How to apply the DCF method to professional sports?


The Discounted Cash Flow (DCF) method is one of the most used techniques in financial engineering to evaluate a company. It consists of evaluating and discounting the future cash flows of the company under study. It is based on the construction of a Business Plan from 4 to 10 years with a forecast of revenues and expenses based on precise assumptions and also a discount rate usually determined via the CAPM model.

The value of the company (EnterpriseValue) is therefore the sum of Free cash flows to the business discount value to which is added a terminal value calculated using the Gordon Shapiro method or applying a multiple to a key indicator that can be the operational result. The value of the shares (Equity value) is therefore the value of the company calculated from which the net debt must be subtracted.

Certain limits may prevent the application of this financial method in professional sports. For example, few clubs manage to regularly generate positive cash flows, making it difficult or even impossible to apply DCF. In addition, the exercise is dangerous to build a Business Plan for a long period whose income is correlated with sporting results, but also with parameters exogenous to the life of the club – including in particular the renegotiations of television contracts. By doing a BP for a short period, most of the value of the company will depend on the value of the terminal. Finally, the calculation of the discount rate based on the CAPM method works very well for industries with many companies listed on the stock market – which is not the case for professional sports. In the excellent book Creating Value in Football, the authors did this exercise and ​​calculated a discount rate of 6.5% for the sector. Although it seems low, we rely on this rate for our work below.

Application – fictitious example

To illustrate the evaluation of a professional club, we start with a completely fictitious example, but whose financial data is based on a classification in the middle of Ligue 1 in the following four seasons. The first version of the assessment does not include capital gains made on the disposal of players, normally considered as exceptional income.

Business plan over 4 years of a Ligue 1 club – v1 – Fictitious example

Non-recognition of capital gains on the sale of players in the model

In this first version, we reach a company value of 37.5 million euros. Considering a net debt of around 10 million euros, the value of the shares is then 27.5 million euros.

The 2e The version includes a normalized income from capital gains on the sale of players. In the example in question, it is considered that the club manages to earn 5 million euros per season in addition to capital.

Business plan over 4 years of a Ligue 1 club – v2 – Fictitious example

Accounting for capital gains on the sale of players

Taking into account capital gains on the sale of players changes the situation considerably. The value of the company is therefore 96 million euros and the value of the shares 86 million euros.

Should it be taken into account in the assessment of capital gains on the sale of players?

This question is the subject of debate among sports finance specialists. And the opinion will necessarily be different according to the defense of the interests of the seller – who will push for the recognition of capital gains in the evaluation – and those of the buyer.

However, it does not seem abnormal for a training club that receives a substantial income from the transfer market every season to take into account this line of income in the assessment via the DCF (even if it is exceptional recipes). And this is more true if the sums recovered are not reinjected into the policy of acquiring new actors.

Is the DCF method used in the world of professional sports?

Traditionally, sports finance players prefer to use the multiples method to get a first estimate of the target club. With the specificity that this multiple is applied to the turnover – while in other industries it is more commonly applied to the operating profit or even the net profit. A multiple that is calculated from past trades in the market while making adjustments based on the asset structure. This sectoral approach allows for rapid validation of initial hypotheses. However, the DCF method is not completely ignored in the sports world.

“The multiple method is generally the preferred method when negotiations are already underway with potential buyers. This allows you to have an overview of the market. However, it is interesting to cross-reference this first evaluation with the DCF method. multiple approach then we cross the first evaluation with the realization of a Business Plan to evaluate the future cash flows. This allows us to estimate the consistency between the amounts planned by the buyer in his investments and the generation of value. And to determine if the return will be enough,” concludes a business expert in French professional football. At the rate of transactions in professional sports, we are not done hearing about DCF.

To go further 👇

Discounted Cash Flows (DCF) – The key concept

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