Owning a major sports franchise guarantees that you are rich beyond belief. The leagues will only approve you as a team owner after their due diligence audit and their cashflow test. Almost all owners buy their teams on credit. As billionaire Warren Buffett once said about borrowing against your asset, “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” Tell team owners about that because they borrow as far as they can in leveraging their assets, and some like their liquor too. There are few stories in recent years of sports franchises failing.
The end of my teenage years and the beginning of my 20’s were spent in college as an accounting major in college. Eventually, that led me in the direction of passing my CPA exam and more schooling, then the working world. One accounting job led to another. Having worked for one of Warren Buffet’s wholly owned subsidiaries (National Corporation for Housing Partnerships) when his Berkshire Hathaway company bought the company that I was with — I met the man and got an education in the real world on leverage, cashflow, tax advantages, and profitability. He eventually sold my division to a British conglomerate, and that is when I was promoted to CFO. I would consider myself an expert in how the dollars and cents work as well as pounds and pence.
Now that you understand a sliver of my background, I was asked to write an article that would serve as an educational piece for those who think rich people (that includes billionaires) can spend money commensurate to their Forbes wealth ranking as the main factor. That is just wishful thinking. If you want to stay in business long-term, you spend in relations to your revenues most years to try to finish in the black, and not the red. Yes, good companies can lose money. But if you lose money year-over-year, you are usually headed towards disaster — just ask the former owner of the Texas Rangers. Revenues minus expenses equal profit/loss. That is simplistic, yet without “creative accounting” the CFO always knows the health of the company. With the Atlanta Braves being publicly traded, you can see their financials. They reported a $27 million loss through June 30 for their 6-months ended this year. Their 9-month financials should be published soon.
Why are we discussing this now? This evidently was a big deal recently when a Yankees’ social media personality, JoezMcfly, went viral on top of a viral tweet from a Cleveland fan (Roberto Shenanigans) that his team could not compete with the Yankees fairly based on payrolls. Maybe in a way they are both right, but neither made their point well, even though JoezMcfly obviously made his point that the Dolans are wealthier than the Steinbrenners per Forbes. And Rob_Shenanigans made his point based on payroll spending with a video from the movie, Moneyball with the “50 feet of crap.”
In that tweet, you will see an authorized community note was added to JoezMcfly’s tweet that reads, “This is misleading. No owner is using their liquid assets to fund their team. Rather, the more accurate information to use is revenue generated each year by team. The Yankees annual revenue in 2024 was $679 million while the Guardians was $315 million.” While that overall point is good, the second sentence might not be accurate because some team owners have funded shortfalls in rare instances. That is what business owners do in the short-term if they cannot borrow funds. You need the cashflow to survive. Just last year, the Padres reportedly ran out of cash and needed a loan. They cut player payroll after the 2023 season. According to Britt Ghiroli of The Athletic, in an interview, she claimed the Nats’ owners, the Lerners, were losing so much money that the Lerner family was “writing personal checks” to keep the team afloat.
Cashflow is known as the “lifeblood” of a business. Some teams are swimming in it. Some are meticulously trying to balance their budgets, and yes, some teams are not spending on player payroll and pocketing huge profits. The revenue sharing model must be overhauled.
First off, an owner’s net worth rarely translates in any sport to their payroll with the possible exception of the Mets’ owner, Steve Cohen, who is listed as the wealthiest owner in MLB and seemingly spends well beyond his revenues per reports. And yes, revenues should drive player-payroll along with a desire to win. The two aren’t necessarily mutually inclusive.
In simple business terms, if the Dolans, who own the Guardians, went with the Mets payroll, would they lose $150 to $200 million in real business losses? If so, they still wouldn’t be guaranteed to win any World Series, and they might run their fortune into the ground in less than 25 years as well as massive cashflow shortfalls in a few years as many billionaires are not very liquid. This is a point used often on wealthy people of “asset rich, cash poor.” They have their wealth in assets that far exceed their net wealth in the balance sheet formula of assets minus liabilities equals net worth in a business. Add up all of those businesses and personal assets and you get to what these billionaires are worth. Remember, those Picasso paintings in their home are worth millions but are not liquid.
Liquidity is made up of liquid assets that can easily be converted to cash without a significant loss in value. Liquid assets are also known as cash equivalents.
Some examples of liquid assets include:
- Cash on hand
- Cash in a checking or savings account
- Money market accounts
- Certificates of deposit
- Stocks
- Bonds
- Marketable securities
- Accounts receivable
If it was all about going in with the largest payroll, remind me again of the last time the Yankees won a World Series? Maybe it will be in 2024, but the previous time was 2009 — 15 years ago. It isn’t easy to win the World Series. But yes, spending Top-10 money generally gives you better odds of making the postseason because great players cost a lot of money.
Now do I believe the Washington Nationals could enter this conversation in agreement with JoezMcfly or Roberto Shenanigans? The answer most likely lands in the middle. The Nationals have wealthy owners per the Forbes ranking and the Lerners come in just below the Dolans. The Nationals are in the 9th largest TV market versus Cleveland at 19th. We can debate if both teams should be spending more money on payroll, and the answer is they probably can in the short-run just like Ted Lerner did from 2010 to 2018 when he raised payrolls year-over-year. Reportedly, the Nats’ lost money but most people never bought that as a possibility because they do not understand that a team’s asset value versus their annual income/loss are not the same. They are inter-related in the example of the Guardians that you could erode your asset value to worthless, even if the team can be sold for a large number.
Let me explain. You buy the team for $450 million. You borrow $200 million and pay $250 million in cash. Your net value is $250 million. The team appreciates in value to $2 billion but you have increased your borrowing from $200 million to $800 million. Your net value is $1.2 billion in that scenario. But if your plan is to spend $150 million over your revenues for 8-years, your net asset value would be zero. The Braves reported liabilities of long-term debt is $462.363 million. They have other liabilities too. Their asset value is $1.6 billion, and they reported they have a net value of $524 million. But here’s the catch, that asset value is on the books — not what the team would sell for in the open market which is estimated at $2.8 billion. As long as that value stays up, the Braves are fine — and since I am not familiar with their accounting, their reported loss of $27 million could turn to a profit by year-end.
We have discussed here that the Nats’ owners, the Lerners, could work on raising their revenues by increasing ticket sales, and selling the lucrative jersey patch rights, as well as stadium naming rights. There are ways to bring in more revenue other than from the MASN TV deal which we know is an issue.
The main reason the Dodgers, Yankees, and Phillies can spend like they have done for years is due to their ability to drive up revenues, and especially in their local TV deals — and in the Dodgers case, internationally too. They have the three largest deals in baseball just on US annual RSN rights fees, and on top of that, they were also the Top-3 in attendance in MLB. They have all taken advantage of the lucrative jersey patch sponsorships as well.
With any hope, the Nationals will give general manager Mike Rizzo a sizeable increase to the budget to spend on new player acquisitions. This offseason will shed a lot of light on the direction on the team.
