It may appear that franchises are bought for prices that have more to do with egos than with financial fundamentals: even teams with persistent negative earnings sell for hundreds of millions of dollars. But it turns out that there is a “method to the madness”, a systematic pattern that thoroughly links prices to current revenues, metropolitan area income (market potential), and historic team performance. Moreover, a careful strategy of managing revenue growth and re-investment in personnel leads to a virtuous cycle of higher performance, higher revenues, and then higher market values for the franchise when an owner eventually wants to become a seller. The reverse is also true: milking the customer for revenues without reinvestment leads to a vicious cycle of declining revenue, performance, and value. Examples from case studies of basketball and hockey data over the past two decades will be used to illustrate these conclusions.
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