Over the past 40 years, the economics of sport have changed dramatically. Its biggest stars, such as LeBron James and Tiger Woods, are billionaires. Total spending on sports sponsorship and advertising was estimated at $77.7 billion in 2022, with a future projected growth rate of almost 9% per year through 2027. Sport is big business, creating diverse opportunities for finance and accounting professionals from entry-level accounting roles to sophisticated analysis of franchise and player values. In June 2023, there were more than 1,000 “sports finance” jobs listed on LinkedIn in the UK and more than 6,000 in the US.
Many factors are driving the ever-increasing valuations of sports franchises. Sports are one of the few remaining vehicles that can guarantee a live television audience and hence eyeballs for advertising. When combined with a constrained supply in many sports — there are only 20 teams in the Premier League, and no new NFL franchises have been added since 2002 — the rich keep getting richer.
Another driving force is that the geographic boundaries to ownership have largely disappeared, which has increased the pool of individuals and entities investing in sports properties.
However, only a few sports can command lucrative media and digital rights fees; others must pay for exposure or rely on non-media-related revenue sources.
Furthermore, despite the huge sums, for example, rolling into the UK’s Premier League, seven of the league’s 20 teams were reported in 2022 to be in financial distress. In the next three tiers of English football, over 40% of teams are struggling financially. Costs, especially for top talent, have been consuming an ever-increasing share of revenues.
From a financial standpoint, it is important not to ignore the basics of economics and accounting when looking at sports. Emotion and passion can easily blur the realities. Sports finance professionals need to bring discipline and data to decision-making, planning, and financial management. Here are five areas that accounting professionals should pay particular attention to when working in the sports industry.
Performance measurement
Legendary American football coach Vince Lombardi, who led the Green Bay Packers to five NFL championships, once said, “Winning isn’t everything, it’s the only thing.” Winning on the field is important, but there are other performance measures that matter in ensuring the long-term health of a sports team or league. Another American football personality, Art Rooney, founding owner of the six-time Super Bowl champion Pittsburgh Steelers, said it best: “The biggest thrill wasn’t in winning on Sunday but in meeting the payroll on Monday.”
Developing a set of performance measures that track the key drivers of financial success and link financial outcomes to on-the-field performance is essential to understanding the complex economics of the sports world.
There are two primary revenue streams to consider. On-the-field revenue includes ticketing, concessions, merchandise, parking, sponsorships, and hospitality. Off-the-field revenue, on the other hand, covers broadcast revenue, sponsorships (national and local), online merchandise, and licensing.
Metrics such as average revenue per spectator and revenue per event provide insight into the elasticity of spectator spending and tend to vary with factors such as team performance, availability of alternative events, weather, and pricing. Off-the-field revenue tends to be less variable in the short term, as it is usually governed by longer-term contracts.
Understanding the different drivers in each sport is an important step. For example, American football and basketball rely on the college system to develop players at little or no cost to the team, whilst top soccer teams invest heavily in developing networks of youth academies and feeder teams to develop talent. The parent company of Manchester City has ownership stakes in teams including in the US, Australia, Japan, Spain, China, India, and Uruguay. Some sports rely on a limited number of events to gain international visibility. For example, outside of the Olympics, cycling only matters to the average sports fan during the Tour de France.
Sport is like any other business. Understanding each sport’s unique drivers and connecting them to a sound financial model underpins disciplined decision-making.
Analytics
The use of analytics in sports has been a defining trend of the past 20 years. Every aspect of on-field performance is now measured and analysed. This has led to the development of much more sophisticated financial models that link athlete or team performance to financial outcomes. In turn, these models are used as a basis for contract negotiation, which drives the biggest expense for most sports teams.
The management accountant may be the only objective voice in an emotionally charged discussion. Constructing financial models that take into account all the variables that can affect the value of a player (eg, past performance, age, injury history, current contract value, available budget, projected performance improvement, availability of alternatives, etc.) is becoming increasingly complex. Uncertainty and risk are implicit, some of which can be insured — but most cannot. The ability to use scenario planning, sensitivity analysis, and other risk modelling is becoming more prevalent.
Revenue and expense recognition
Accurate revenue and expense recognition is important in all industries. However, sport has some unique complexities. Recent changes in revenue recognition rules and lease accounting have impacted accounting for sports significantly. Revenue streams such as sponsorship, broadcast, naming rights, and digital rights contracts extend over multiple accounting periods and may be subject to complex revenue-sharing algorithms.
Similarly, it is important to accurately account for expenses such as player salaries, signing bonuses that may be amortised over the life of a contract, and stadium or arena lease payments. In many instances, liabilities may exist for many years to former employees who have had their contracts terminated or transferred to other teams.
Taxation
Many sports are becoming more global. NFL teams routinely play games in Europe; teams from 36 countries participated in European (UEFA) football tournaments in 2022; and 20 countries are hosting a Formula One Grand Prix in 2023. Different taxation rules apply to revenue and expenses in each jurisdiction, requiring timely and accurate accounting and reporting.
Further tax complications can arise due to the increasingly complex ownership structures being used to acquire and operate sports leagues and franchises. General and limited partners from multiple geographies may combine to form an ownership group, with profits passed through to the partners. And taxation must be handled in accordance with the rules in each partner’s tax jurisdiction.
Changing dynamics
Sport, like every other industry, is always changing. New formats and events are constantly seeking to upset the status quo. The Indian Premier League in cricket, the Saudi-backed LIV Golf [proposed merger is under threat and may not happen], and even a professional pickleball league in the US are all disruptors. There is also a continuing uptick in the global popularity of women’s soccer, which is finally attracting investment after years of false starts.
Many sports have tried to globalise their appeal with varying degrees of success. Snooker has been successful in Asia but not in North America. Handball is hugely popular in a few European nations but has little global visibility. The Netflix Formula One series, “Drive to Survive”, has sparked increased interest in the sport, especially in the US, which is hosting three Grands Prix in 2023. Golf and cricket have tried similar tactics with varying degrees of success.
The picture is not all rosy. There are potential threats on the horizon. Risks to player safety in American football, rugby, and other contact sports are a growing concern. Differing rules about the ability of transgender athletes to compete is a divisive topic. And so-called sports washing, where a company or country invests in sport to distract from a poor environmental or human rights record, is controversial.
Looking to the future, the demand for sports finance professionals is set to increase. Many universities now offer a sports accounting specialisation as part of their accounting curriculum, and a number also offer MBAs in sports management. These programmes can equip finance and accounting professionals with the skills to apply sound financial practice to the complex and volatile world of sports. It promises to be an interesting journey — win, lose, or draw.
David A. J. Axson is a former partner with Accenture, co-founder of The Hackett Group, and former head of corporate planning at Bank of America. He currently serves as part-time CFO of Shrap.co.uk. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
