Investing in a Sports Franchise: Key Considerations for Stepping Into the Game

Investing in a professional sports franchise is not merely a financial transaction: It is an invitation to join an exclusive club, feel the thrill of competition from a very different seat and leave a lasting legacy that touches the hearts and souls of fans. For high net worth individuals and families, owning a professional sports franchise offers a unique opportunity for capital appreciation, societal prestige and other intangible benefits. The following explores some of the essential considerations for investors contemplating this exciting venture.

Why Invest in Sports?

A Winning Track Record. Over the past three decades, professional sports franchises and their respective leagues have consistently outperformed the broader U.S. stock market. While not every team has been a slam dunk, aggregated data across sports leagues reveals impressive returns that outpace the S&P 500. Between 2002 and 2022, National Football League (NFL) franchises have appreciated 600%, with the average team now worth approximately $3.5 billion (see reporting from Sportico here). It is not just prominent U.S. sports leagues that are seeing incredible growth. Since 2019, the valuations of Formula 1 teams have surged by a staggering 276% (see Forbes article here). 

These gains are driven primarily by long-term capital appreciation that is recognized upon the sale of a professional sports team, making sports investments attractive to investors. The recent sale of teams in leagues as old as the NFL and as new as the National Women’s Soccer League (NWSL) underscore this trend. The Washington Commanders’ $6.05 billion sale in 2023 and the San Diego Wave FC’s $113 million sale earlier this year represented returns of over 330% and 4,700%, respectively. 

The Revenue Game. The accelerating growth in valuations of sports franchises is likely to persist as long as sports leagues continue to score big in terms of revenue and growth. Live sports remain dominant in U.S. television ratings, accounting for 97 of the top 100 broadcasts in 2023, increasing from 94 of the top 100 broadcasts in 2022 (see Sportico articles here and here). The value of broadcast deals also keeps soaring, ultimately translating into more dollars for networks, teams and owners. According to Forbes, the NFL’s TV rights agreements alone could exceed $126 billion by 2033, representing approximately $4 billion for each NFL team (see article here). With this broadcast domination, many investors expect that sports leagues and their teams will continue to cash in.

Historically, men’s sports have commanded viewers’ attention and held a firm grasp on most of the revenue generated by professional sports. Interest in women’s sports has begun to increase, however, resulting in new expansion teams for certain leagues, private equity funds focused solely on women’s sports and, of course, more lucrative broadcast deals. Since many aspects of women’s sports are relatively new, undervalued and actively seeking investments, this area may present greater opportunities for investors that can get in on the ground floor. For example, women’s professional sports have seen record-breaking success in broadcast deals, team sales and viewership, such as a four-year broadcast deal worth $240 million for the NWSL, inked in 2023, and record viewership for this year’s Women’s NCAA Basketball Tournament, which capitalized on the popularity of players such as Caitlin Clark and Angel Reese. This year’s championship game drew a record 18.9 million viewers, while the men’s championship game only drew 14.8 million viewers (see Nielsen article here). Overall, 2024 is shaping up to be a historic year for women’s sports, with women’s “elite sports” predicted to generate revenue in excess of $1 billion, a 300% increase from 2021 (see Deloitte article here). There are many scenarios in which the number of teams within the WNBA and NWSL increase in the next several years, which may create even more investment opportunities. 

Navigating the Buying and Selling Process

Limited Opportunities. Buying a sports franchise is a unique endeavor that differs greatly from the purchase of other assets. Opportunities are scarce, as there are a limited number of teams in any given league and usually only a small number are for sale in their entirety or open for minority investment. Many teams are family owned and have been so for generations, including the Kansas City Chiefs (the Hunt family), the Chicago Bears (the Halas/McCaskey family), the Los Angeles Lakers (the Buss family) and the New York Yankees (the Steinbrenner family). Many family-owned teams and their respective leagues seek to ensure continuance of family ownership and control. In fact, leagues such as the NFL have recently made it easier for teams to remain family-owned (see Sports Business Journal article here). Potential buyers or investors need to understand the acquisition process to enhance their likelihood of success. 

Substantial Required Capital. Even if an acquisition opportunity is identified, the most important aspect of the process will be raising the substantial capital required to fund the purchase. Given the fast-growing valuations of sports teams, many individuals seek co-investors to form an ownership group that purchases the sports team through a suitable special purpose vehicle. Most leagues, however, limit the total number of team owners, exacerbating the shortage of acquisition opportunities already limited by the low supply of teams and the high cost of purchasing one. For example, the NFL limits a team’s ownership group to 25 people (see Sportico article here). Another source of financing is debt, yet many leagues also limit how much debt financing may be used to purchase a team. The NFL’s current maximum is $1.1 billion, which represents only 18.18% of the price paid for the recent purchase of the Washington Commanders (see Sports Business Journal article here). Given the rapidly escalating value of sports teams, the leagues likely will need to review these policies as fewer prospective buyers will have the capability to purchase available franchises. 

League Approval. An often overlooked final hurdle is league approval. In addition to financial requirements and background checks, a league’s commissioner and board of governors (the current owners of the league’s teams) will scrutinize potential owners to ensure they are a good fit for the league’s ethos and brand.

Minority Ownership Considerations

Controlling vs. Noncontrolling. An attractive alternative to complete or controlling team ownership is the purchase of a minority stake in a sports team. This option could be especially appealing for investors who want to acquire an interest in a billion-dollar team but do not have or want to raise the required capital for full or majority ownership. It also provides a means for existing team owners to realize liquidity or add famous or otherwise noteworthy new owners who could add value to the team’s brand. 

While there is some clout associated with being a partial owner of a team, potential investors must understand that a minority owner typically does not call the shots. Many leagues want a clearly defined controlling owner who wields genuine management control and voting power and sits on a league’s board of governors. Therefore, a minority interest will provide limited rights and protections under the team’s governing agreement. Restrictions also may apply regarding the ability to liquidate the interest and exit the investment, including requiring preapproval from the controlling owner and the league or preventing liquidation of the interest until there is a complete sale of the team. For these reasons, minority interests, if allowed, are normally sold at a liquidity discount of 20% – 50% (see Sportico article here).

The Private Equity Avenue. Indirect minority ownership of a sports team through a private equity fund is another avenue for consideration for certain potential investors, as many leagues are revising their respective ownership rules to allow for investment by institutional funds. The National Basketball Association (NBA), the National Hockey League (NHL), Major League Soccer (MLS), Major League Baseball (MLB) and the NWSL all allow their respective teams to sell a limited portion of their interests to private equity funds. Additionally, on Aug. 27, 2024, the NFL and its current team owners approved the ability of private equity funds to invest up to 10% of an individual team’s equity. All NFL-approved private equity funds may hold an equity interest in up to six teams but may not have any governance rights and are required to maintain their equity interests for at least six years, among other league requirements. Some of the most active funds in this space include Arctos Sports Partners, Ares Management, Beautiful Game Group, Dyal Homecourt Partners, Sixth Street Partners and Galatioto Sports Partners.

Additional Economic Opportunities and Benefits

The Real Estate Play. Today, sports are more than just what happens on the field or court. Sports and sports-adjacent businesses have become their own business class, with greater extensions of the teams into adjacent business ventures geared to generate more liquid revenue and enhance team value. New stadium builds is one area where this plays out. A recent trend among owners of many teams within the NFL, NBA and MLB has been a push for state-of-the-art stadiums and arenas surrounded by “entertainment districts” that can provide enhanced entertainment experiences for fans even when the team is not on the field or court. These new districts are typically mixed-use developments that include the stadium, dining and shopping facilities, apartments, and office space. 

Perhaps the best example of this trend is Stan Kroenke, owner of the Los Angeles Rams, and his 298-acre Hollywood Park site that is home to SoFi Stadium, an artificial lake, a 6,000-seat theater, office space, apartments, hotels, shops and restaurants. Owner-developed entertainment districts like Hollywood Park provide complementary revenue sources for team owners and a growing opportunity to capitalize on soaring real estate valuations in the U.S. As noted by Victor Matheson, an economics professor at College of the Holy Cross in Massachusetts, “having an entertainment district that generates money 365 days a year is way better than the model of a walled fortress surrounded by a moat of parking lots” that is used a handful of times a year. “NFL parking lots are about the worst possible use of real estate you can think of,” he adds. “You’d much rather have a stadium in a dense area where you can generate money all the time” (see article here). 

Tax Advantages and Estate Planning. In addition to the vanity perks of team ownership, there are several tax advantages that can be beneficial to high net worth individuals and families and make team ownership a tax-efficient income tax planning tool. With proper structuring, the purchaser of a sports team can generally amortize the purchase price over time to offset the purchaser’s income in the following years. This includes the purchase price attributable to tangible assets such as stadiums (if privately owned), practice/office facilities, equipment and vehicles, as well as intangible assets such as goodwill, all of which can significantly reduce taxable income or create tax losses for new owners for years after their purchase. The greatest advantage may be the ability to amortize the value of players’ contracts purchased with a sports franchise, potentially allowing the owners to both deduct the salaries paid as operating expenses and amortize the contract’s value over the contract term. Note, however, that the IRS has signaled it will step up scrutiny of partnerships in the sports industry that report significant tax losses and review whether the income and deductions causing the losses are reported in accordance with the tax rules.

High net worth individuals and families should consider essential estate planning methods for ensuring tax efficiency and avoiding family disputes after the sports team owner’s death, which may include making lifetime gifts to irrevocable trusts and/or using family limited partnerships or limited liability companies (LLCs) to mitigate estate and gift taxes on skyrocketing franchise values and planning for paying estate tax liabilities without needing to sell equity interests of the franchise. Leagues may also require a succession plan to address transfer of ownership when an owner dies, and heirs of owners should be prepared to work with the league’s organization to gain approval and facilitate transfers of team ownership after death. Early preparation and communication among family members, other beneficiaries and the league will be crucial for streamlining the transfer process.

Navigating the Challenges

Long-Term Investment Horizon. Potential investors should appreciate that sports team investments often don’t yield dividends or regular distributions like traditional investments do. Typically, the value of a sports team is not fully recognized or realized until a team enters into a sale process and begins to receive bids from prospective buyers. Investors should carefully consider their investment horizons given that returns may not be seen until the sale of the team. 

Fan and Media Scrutiny. Along with the highs of professional team ownership can also come the lows. Owners tend to face intense fan and media scrutiny in connection with the team’s performance, coaching personnel decisions and player personnel management. Such scrutiny can thrust investors (and perhaps their families) into the media spotlight. Owners of sports teams also are facing greater scrutiny regarding potential sources of funding and any favorable tax treatment received in connection with building or renovating stadiums and arenas in which their teams play, including resistance from residents and local politicians, as has happened with the Kansas City Chiefs (see here) and the Chicago Bears (see here). 

The Final Drive

For high net worth individuals and families, investing in a sports franchise is a unique opportunity that can provide tremendous financial upsides along with great intangible benefits. If an investor can get past the velvet ropes, raise the necessary capital, sustain the long-term investment horizon and weather the emotional ups and downs of asset performance, the rewards can be significant.