Market Approach to Valuations as Explained through a Free Agent in Professional Sports

Last week, James Janos, a valuation analyst in the Valuation, Strategy and Litigation Support Group at Sobel & Co. LLC presented an informative CLE class on valuation, with a fun, sports-minded twist.

“The Market Approach to Valuation as Explained through a Free Agency in Professional Sports” focused on the well-known wide receiver, Odell Beckham Jr (OBJ) #13 of the New York Giants.

What is the Market Approach? The market approach looks to completed private and public transactions to derive market multiples of similar entities. James took the class through OBJ’s stats and compared those to similar NFL athletes.

First, who is Odell? He was the first round draft pick in 2014. His parents were collegiate athletes, he had two injuries in the NFL and he holds many NFL records. He was the fastest to reach 100, 150, 200 and 250 career receptions. He was the fastest to reach 3.0 K, 3.5K and 4.0K career receiving yards. He had 13 games with 125+ receiving yards in first three seasons and the most receiving yards in his first two seasons. He is the only player in NFL history to have 1300+ receiving yards while playing in ≤ 12 games in a season.

So what’s his future performance? By taking his last three years, and calculating his catches, touchdowns and yardage and applying a percentage weight, a weighted average can be generated. But is the weighted average reasonable? Should different years be weighted differently? Has the NFL ever seen a wide receiver like this?

Who are the comparable athletes? When doing a valuation you look at the comparables. What other players are wide receivers? Look to the completed deals of other wide receivers, what are they paid? Who is the same age? Who has a similar performance level? What other athletes have had similar injuries?

Once the ‘closest’ comparable athletes have been established, you should look towards describing the comparables and analyzing the market. You then apply the multiples based on the mean, median, maximum and minimum.

Then James moved on from the multiples, to the discounts. Should a discount be applied? In OBJ’s case – should a discount be applied for lack of sanity? OBJ has been fined more than $225K for excessive end zone celebrations, obscene end zone celebrations, improper equipment, unsportsmanlike conduct, verbal abuse, fighting and blind side hits.

Now do professional sports teams actually do this? The answer is yes, they do. All NFL teams have scouting and budgeting offices. Players are generally assigned grades, then the general manager and owner meet to assign contract values based on current contracts. This value is based on history, production and needs.

In a nutshell the market approach is tackled by following these short downs -

  • Look to the comparables
  • A review of the qualitative and quantitative history
  • Convert market value into standard value
  • Compare multiples for the asset being analyzed
  • Assess with reasonableness – would a hypothetical buyer buy?
  • Do the deals sound reasonable?
  • Look at other valuation approaches or compare deal values.
  • Did we determine the correct level of control and marketability?

This class was filled with sports fans who had a desire to learn about valuation using a simplistic and fun format.

So how much do you think OBJ’s contract is worth?.....