We did a lot of reading this offseason (late December for us). In the coming weeks, we’re going to attempt to explain a lot of the nitty gritty details we picked up along the way.

Today we’re going to explain how to value a NFL team.

Why NFL teams? Because it’s probably the most deceptively automated business in the U.S. An ironclad business model and corporate structure with enough storytelling to make it constantly relevant.

It’s like a successful HVAC Business that has so many billboards that you’ve called those guys over to your house twice just for them to ‘check shit out’.

Let’s get going.

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How do you value a NFL Team?

It’s a lot simpler than you think. The NFL operates under a socialist system, where a lot of the revenue is shared equally amongst teams. And an overwhelming percentage of teams’ revenue is automated in the form of NFL media rights.

But we’ll get to that in a minute…

What’s the basic equation of getting to a valuation in the first place?

We’re so glad you asked! Here it is:

Equity + Net Debt = Value of the team

Great! What the hell does that mean?

Let’s explain:

Imagine an NFL team:

Equity: The team's ownership is valued at $4 billion. This represents the value of the team that is "owned" by the stakeholders.

Debt: The team has taken out loans totaling $500 million to fund operations, improvements, etc.

Cash Reserves: The team has $100 million in cash or cash equivalents available to offset its debt.

To calculate the net debt, it goes:

500 mil (Debt) - 100 mil (cash) = 400 mil

Which means, that the following is true:

4 Billion (equity) - 400 mil (net debt)= 3.6 Billion (team value)

But you said something about revenue sharing, right?

Right! The league generated 20ish Billion this season. 67% of that was distributed equally amongst NFL teams.

So now, when a PE group comes into value a team, a big part of their job is done for them, since the Bengals and Cowboys get the same 430ish million dollar check every year.

Note: We just want to take an aside here and say something here.

Average revenue of an NFL team for the 2023 season was ~$640 million dollars. This means that more than 65% of a NFL team’s revenue comes in the form of a check doled out by the league after every season.

So, why be competitive?

Yeah, this is a great question. Why try to have success when 2/3 of your revenue is absolutely guaranteed? The nature of that question is highly subjective but also not. Think of the basement dwelling teams. Are they about to get better any time soon?

There’s a more interesting question here though:

Why are the Bengals worth so much less than the Cowboys if they get the same check every year?

It’s a great question. While revenue sharing is equal when it comes to national revenue. Generating local revenue is up to the team entirely. National revenue is stuff like merchandising and media rights.

Local revenue is about  venue related income like ticketing (although partially shared), sponsorship deals, and local media broadcast (local tv and radio). It also doesn’t hurt that Dallas is a much bigger market than Cincinnati and has a much bigger fan base (although that’s mostly a fantastic marketing effort done by the Cowboys organization).

Here’s an example in the form of Naming Rights:

Paycor pays around 3-4 million bucks a year to the Bengals

ATT pays around 17ish million a year to the Cowboys.

Stadium revenue for JerryWorld is also a lot higher than what Paycor currently generates.

There has to be incentive around teams getting into the playoffs, though?

HAH! YOU’D THINK SO, RIGHT?

1. League collects all of the ticket revenue. The league pays for home/away costs and stipends to players.

2. Teams make money on parking/concessions (mostly a rounding error given teams’ top-line revenue).

There’s a few positive effects of a team contending for a title every year:

1. It’s a good long term business move: The Pats are a top-5 valued franchise because of all the modern day dynasty stuff (they also happen to be in one of the best sports markets in the country).

2. Create/maintain pricing power on tickets: Imagine being a Detroit Lions fan. Ticket prices aren’t the same anymore, are they?

None of this is investment advice, btw.

P.S. - Sportico had a great visualization around team valuations.

Have a great week!

Ahmed and Peter