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.

TUTORIAL: Buying A Home

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.)

Possible Problems
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)*
2010 Texas Rangers MLB $593
2009 Phoenix Coyotes NHL $140
2009 Chicago Cubs MLB $173
2003 Buffalo Sabres NHL $92
2003 Ottawa Senators NHL $100
1998 Pittsburgh Penguins NHL $85
1995 Los Angeles Kings NHL $113
1993 Baltimore Orioles MBA $173
1978 Cleveland Barons NHL **
1975 Pittsburgh Penguins NHL $4
*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

TUTORIAL: The Greatest Investors

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.

Related Articles
  1. Fundamental Analysis

    The Economics of FanDuel

    Part of fantasy sports’ success lies in one-day and week-long contests serving as an alternative to season-long games. FanDuel, a leader in this space, has recently surpassed a $1 billion valuation.
  2. Personal Finance

    The Future Outlook of the Golf Industry

    The popularity of golf peaked in 2003. To regain popularity and survive, the industry is adapting to appeal to a younger generation of players.
  3. Investing News

    Will Arch Coal file for Bankruptcy?

    In the last four years, Arch Coal Inc. (ACI) has been facing headwinds from lower price of coal amid global oversupply. The shares of ACI have lost nearly 99% of their value this year.
  4. Investing Basics

    3 Companies You Never Thought Would Go Bankrupt

    Understand more about company bankruptcy and why a company would file for bankruptcy. Learn about three companies that went from industry leaders to bankruptcy.
  5. Investing Basics

    These Four Industries Must Change to Survive

    Tech innovations from new companies are threatening long-time industry stalwarts in transportation, hospitality and finance.
  6. Economics

    Oil Companies Near Bankruptcy

    With the resumed uncertainty in Europe surrounding Greece and the sudden bear market gripping China, the price of oil has once again slid under $50. While low oil prices may be welcomed by drivers ...
  7. Economics

    What Does Going Concern Mean?

    Going concern is a concept used in business and accounting to describe the fiscal health of a company.
  8. Fundamental Analysis

    Companies That Went Bankrupt From Innovation Lag

    Companies that don't keep up with market-changing innovations run the risk of going bankrupt. We look at some examples.
  9. Entrepreneurship

    Nike and the NBA, a Perfect Duo?

    What does Nike's recent eight-year contract partnership with the NBA entail for its largest competitor Under Armor?
  10. Economics

    The NBA’s Business Model

    Drawing interest domestically and abroad, the NBA has seen its popularity and revenue streams rapidly increase over the past few years.
RELATED TERMS
  1. Hole-In-One Insurance

    A product that offers financial protection to golf tournament ...
  2. Accelerated Resolution Program ...

    A program designed to reduce the time and cost of resolving failed ...
  3. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  4. Estimated Recovery Value (ERV)

    The projected value of an asset that can be recovered in the ...
  5. Recovery Rate

    The extent to which principal and accrued interest on a debt ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail ...
RELATED FAQS
  1. Why is Manchester United (MANU) carrying so much debt?

    The takeover of Manchester United by the Glazer family beginning in 2005 saddled the historic club with substantial amounts ... Read Full Answer >>
  2. What are Manchester United's (MANU) largest revenue sources?

    Manchester United is one of the most popular U.K. soccer teams. Its principal stadium is Old Trafford, located in the heart ... Read Full Answer >>
  3. Does Manchester United (MANU) own Old Trafford stadium?

    Old Trafford Stadium was built for and is currently still owned by Manchester United Football Club (Man Utd.). This means ... Read Full Answer >>
  4. What's the biggest sports endorsement deal ever signed?

    According to Forbes, basketball player Derrick Rose holds the largest endorsement deal as of 2014; the deal is for more than ... Read Full Answer >>
  5. What are the biggest stadium naming rights deals of all time?

    The top three stadium naming rights deals of all time were all for stadiums hosting New York City teams. The largest was ... Read Full Answer >>
  6. What is the difference between a mutual fund and money market fund?

    The Herfindahl-Hirschman index can be used to determine competitive balance in sports. Competitive balance is desired in ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!