Have you ever wondered how much your favorite college football team is worth? Mark Zyla, CPA/ABV, and Dan Cohen, Esq., discuss the value of teams to universities — and the ways in which a CPA might try to determine their financial valuation.
What you’ll learn from this episode:
- How athletics departments’ budgets differ from those of for-profit businesses.
- Why it’s so hard to compare one department’s budget to another’s.
- Where you can get more information on football teams’ revenue and expenses.
- Why a cash flow approach might be the best way to value a college football team.
- The intangible value that a college football team brings to a university.
Play the episode below:
To comment on this podcast or to suggest an idea for another podcast, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.
(Editor’s note: The following transcript has been lightly edited for brevity and clarity.)
Chris Baysden: Hello, college football fans. The season is kicking off this week, which means there’s going to be plenty of big plays, big wins, and big revenue for teams around the country. As most fans know, football is one of the primary drivers for college athletic departments’ revenue. Hi, I’m Chris Baysden, an editor with the Journal of Accountancy. To celebrate the new season, we thought it would be fun to talk about how a CPA might go about trying to conduct a valuation of a college football team. Of course, we know that you can’t really value a team, due to the way they’re set up within universities. But if you were going to try to do that, how might you go about it? And what would be the pluses and minuses of that approach? My guests today are Mark Zyla, a CPA/ABV and the managing director of Zyla Valuation Advisors in Atlanta. We also have with us Daniel Cohen, an attorney at Nelson Mullins in Atlanta, who works with educational institutions and their athletics departments.
So athletics departments are big businesses, but they’re run differently than most businesses. Can you give us an overview of how they operate from a revenue/expense perspective? How are they similar, and maybe more importantly, how are they different from other types of businesses?
Daniel Cohen: These college football programs are parts of higher education institutions, so there are some very fundamental differences. If we were to try to look at individual teams — because you know, a college football program is going to be fairly similar in its end product, in its skill level to an NFL team — that may be the easiest analogy to make in the fans’ eyes. But at a very fundamental level, individual college football teams are not stand-alone operating entities. Teams are members of athletic departments, which in turn are parts of higher education institutions, whose mission is to educate the citizenry. And when we’re looking at the biggest programs, the Power Five programs, for the most part those are public entities, which means that they are parts of the state. So the mission is to educate students, not necessarily put on a for-profit entertainment option for fans.
So that sets up some very fundamental differences in the way that they operate. For the most part, college football programs don’t try to make positive net generated revenues. Athletic departments don’t. Generally they try to break even. The NCAA used to publish reports on this; the last one was put out in 2017. And it showed at that point that only 24 of the FBS Power Five athletic departments actually had positive net generated revenues. As we then pivot towards football programs, among the Power Five programs, only 70 had revenues greater than expenses, as of this last 2017 published report, while 59 had revenues that were less than expenses. It’s fairly similar statistics as we look at men’s basketball programs. Sixty-one of them as of this last NCAA report had revenues greater than expenses, while 68 had revenues that were less than expenses.
But even if we look at those programs that are so-called profitable, again, that’s not consistent with their educational mission. So if you look at some of the schools with the biggest positive net generated revenues — Georgia, Texas, Nebraska, Purdue — what they tend to do is they put those positive net generated revenues back into the higher education institution. Nebraska has done some great work in this area. They have a commitment where they’re going to send $10 million, at least, back to the other side of campus on an annual basis. So last year Nebraska actually offered 4,000 students Husker Scholars money. That was funded by the athletic department, which meant that 20% of the undergraduate students on the main side of campus received some kind of Husker scholarship that was funded by the athletic department. So I think that’s a pretty fundamental difference in the way that these programs operate within the higher education industry.
Mark Zyla: Like most business enterprises, athletics departments, particularly college football programs, keep track of revenues and expenses. So at the heart of a valuation it’s how much positive cash flow that the enterprise actually generates for the university. And so one can look at that data as it’s regularly reported and draw some conclusions about the contribution of overall value. From an operating standpoint or a valuation standpoint, that’s the primary similarity between a football program and a traditional operating business. In addition to some of the differences that Dan mentioned — the mission of the university — most programs typically don’t operate at a profit. And also the data, as reported, there are some variances in types of information — how the entities may report data, what they consider revenue. So it may fluctuate from year to year. So there’s some challenges one would encounter when looking at them, trying to place a value on the college program.
Baysden: What are the major sources of revenue? I’m thinking tickets and TV deals, probably for football and men’s basketball. Maybe some apparel sponsorships, maybe even booster money that might go towards scholarships.
Zyla: The biggest categories in addition to what you mentioned as far as ticket sales and so on — contributions are considered revenue, and that’s one difference between a valuation of an athletic department or a football program compared to an operating business. For example, corporate contributions, naming rights, television and licensing rights also contribute to overall revenue. And each of those categories may change from year to year. So there are certain universities, if you look over time, that lead in revenue, but in some years there may be outliers. For example, in 2006, Oklahoma State reported revenue of $241 million, which was a tremendous outlier. And a lot of that revenue, $211 of it, came from contributions, because they were renovating Boone Pickens Stadium. So as comparison, this year they only recorded revenue of $88 million, which is more of a normalized number. So part of the overall valuation process is trying to normalize what actual revenue is.
Baysden: What about the major expenses? Scholarships are certainly going to be one of those; also facilities costs. What might be some of the rest?
Zyla: Coaching salaries. Both current, and in a lot of cases they’re paying salaries of coaches that are no longer with their program. It’s a very significant expense. Some other expenses might be guarantees to pay other schools. For example, if the University of Georgia is playing Georgia Southern or something, they may pay them a fee to play them in a football game, and so that’s an expense. Travel, equipment, uniforms, marketing costs, medical insurance, and expenses. They often reimburse universities for use of university assets as another example of a fairly large expense.
Cohen: Since the NCAA’s deregulation in 2015, we’ve seen a significant increase in expenses related to student athlete health, safety, and welfare issues. So that would be everything from the employment of additional medical and athletic trainers, to the provision of nutritionists and healthy food that you may find in fueling stations in every locker room for every team.
Baysden: So in a past journalism job, I did some reporting on athletic departments’ finances, and back then I found it hard to compare departments’ numbers in an apples to apples kind of way. Is that still true, and if so, why?
Cohen: Yes, that is still true. That was the beauty of those old NCAA reports. They did at least try to do comparisons on an apples to apples basis based on the data. But even then the NCAA would not release that data to the public. Now we’re forced to look at sources such as USA Today, which relies on open records requests to collect its data, annual Equity in Athletics Disclosure Act (EADA) reports. They’re publicly available. Schools are required to provide that information to the Department of Education every October. But with both of those data sources, they tend to include allocated revenues within their calculations, and allocated revenues are revenues that are allocated by the institution to the athletics department. So we’re talking about direct institutional support, we’re talking about indirect support depending on whether a school counts maintenance costs or insurance costs under the university umbrella or the athletic department umbrella. Allocated revenues may include student fees. They may include direct governmental support — things like that. That’s really where you’re getting your apples and your oranges.
Because of this allocation of institutional revenue sources, most institutions try to report that they roughly break even, even if they, from an athletic department stand-alone basis, would be actually looking at losing money. So the effect of this institutional support is to disguise what the athletic department itself is truly generating when you’re looking at some of these public sources, like the EADA or the USA Today reports. But even at that, colleges generally are reporting within their athletics dollars, their athletics-generated revenues — things like donor contributions, as Mark said. The last NCAA report from 2017 said that donor contributions accounted for roughly 23% to 24% of all athletic department-generated revenues. So that tends to disguise the numbers even further.
Greg McGarity of the University of Georgia came out with a discussion of USA Today’s financial report. And at first blush it would look like UGA had a very healthy athletic department — and it does. But the math as reported by USA Today was $176 million in total revenue and $133 million in total expenses. But as you dive into the numbers, the expenses excluded money paid out for construction on a stadium project and other facilities upgrades. And of the $176 million in revenue, $67 million of that came in from donor contributions. So as you really dive into the numbers, you see where there are so many differences in the ways that individual schools can and do report individual categories that it clouds what the true situation looks like as you go from school to school to make apples to apples comparisons.
Baysden: So let’s talk a little bit about valuation. Mark, you’re a valuation specialist. If you were going to try to value a college football team, how would you go about doing that?
Zyla: Typically when you’re valuing a business or real estate or other types of property, there are three main ways to approach it. One is a market approach, where you look at comparable businesses either from publicly traded information or recent acquisitions. A second approach might be a cost approach, where you replicate the cost to create that particular entity. And then the third major approach is income or a cash flow approach, where one would look at the cash flow that the entity generates as an indication of value.
Baysden: It seems like one of those approaches is obviously not going to work, since you don’t have any kind of comparable sales to compare to, is that right?
Zyla: That’s correct. A market approach generally is not going to work, because football programs are part of the university and they’re not actively traded. So that leaves us with a cost approach and an income approach. The cost approach might lend itself more to valuation of certain assets. For example, if a football program builds a new practice facility, that would indicate the value of that particular asset, but it wouldn’t lend itself well to the value of the overall program. So that leaves us with the income approach, which is the value is based on the amount of cash flow that the program generates. So one could look at the data as reported to the NCAA and look at the cash flow that the program is generating and base a valuation on that data.
Baysden: What are the pluses and minuses of that approach?
Zyla: The plus is that cash flow is tangible. You can look and see, “Here’s the profit, the cash flow that we’re generating,” so that lends itself really well to concluding an overall value contribution to the university. The minuses — the data that’s reported varies from year to year. So in some years, for example, there may be a large number of donations for whatever reason. That may distort the data in one year. So one would have to look at a normalization across time. There are certain universities — the University of Texas, Ohio State — that tend to lead in revenues and thus overall valuations over time. But there are other universities where they may have a lot of contributions in a particular year that may look like they have a lot of value, but it’s just an anomaly because of that one year. So the disadvantage is how data is reported, so one would have to cull through that and then normalize the data over time to get a true indication of the cash flow generating ability.
Another area of valuation that we haven’t touched on, though, is the value that athletic departments bring to the university. There is a phenomenon termed the Doug Flutie Effect — there are studies that show that if you have a successful athletic program, it enhances the prestige of your university, it enhances the number of applicants and the quality of applicants. So there’s a reference that athletic departments, particularly football programs, are considered the front porch of the university, that they add intangible value to the process.
Baysden: Is that something that they talk about a lot, or do they not really pay attention to that?
Cohen: No, that’s a very recognized phenomenon with respect to building a sense of community among the student body. It’s something to rally around every Saturday in the fall and once you turn to basketball season, twice a week. So the sense of continuity and community that can be built through a successful athletic department — or even if you’re not having success, at least a high-quality entertainment product, does lead to a better student experience, which in turn can lead to more applicants. And as you have more applicants you can be more selective with who you select for admission among the applicants, which in turn can raise the academic profile and success of your overall academic mission. So that’s why most universities see athletics as an investment — not as a profit source, but rather as an investment for the good of the overall academic community.
Baysden: There’s been a lot of talk in recent years about whether college athletes should be paid. How would that change the calculus of how much a program might be worth, compared to a pro football team, for instance?
Zyla: Well, the most recent NCAA data suggests that on average, the expense for a male athlete, in terms of scholarships, medical costs, nutrition, equipment, and so on, is about $181,000 per year. And so there’s a significant investment already in the student athlete without paying a salary. As far as the overall valuation, if one were to, say just hypothetically, pay a stipend to a student athlete, obviously that would increase their expenses. As far as overall valuation, if expenses increase, the overall value would decline over time. One would also have to look at whether programs can afford to do that or not. I think there’s only 41 of the programs that are actually showing a profit, so there are only a limited number of programs that actually can afford to pay students. Or they would have to find other sources of revenue.
Cohen: Higher education institutions are subject to Title IX, which is a gender-equity federal statute. So if college athletic programs were to begin paying, say, college football players, they would also have to make similar investments with respect to their female student athletes. And so the costs would not just be the single-time cost of how much do we pay a given football player or a team, but rather we’d be looking at something akin to doubling those expenses. The alternative would be to carve a football program or a basketball program out of the athletic department in order to avoid the expenses that would come along with Title IX compliance. And if we were to carve a football program out of an athletic department, you can probably count on all of those intangible benefits also going away.
For the University of Georgia, of $176 million in revenue, $67 million of it last year came from donations. We don’t typically think about giving donations to Home Depot or to the New York Giants or to any other professional entity. So you would have to imagine that if we carved out football programs in order to get around Title IX and only paid football players, we would also lose all of those or many of those other flows of cash that come into athletic departments.
Baysden: How might winning a national championship impact the school’s valuation?
Zyla: There was a study that tried to quantify the effect of success from an athletic program on the university itself. It was done by Doug Chung of the Harvard Business School. And he termed it the Flutie Effect and it’s based on a famous 1984 game where Flutie scored the winning touchdown on a Hail Mary pass with six seconds left in the game. The impact from this particular study is that Boston College, where Flutie attended, in the two years after that football game saw applications increase 30%. It piqued Chung’s interest, so he did a study and determined that when an athletic department, particularly a football program, is successful, the school sees a rise in applications on average of about 17.7%. And it’s not only the number of applications but the quality of students measured by SAT scores also increases. So the success on the athletic field translates into more applications, typically a higher-quality student and increased donations.
Cohen: We’ve also seen that more recently with the likes of Villanova, with its basketball success. We’ve seen it with the University of Alabama with respect to its academic applications. And certainly a school like Butler University, which many people probably hadn’t heard of prior to 2010, which made a run to the national championship game in two consecutive years and now Butler’s on the map nationally. So this certainly is a phenomenon that has an effect. Success on the field or on the court does lead to increased interest, not just in the athletic program but also in the academic program.
Baysden: Is there the information out there to do a proper valuation of college football programs? Could you do it in such a way to rank them so that people could really get a good comparison?
Zyla: It’s probably fairer to say you can look at information that’s provided that’s required to be made publicly available. It used to be the NCAA compiled that information and placed it on their website, but the last data was from 2016. So one would have to go university by university to get that publicly available information. That doesn’t appear to be complied directly by the NCAA. But you could use that to perform the basis of a valuation, but you’d have to delve a little bit deeper in terms of what that data means. What are the details behind the revenues and expenses that are presented in the data? But one can generally do that. It would be compiling a lot of information. USA Today does that and they have an annual ranking of valuation of college football programs.
Baysden: What do athletic departments think of these rankings? Do they think they’re fairly accurate or off the mark?
Cohen: I think in a general sense they’re accurate in regard to reporting or giving a picture of how much revenue may be generated. To one of your earlier questions though, it really is an apples to oranges comparison, and so the rankings I think are pretty much universally recognized as being inaccurate, because of those different categorizations. But on a snapshot basis, Texas is ranked number one by USA Today in terms of its profitability. Does the University of Texas generate a lot of revenue? Absolutely. So that’s accurate insofar as you get a snapshot of how healthy a program is, but whether or not it is ranked number one at the end of the day, if you were able to compare apples to apples, it probably would be towards the top. But would it be number one? I don’t know. So it’s a good indicator of health and revenue generation, but probably not on a comparison or on a ranking basis.