States: Financial World magazine and Forbes magazine. It appears that both relied heavily on the work of one researcher, Michael Ozanian, to develop their estimates. The published Forbes estimates have been accompanied by considerable data, including indicators of revenue from various business enterprises associated with a sports team, information on television and royalty revenue, and player salaries. Furthermore, they have been published on an annual basis for a number of years, during which some market transactions also occurred. Although no specific methodology has been claimed for these various estimates, it appears that professional judgment is the dominant factor.

The Forbes estimates have become public benchmarks of value, even though they are not market values and in some cases are hotly disputed by both the owners of the specific teams and the leagues. In the case of Major League Baseball, the league has a track record of “lambasting” the estimates.9 Certainly, the release of bits and pieces of information on privately held firms can misportray the actual finances of a club.10 The same, of course, is true of selective reading of similar data by others involved in the sports industry, including players’ unions, local sports committees, municipalities, and stadium authorities. The tension in the industry between these parties, especially at times when contracts or stadium leases are being negotiated, colors many of the public statements on team finances.

Evidence from Actual Transactions

U.S. Sports Teams

A handful of recorded transactions involving U.S. teams provide a basis from which to compare estimates with actual market values and to consider whether a naive income method works well for such firms. The sale of the Boston Red Sox in 2002 was one example. In this case, a naive income method would have implied little worth in the apparently money-losing club, while the professional judgment method used by Forbes correctly implied a value in the hundreds of millions.11

Geckil and Anderson (2007) compiled data on a set of U.S. major league franchises for which published value estimates and transaction prices were available and adjusted several of the reported transaction prices to make them comparable with the estimates. Their data support the notion that a naive income method fails to predict actual transaction values and instead suggest that other factors (including those identified by the Forbes researchers) were in play. However, for most of the transactions, the previously published estimate differed from the transaction price by a significant margin. They conclude that at least three factors account for this degree of variation:

  1. (p.305) 1. There is a powerful “ego factor” at work in these transactions, implying that team owners are paying for more than future earnings.12

  2. 2. The Forbes estimates appeared to take into account winning percentage. However, Anderson and Geckil propose an explicit “contender factor,” which is discussed further below.13

  3. 3. Sports team finances are clouded by arrangements for stadium leasing, parking and other concessions, league revenue sharing, and other factors, thus making the transaction prices less than completely observable.

These issues are in addition to the normal difficulties in estimating the value of private firms.

European Sports Franchises

Unlike U.S. major league sports franchises, many European franchises are publicly traded. This provides a transparent data source on franchise values. Anderson and Geckil (2007) used data on market capitalization of these organizations to test a hypothesis that “sportive performance” as well as current earnings affects the value of a sports franchise.14 They conclude that there is a strong relationship between a team’s performance in recent seasons and the current value of the sports team. They identify a “contender factor” separate from average winning percentage, and assert that investors appear more interested in a franchise that consistently has a chance to win a league or conference championship than one with a similar average winning percentage.

Case Study: The Chicago Cubs

The same researchers, along with a Chicago-area collaborator, undertook a similar study of the Chicago Cubs baseball team in 2007. At that time, the team invested significantly in new playing talent and upgrades to the venerable Wrigley Field ballpark.15 They predicted that the club, strengthened enough to be a contender for the league pennant, would be worth $600 million—a significant increment over the previously available estimate from Forbes.

The same report also listed potential buyers, one of which later purchased the Tribune Company, owner of the Cubs franchise in Chicago, for $8.3 billion.16 The sale price included many more assets than the Cubs sports teams, including the stadium and media interests. By January 2009, the Cubs baseball team along with related assets, including Wrigley Field, was sold for $900 million. If one deducts about $250 million from this sales price for Wrigley Field as a separate entity, the implied 2009 sale price of $650 million closely corroborates the 2007 value estimate for the team alone.

Notes:

(1.) Recall the definition of a firm from Chapter 4, “A New Definition of the Firm.” Under our definition, a firm must have a separate legal identity, a motivation to earn profits for investors, and replicable business processes. This rules out a number of firms that may be subject to bankruptcy codes, including individuals (personal bankruptcies), nonprofit firms, governments and many quasi-government organizations, and businesses that do not fulfill our definition of a firm.

(2.) This assumption would cover most U.S. corporations (including S and C corps), limited liability companies, and some partnerships and similar organizations such as REITs. It would also cover similar forms of organization in other countries.

(3.) For the purposes of this chapter, we assume that the bankruptcy code governing the firm has the following features: a petition requirement; protection of the assets of the firm from demands by creditors after the filing of the petition; ability to reorganize its operations, including the ability to dissolve existing contracts (executory contracts under the U.S. bankruptcy code); the ability to negotiate a plan with existing lenders and other creditors in which individual obligations were reduced or eliminated; supervision by a judge or other official of the process; the ability to reorganize and emerge from bankruptcy; and a process for the orderly liquidation of the existing assets.

The U.S. bankruptcy code (often referred to by two parts of it: Chapter 11 and Chapter 7) contains all these features. Tirole (2006, chap. 1) includes an international comparison of laws protecting investors in bankruptcy situations.

(4.) Examples include the near-disappearance of buggy-whip and horse-carriage manufacturers once the automobile gained market acceptance in the early twentieth century; mechanical watch manufacturers after quartz watch technology developed in the 1970s; fountain pen manufacturers when ballpoint pens became cheap substitutes; and many men’s clothiers when casual business clothing became acceptable in the 1990s.

It is interesting to note that the disappearance of mass producers of these products is often followed, some time later, with the reemergence of boutique manufacturers that cater to collectors and aficionados. Fountain pens and mechanical watches are two recent examples favored by this author, who has somehow avoided the attraction of buggy whips.

(5.) This section is based on Anderson (2004b); excerpts are used with permission.

(6.) In the author’s experience, this occurs even in industries (such as alcoholic beverage distribution) where state laws typically require a written agreement! Despite the legal and business risks involved, many such arrangements have existed over multiple years, proving again that businesses fundamentally operate through people-to-people agreements. (p.387) The continued existence of such handshake business arrangements, which may involve millions of dollars of annual sales revenue and a similar scale of investment by both parties, is interesting and, to some degree, comforting.

(7.) P. Miller (2006). Miller adds an important internal footnote to this selection: “The assumption of perfect foresight is made for simplicity.”

(8.) Lee and Chun use the term valuing in a colloquial sense, meaning “estimating the value.” Therefore, their statement about sports teams being valued on revenues probably means only that the rules of thumb for estimating those values are based on revenues. Miller’s statements about “discount … rate,” “costs are the same,” and “perfect foresight” are enormous qualifications in the practical sense, thus restricting the assertion to an almost purely theoretical argument.

(9.) See, for example, Colby (2006).

(10.) As far back as 1998, Ozanian attacked the practice of portraying sports franchise ownership as a barely break-even business:

A casual reader might think the owners of most sports teams were all headed for Chapter 11. Baseball owners say most of their teams are in the red. By some accounts, as many as 20 hockey teams are losing money.

Even as they pocket an $18 billion TV deal, many football team owners cry poor mouth.

See Ozanian (1998).

(11.) An excellent example, in which a market transaction proved the value of this general approach, was the sale of the Boston Red Sox in 2002 for approximately $700 million. As pointed out by Ozanian and other journalists at Forbes.com on April 15, 2002, the (estimated) operating loss of $11 million for the Red Sox the previous year was a poor indicator of value. The buyer acquired a team with an intensely loyal fan base and 80 percent interest in the New England Sports Network—which happened to broadcast those same games. See Bandenhausen et al. (2002).

By the fall of 2010, the owners of the Red Sox were in such a strong financial position that their owners, New England Sports Ventures, purchased one of the most famous professional soccer teams in Europe, the Liverpool Football Club. The purchase, at an announced price of $476 million, implied a value that was 40 percent less than the Forbes value.

(12.) The fact that business owners are seeking more than just income is obvious in this market. The same fact in other markets is one of the themes behind the discussion of the true motivation of entrepreneurs, and the failure of the NPV rule, throughout this book.

(13.) See the following discussion on Geckil and Anderson’s review of European sports franchise data.

(14.) These included Ajax of Holland, Borussia Dortmund of Germany, Fenerbahce of Turkey, Lazio of Italy, and Newcastle United and Manchester United of England.

(15.) See Geckil, Mahon, and Anderson (2007).

(16.) Sam Zell, identified as a potential buyer in the report, later purchased the Tribune Company (which included broadcast and media interests as well as the Cubs franchise). Zell soon afterward put the Cubs on the block.