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Team valuations are a mix of art and science. As they keep climbing, it’s useful to understand the math, or lack thereof, behind them

Sportico came out with its valuations for MLB teams in March. Their valuation estimates provide one of the most rigorous and consistent comparisons of team value in sports. But all team valuations tend to be less analytical than they first appear. Let’s go through it.

Valuation Approaches

To oversimplify a bit, there are two approaches to business valuation: discounted cash flows and relative valuation. 

The discounted cash flow (DCF) method treats businesses like a money machine. You see how much money the machine churns out a year, and estimate how much that machine will continue churning out in the years ahead. Future earnings are discounted by a cost of capital (inflation, interest rates, etc). In non-mathematical terms, a dollar today is worth more than a dollar two years from now, so the discount translates the value of future dollars into today’s dollars. You add up all the cash flows from now until the future, and you get a value for the company based on DCF. Most publicly traded companies are valued this way. It doesn’t matter if a company makes cars or movies; its value is determined solely by the cash it is expected to generate.

Relative valuation, on the other hand, treats businesses more like houses. The value of a house, generally speaking, is determined by what similar houses around it have sold for. You could have two identical houses with very different values based on the proximity to a major city, the type of neighborhood, the quality of schools, the current style trends, and a host of other intangibles. A real estate appraiser determines the value of a house primarily by looking at what other houses in the neighborhood have sold for. The appraisal may go up a bit if the house has an extra bedroom, a bigger yard, or newer construction than the other houses, but the valuation is mostly based on what other people have paid for similar houses nearby.

Team Valuations

If you look at the Sportico estimates, they appear to show the data associated with the DCF approach. They gather lots of information on the various revenue streams, look at stadium and other real estate rights, adjust for league and local revenue sources, and generally seem to take a very mathematical approach. But if you look at the footnotes, they then apply a “team multiplier” to the revenues to get to a valuation, which is basically just a way of saying people just like some houses better. If you compare the top and the bottom teams, it’s clear that the teams are not being valued solely on cash flows.

Source: Sportico

The Yankees make about 260% more money than the Marlins but they are valued at about 650% more. That would make little sense in a DCF model, but is more understandable with a relative valuation model. In essence, people would just pay a lot more for the prestige of owning the Yankees than they would for the Marlins. It will be interesting to see if the growing ownership interests of private equity and other professional investors will change this as they become more focused on the financial performance of the teams and less on the status of running a storied franchise.