Sports Franchise Acquisitions: Valuation of Intangible Assets. Part 2 of 2

By Reilly, Robert F. | The CPA Journal, November 2003 | Go to article overview

Sports Franchise Acquisitions: Valuation of Intangible Assets. Part 2 of 2


Reilly, Robert F., The CPA Journal


This article concludes a two-part series on purchase price allocations of professional sports franchise acquisitions. Part One discussed financial and tax-related purchase price allocation procedures. Part Two will focus on the identification, valuation, and remaining useful life (RUL) analysis of franchise intangible assets. It will conclude with a detailed example of an allocation.

Valuation Procedures

Sports franchise intangibles are valued using sales comparison, cost, and income valuation approaches. A valuation approach represents a category of related economic analysis methods, or related valuation methods. Within each method are a number of specific procedures, which may be either qualitative or quantitative. These procedures build up to valuation methods, which then aggregate to valuation procedures.

Many sports franchise intangibles assets, their valuation data sources, and thus the application of valuation procedures, are specific to the industry. In addition, most of the qualitative procedures require analytical judgments and experienced reasoning that are industry-specific. Franchise owners and their advisors should understand that all valuation approaches can be vised to estimate market value. All valuation variables should be empirically based and market-derived. It is the marketplace of actual franchise buyers and sellers who actually determine sports industry intangible asset market values.

Sales comparison approach. The sales comparison, or market, approach is based on transactional data regarding arm'slength, third-party sales or licenses of discrete intangible assets. These data are extracted from the marketplace and analyzed to conclude cash equivalency prices for the intangible sales or licenses. Both the transactional intangibles and the subject intangible are analyzed on common quantitative fundamentals, while intangible pricing metrics are calculated based on common units of comparison. Depending on the quantitative fundamentals' comparative analysis, subject-specific pricing metrics are selected from the range of transactional pricing metrics. The selected pricing metrics are applied to the subject's fundamentals to derive an estimated value.

The market approach considers both intangible asset sales and licenses or leases. Accordingly, the market approach examines market-derived license fees, royalty rates, profit split percentages, and other intangible asset transfer price arrangements, in addition to fee simple intangibles sales. All valuation methods within the market approach rely on commercial transfers of naked (i.e., individual or unbundled) intangibles. For this reason, the guideline sales method, guideline license method, market rental income method, and other market approach methods often are not applicable to sports franchise intangibles, as individual intangibles are seldom sold or licensed between franchise owners. Nonetheless, when the market approach can be used to value stadium leases, concession agreements, trademark licenses, and other such intangibles, it does provide a convincing valuation analysis.

Cost approach. The cost approach is based on the economic principles of substitution and utility. The conceptual premise is that a franchise buyer will pay no more for an intangible asset than the cost of a substitute intangible that provides the same utility. Most cost approach methods estimate cost in current dollars as of the valuation (acquisition) date. The two common measures of cost are replacement cost, which seeks to replace the utility of an asset, and reproduction cost, which seeks to replicate it. For an intangible, replacement cost is typically not the same as, and is often much lower than, reproduction cost.

Whether measured by either model, an intangible's cost is not the same as its value. Cost has to be adjusted for obsolescence in order to estimate value. The four common forms of obsolescence are physical deterioration, functional obsolescence, technological obsolescence, and external obsolescence. …

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