by Tommy George, the Sports Advisory Group
As the baseball season heats up, so does the interest from buyers and investors in acquiring a baseball franchise. This is the time of the year when our partners get calls every day asking, “What do I need to do to buy a Minor League Baseball team?” The first step for prospective owners is to understand Minor League Baseball, including valuations, revenues, the Player Development License, and more.
Minor League Baseball (MiLB)
Minor League Baseball was formed and is operated to meet the player development needs of Major League Baseball’s thirty (30) member clubs. The Player Development License (“PDL”) (formerly an affiliation agreement or Player Development Contract) guides the relationship between Major League Baseball (“MLB”) and MiLB and ensures that major league teams will field at least 120 minor league affiliates through 2030. Each MiLB club is granted a PDL by its MLB parent-club for ten (10) years provided that each club maintains sufficient operations, and meets the stadium and facility standards outlined by Major League and Minor League Baseball. The PDL also commits the Major League team to supply a manager, coaches and players to the Minor League team, and the Major League teams pay salaries and benefits for players (increasing the minimum salaries by more than 70% at the Single-A and Double-A levels, and nearly 40% at Triple-A compared to the previous system), coaches and trainers, as well as some equipment. The MiLB team pays for items such as in-season travel, front office operational expenses, facility contracts, etc.
The PDL arrangement with MiLB began in 2021, as the Professional Baseball Agreement (“PBA”) expired between the National Association of Professional Baseball Leagues and Major League Baseball. This expiration paved the way for Major League Baseball to take over Minor League Baseball, bringing all employees, staff, offices and day-to-day operations in-house to the MLB headquarters in New York and effectively eliminating the former structure of affiliated Minor League Baseball. By doing so, MLB intends to reduce overhead expenses, streamline communications, improve club support, share best practices, and enhance branding and operational synergies. Ultimately, MLB intends to provide the resources and tools necessary to take MiLB clubs to the next level and grow national revenue opportunities via sponsorships, marketing, naming rights, digital media and streaming – all of which will help to maximize value and valuations for MiLB clubs.
The restructuring gave Major League Baseball the opportunity to eliminate outdated facilities and stadiums while also streamlining the geography of leagues and MLB affiliations. MLB hoped to decrease travel for potential player call-ups and creating a more comfortable environment for its minor league players to develop. MLB also stated that improved facility standards would ensure the highest caliber environment for training and development. However, the majority of these facility improvements would be the responsibility of the MiLB clubs and their ownership.
Under the PBA, MiLB had 160 teams across 14 leagues. The facility standards language as part of the PDL ultimately limited the number of facilities available that met the new criteria of MLB. Combined with increased player wages and the innovations in scouting and player development tracking via digital technology and analytics, MLB and MLB owners decided that a reduction in MiLB teams would be appropriate. Altogether, 40 MiLB teams were eliminated from the new model and would no longer have a MLB affiliation. Some of these teams were moved into independent professional baseball leagues; others converted to being summer collegiate amateur wood bat league teams; and, some suspended operations completely.
MiLB franchises trade at values ranging from $6 million to $50 million+, depending on the League, level of play (Single-A, Double-A, Triple-A, etc.) and financial performance of the franchise. MiLB franchise valuations are more greatly influenced by comparable transactions within the respective League, as compared to traditional economic valuations using traditional EBITDA multipliers. Forbes annual report of MiLB valuations provides great insight on the most profitable and highest valued teams within MiLB.
Revenue streams for MiLB teams are similar to MLB clubs: ticket sales, sponsorships, concessions, souvenirs and web / media. The remaining revenue for these enterprises is derived from licensing deals, MiLB generated revenues, stadium concessions, merchandising, and “other” ancillary sources. Retail sales of licensed Minor League Baseball merchandise have more than doubled over the last ten years. The “other” category may include a wide variety of services, such as parking, catering, luxury box seats (not included in ticket sales), amusements, and the rental of facilities, equipment and / or other goods. Many teams also host ancillary events at their ballparks throughout the year. These can include concerts, flea markets, and beer and wine festivals.
Typically, full / controlling interest transactions within Minor League Baseball take place in the off-season although due diligence and negotiation for the deal can certainly be completed during the season. Some teams are owned outright by one person, and some operate with numerous shareholders. Minority shares of MiLB franchises are often available. You can expect teams with shares available will want to sell a minimum 5% interest in the team. Sales of a controlling interest are rare. These deals can be completed at various points of the season, depending on the team, League, and % being sold.
Minority partners / shareholders in Minor League Baseball franchises receive many of the same ownership perks that apply to a controlling partner, including tickets / ownership suite access, player access, and perhaps some connections at Spring Training with the MLB parent club. However, minority partners / shareholders will typically not have a direct say in team operations, management, etc.
The obvious lure to MiLB ownership is the direct connection with MLB clubs, and future MLB stars. Since 1996, only two players have gone straight to the Major Leagues with no professional baseball experience (Xavier Nady – San Diego Padres, 2000; Mike Leake – Cincinnati Reds, 2010). Every other MLB player since then has gained professional experience before taking the field in the Majors, with the overwhelming majority coming from MiLB (others have come from professional leagues in foreign countries, or independent professional leagues). These players include Bryce Harper, Mike Trout, Kris Bryant, Clayton Kershaw, and hundreds more of today’s MLB stars.
The Geography
Once an owner / ownership group gains an understanding of Minor League Baseball, the key is to focus in on geography and/or League. What makes sense for ownership? What are your financial parameters? Is it a franchise that is within close proximity to the managing partner? Does geography not necessarily matter? Is a franchise near an airport the key ingredient, for accessible travel? Due to the limited availability of teams to purchase, most ownership groups place higher value on the opportunity versus geography.
Turn-Around or Turn-Key?
Owning a professional baseball team is a major acquisition. Ownership requires hard work and effort, financial resources, professionalism and creativity. At the Minor League level, most franchises employ highly capable sales, marketing and operations staffs. Hands-on management of the day to day operations by is typically not required by ownership. These teams can be successfully run by absentee owners (although they are certainly keeping their “eyes on the store”).
Owning a team can also be a great deal of fun and offers a highly visible role within the local community. It is typically viewed as a much more conservative investment than say stocks or bonds. Ownership will most likely want to be able to attend games with relative ease. Being able to take friends, family, clients and co-workers, etc., to games will probably be a top priority for ownership.
For some buyers / investors, a turn-key operation is extremely attractive when pursuing the acquisition of a franchise. Strong operations and a successful financial performance on an annual basis means that new ownership will have to do very little to continue the success of the team. These ownership opportunities are typically higher priced from a valuation perspective than other franchises. However, for first-time owners, or ownership groups with other business ventures that require their attention and time, these teams are extremely attractive.
For successful operators and many entrepreneurs, a turn-around opportunity is extremely attractive. Since most teams employ solid staffs, these types of situations do not come with much frequency. Turn-around opportunities provide ownership the ability to implement new business strategies and practices, perhaps some financial reengineering, all in an effort to improve the financial performance. Ultimately, the goal is the successfully cultivate a change in the business of the team, and improve the team’s finances – both on an annual basis and long-term appreciation in valuation of the franchise.
The Money
The final step is assuring that your ownership group has its funding in place. Professional sports ownership requires that buyers / investors come to the table with their monies in-hand. Financial contingencies are typically a non-starter in negotiating for a team. Bank financing in regards to sports ownership is rare. As a result a buyer / investor typically needs to have their monies in place before they can pursue the acquisition of a team.
What to Expect
Most ownership groups understand that the return on investment will come in the long-run, not on an annual basis. Many successful ownership groups take annual profits or returns and immediately re-invest those funds into their franchise. These monies are typically spent on revenue generating investments, such as marketing, facility improvements / upgrades (electronic displays, kid’s play areas, concessions areas, etc.), or staffing.
Over the past 20 years, most franchises have appreciated between 2-5% per year, regardless of cash flow or annual financial performance. Those franchises with a strong financial performance on an annual basis can have much higher appreciation rates. The long-term payout of ownership is truly where investors will make their money – especially with successful operations. Most teams are held for a minimum of five-plus years. As mentioned above, minimal supply and strong demand continue to fuel price appreciation. There are only a few opportunities available each year to own a franchise.
A wonderful example of the buy and hold strategy is seen with the Columbus Clippers. The government of Franklin County, Ohio purchased the Clippers in 1977 for $25,000. After years of successful operations, strong community partnerships, and a history of players who went on to MLB stardom, the team and County were able to secure funding to construct the brand new, state-of-the-art Huntington Park for $70 million. In 2016, Forbes valued the Clippers at just over $41 million, with the team producing over $13.5 million in revenue and an operating income of over $4 million. All-in-all, not bad for $25,000…even if it did take 40 years.
Most investors obviously will want a quicker timeframe than 40 years though regarding an investment, which is fair. Most teams now recognize that further developing the fan experience at the game can have a major effect on revenue generation. Providing highly creative concessions, selling stadium and field naming rights, offering unique game day promotions, adding carnival style games and amusements, luxury boxes, and crafting a wider variety of sponsorships are just some examples of ways teams are driving revenues much higher. Baseball is a business, which is why MLB and MiLB are looking to executives and professionals with business-world experience to become owners / operators.
What Next?
The partners at The Sports Advisory Group can assist you in finding and fully analyzing an ownership opportunity that meets the criteria of your ownership group. The Sports Advisory Group is the nation’s leader in the sale and acquisition of professional sports franchises, with experience across all levels of baseball, minor professional and junior hockey, E-Sports, professional soccer, the NBA C-League, NASCAR, and more. The team at The Sports Advisory Group can assist with all types of ownership transfers, big or small, and has the experience needed to ensure the deal meets the needs and expectations of both the Buyer and the Seller.
For more information, contact Tommy George, President, (240) 409-6297; tgeorge@thesportsadvisorygroup.com.