Three quantifiable factors will influence the sale price of the Los Angeles Clippers—and one more will trump them all, business valuation (BV) experts say.
The Clippers have been the talk of the sports world for the past couple of weeks after media outlets began airing a tape of racist comments made by longtime owner Donald Sterling. The National Basketball Association responded swiftly and decisively, fining Sterling $2.5 million and banning him from the league for life. NBA Commissioner Adam Silver also announced that he would ask the NBA’s other 29 owners to force Sterling to sell the team.
Big names including media mogul Oprah Winfrey, Oracle Corp. CEO Larry Ellison, musician Sean Combs, and boxer Floyd Mayweather Jr. reportedly are among those interested in bidding for the franchise. Meanwhile, trying to determine just how much the team might sell for has become something of a parlor game for sports journalists. The baseline for many such deliberations starts at $575 million, which is the value that Forbes calculated for the franchise in January. But Forbes’s sports valuations have proven to be significantly lower than prices in recent sales involving the NBA’s Milwaukee Bucks and Major League Baseball’s L.A. Dodgers. Some have even speculated that the Clippers will fetch in excess of $1 billion.
Professional BV consultants, such as CPAs with the Accredited in Business Valuation (ABV) credential, are among the experts who can provide insight into the valuation process. Several of these experts identified four broad factors that will affect the sale price:
Market. Los Angeles is a monster, plain and simple. It’s the country’s second-largest city, with about six times the number of residents as Milwaukee, whose Bucks are in the process of being sold for $550 million. Such a large population bodes well for both gate receipts and media rights contracts. Los Angeles is the hub of the nation’s entertainment industry and is home to plenty of billionaires, which never hurts a local sports club’s resale value. In the end, there are only 30 NBA franchises, and just four of them are in markets as big as or larger than Los Angeles.
“If Sterling does sell the franchise, despite its current issues, he would probably still realize a significant premium because (1) there is so little supply (i.e., there are few franchises and these come up for sale rarely) and the demand is significant, which may result in a bidding war that will drive up the price, and (2) the market in which the franchise is located,” said Harold G. Martin Jr., CPA/ABV/CFF, a partner in Valuation and Forensic Services at Keiter.
Organizational performance. This encompasses everything from the franchise’s financials to its on-court performance. While the league keeps financial information close to the vest, Forbes in January estimated the Clippers had operating income of $15 million on $128 million in revenue. Other than the NFL, most sports leagues don’t tend to be cash (flow) cows. Instead, owners often have to wait until they sell to realize significant return on investment. Sterling bought the team in 1981 for a mere $12 million.
On-court performance is easier for outsiders to judge than financials. The Clippers have been one of the least competitive franchises in all of sports during Sterling’s tenure. In a league where more than half the teams qualify for the postseason, the Clippers have reached the playoffs just 10 times since 1970 and have never advanced past the second round. By comparison, the Lakers, Los Angeles’s other NBA team, have won 16 titles, including five in the past 15 years.
Yet the Clippers have shown signs of life in recent years, making the playoffs for three straight seasons— including advancing to the second round of this year’s playoffs with the possibility of more to come. They also have two of the league’s top 15 players in point guard Chris Paul and forward Blake Griffin, and one of the most highly regarded coaches in Doc Rivers. Paul and Griffin are extremely marketable—just ask sponsors State Farm, Kia, or GameFly—and Rivers orchestrates a fan-friendly style of play that has helped fuel ticket demand.
“The fact that the franchise is in LA and has some really good players helps its value,” said Ron DiMattia, CPA/ABV, president of Corporate Value Partners Inc. “To be sure, there are a number of drawbacks, but I’m not sure those drawbacks will have a big impact on price.”
To illustrate, DiMattia cites the example of the Dodgers, a franchise that sold for $2.1 billion in 2012 despite numerous off-the-diamond complications.
Timing. Due to the shotgun divorce nature of the Clippers sale, it’s tempting to think that buyers will have a lot of leverage. That’s not the case, according to BV experts, especially if Sterling finds a way to fight the league in the legal system.
Marie Ebersbacher, CPA/ABV/CFF, the national practice leader for forensics and financial services at CBIZ and shareholder at Mayer Hoffman McCann PC, explains that there are several reasons getting a sale done sooner rather than later likely will increase the price tag. First, financial and on-court performance may suffer if Sterling draws out the process. That could force the team into operational limbo, hurting its chances of retaining or attracting key personnel, both on the court and off. The league undoubtedly wants to put this situation behind it as quickly as possible. The ability to capitalize on the current frenzy rather than the unknown of years of litigation might mean finding buyers willing to pay a substantial premium that would be too much for even a recalcitrant Sterling to reject, and could encourage him to sell rather than litigate. “Time is the killer in many valuations—and this is one of them,” Ebersbacher says.
Emotion. The Clippers’ market size, its financial and on-court performance, and the amount of time it takes for a sale to close are all factors in the sale price. But the most important factor is a wild card that’s simply not quantifiable when it comes to the ultimate billionaire vanity purchase.
“Owning a team is not generally thought of as a great return on investment,” DiMattia said. “But it gives the owner a chance to delight in something that is excellent, unique, and admired by millions; and they own it. Call it emotion, ego, whatever you want, but it is not quite rational from an economic perspective.”
The desire to sit courtside during a deep playoff run or share champagne in the locker room with famous athletes may not be rational. But it may be an irresistible element for billionaires enthralled by pro sports—and more than enough reason to move the decimal on the offer sheet one more spot to the right.
—Chris Baysden (email@example.com) is a JofA senior editor.