Market Comparison Approach and Asset-Based Approach - Essay Example

One of the most serious bidders is Steve Ballmer, the former Microsoft CEO, who has been part of efforts to make sure that Seattle enjoys NBA action. However, Ballmer has indicated that he can own a team anywhere as he is no longer tied down by work commitments. Shelly has already indicated that she would not consider any buyer who intends to relocate the L.A. Clippers franchise. In addition, she is keen to get a sale price that would leave the Sterlings with “enough” money after the hefty tax obligations (Shelbourne). This presents an issue with the evaluation of such a sports franchise.

Sports franchises are often valued at significant amounts. For instance, the L.A. Clippers were valued at $575 million in January 2014 (Forbes). The values of basketball, football, and hockey teams may seem astonishing as well as ambiguous because it might not be clear how the values of the teams are arrived at. This is because many people do cannot ascertain how a team’s performance, qualities, assets, accomplishments, ticket prices, venue, concession sales, and broadcasting revenue contribution to the overall value. Various approaches are used in valuation: income approach; market comparison, and asset-based approach.

According to Baum, Baum, and Nunnington (67), the value of a team would be computed on the present value of the future net cash flows that it will be in existence. This method utilizes a value estimate based on expected cash flow obtained through the discounted cash flows method. An analyst makes assumptions on how the various value drivers contribute to expected earnings and works backward to compute the present value. This is a common method in valuing sports franchises and it utilizes factors such as team performance, ticket sales, and stadium attributes.

 The market comparison approach uses the competition principles in a free market and depends on the hypothesis that the price of one investment applies to comparable investments with little modifications (Munizzo and Musial 126). The analyst looks at the actual data on generated revenues, one can make comparisons between a franchise that is being valued and other franchises that have recently been traded. Some of the important factors that should be considered include television agreements, revenue streams from the venue, lease or ownership terms, demographics, location, and market size. However, this approach may face challenges due to a lack of accessible data on similar franchises and inconsistencies in value adjustments. 

The common measures include reproduction costs and replacement costs, both of which indicate an amount that an owner is willing to part with to obtain the future cash flows from the asset (Monks and Lajoux 90). However, the asset-based method has been criticized as unreliable when compared with the other two methods in making valuations for sports franchises due to the dominance of intangible assets.