Owning a professional sports team isn't always worth the glamor and fame. We always see the owner of the Super Bowl or World Series celebrating along with their players after winning a championship, but owning a professional sports franchise is a very challenging business endeavor and throughout history, there have been more than few team failings.
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While some teams have been able to file for bankruptcy and return to regular operations, others have had to shut their doors and turn out the stadium lights forever. Owning a franchise, after all, is just like owning any other business. If expenses exceed revenues for an extended period of time, an owner has no choice but to shut down operations. But a historical view of those teams that have had financial difficulties reveals a few primary reasons why sports teams fail. (If you like being your own boss, this is not the job for you, check out Is Buying A Franchise Wise?)
1. Owner's Primary Business Goes Bust
As with many other businesses, owners often have a variety of different companies in a diverse set of industries. There are few examples of team owners making their millions through the ownership of a professional sports franchise. More often than not, owners have had previous success in an unrelated business and decided to buy a team with their wealth. Unfortunately, many of the teams that have failed in the past were because the owner's primary business failed. In 2007, the Buffalo Sabres file for bankruptcy due to their owners' troubles at Adelphia Communications. And in 2009, the Phoenix Coyotes filed for bankruptcy for similar reasons.
2. Large Amounts of Debt
Professional sports teams are often bought with the help of a loan or other financing arrangement. These large amounts of debt can become burdensome if ticket sales suffer or merchandise sales are slacking. Whatever the case may be, the interest payments due on this debt burden can become financial suicide and there have been many examples of teams going through bankruptcy because they couldn't meet their debt obligations.
3. Business Reasons
On a few occasions, owners of professional teams have folded strategically for business reasons. Such as when the Seattle Pilots filed for bankruptcy in 1970 after a judge granted the State of Washington and injunction preventing the team from moving. Once the team filed for bankruptcy, it allowed the team to be sold and moved to Milwaukee, where they were renamed the Brewers.
4. Bad Investments
In 1993, the Baltimore Orioles filed for bankruptcy partially because their owner, Eli Jacobs, encountered debt problems related to his investment in Memorex, a computer disk maker that was suffering in 1992. While this has not been an often cited primary reason for other bankruptcy filings, we could assume that owners have endured financial difficulties from failed investments that may not have been exposed as such at the time of filing. In the end, the league owners approved the $173 million sale to a group headed by Peter Angelo at a U.S. Bankruptcy Court auction. (For similar stories, see Millionaires With The Most Bankruptcies.)
Interestingly enough, of the 10 bankruptcy filings from major sports teams, or the parent company, over the last 40 years, seven of them have been from the National Hockey League. It turns out that NHL teams have a higher likelihood of failure because the teams have less cash flow and the owners usually have a lower net worth than owners of other sports franchises.
As this article is being written, a lock-out for the National Football League looms, putting in jeopardy all or a portion of the 2011 season. While there is no evidence that these types of challenges have caused franchise bankruptcies in the past, the imminent lock-out brings to the forefront the possibility of yet another reason for future possible bankruptcies.
Major Sports Bankruptcies
|Year||Team||Sport||Sold For (million)*|
|1995||Los Angeles Kings||NHL||$113|
|*Sold amounts are approximations. To get a better understanding of the true costs of acquiring a team, additional considerations would include assumed debt after restructuring and outstanding loans such as taxes owed.|
|**Merged with Minnesota|
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The Bottom Line
Just like in the airline and automobile industries, labor unions have often made company cost structures unsustainable over long periods of time. And over the last decade or so, we have seen player salaries grow considerably, even through two recessions in the last 10 years, while the salaries of millions of regular workers have been slashed or eliminated. At some point, these compensation packages, which sometimes include revenue sharing, become extremely burdensome to owners.