This article is written by Souradh C. Valson, from Government Law College, Thiruvananthapuram. The article gives an overview of the financial and investment aspects of sports and the role of governing bodies in regulating such aspects.
Table of Contents
The global sports industry is worth over $500 billion and is growing at a rate of 5.9% every year. This growth requires investments and financing, thereby creating a need for many skilled workers in sports, finance, and management. Regulation of these investments is necessary to channelize them for their intended purpose.
Finance management in the sports industry
Sports organizations have a lot of revenues and expenses, so correct financial practices are necessary for the global sports markets to thrive. Financial experts and experts in sports management are integral to the global sports market. Like other professional fields, financial management in sports deal with:
- Planning strategies and budgets.
- Reducing unnecessary expenses and cautious spending.
- Proper reporting and detailed analysis.
Now let us discuss in detail how these activities help in the financial management of sports.
Firstly, for financial management, the type of business organization is identified and then classified as a sole trader, a partnership, a co-operative, a corporation, or a non-profit organization.
Secondly, the proper allocation of funds is made by ascertaining what funds are available for disposal. The examination of previous financial records can help to create a plan for allocating the funds. For developing a new plan and strategy, extensive planning with owners and stakeholders is necessary. A proper strategy must include the following:
- Keeping in mind the relevant trends.
- Comparing the internal and external constraints.
- Categorizing expenses into travel and accommodation costs, equipment cost, salaries of personnel, insurance, marketing, and promotion.
- Estimating possible revenues such as ticket sales, donations, membership fees, and sales of merchandise.
- Making it easy to read and understand and preparing an outline for the stakeholders.
Plans and strategies should have legal validity and must follow the necessary rules and regulations.
Thirdly, after planning and budgeting, the organization must focus on proper spending. Making correct decisions that increase the value of the organization is necessary for successful financial management. Working with high profile organizations will result in better sponsorship, expanding the revenue by creating apps with in-app purchases, and reducing unnecessary expenses are also part of proper financial management.
Finally, for the proper implementation of all the above steps, reporting and analysis are necessary. Accurate and detailed reports are required to make financial projections, measure their success, and also influence other business plans of the organization. Additionally, they also serve as proof for tax purposes.
Other relevant factors in sports management:
- Media: Financial agreements between the sports organization and the broadcasting company is necessary for broadcasting sporting events.
- External partnerships: External partnerships between retailers and manufacturers allow the sale of merchandise outside the stadiums.
How to get into sports finance
The world of sports is evolving every day. The increased influence of sports creates many new jobs and opportunities. Given below are some jobs in sports finance.
- Finance Advisor: A tremendous amount of money comes into sports clubs and organizations. Big sporting organizations have numerous sources of income, which amounts to a lot of money. Their expenditures for salaries to staff, players and coaches, transportation and accommodation, marketing and promotion also amounts to a lot of money. Dealing with big sponsors, players, and their agents, and advising the organization to spend its revenue in a planned manner is the role of a financial advisor.
- Placing Broker: Sports can be unpredictable. Injuries can happen, both on and off the field. A placing broker assesses the risk players face and insures them from any injuries and personal accidents.
- Business Development Executive: The job of the business development executive is to find new business leads through sponsorships and advertisements.
- Investment Banking: Many investment banks are now specializing in sports finance and lend their services such as advice for mergers & acquisitions of franchises, restructuring the loans of the organization, and corporate financing, for constructing and renovating stadiums.
- Accounting Jobs: Big sports clubs and organizations have a separate accounting department. They ensure financial stability and progress by monitoring purchases and sales, processing payrolls, and preparing the documents for tax filing. Sports accountants also submit their analysis to the team executives.
- Agents: All professional athletes have agents who negotiate marketing and sports contracts. Agents must also monitor the player contracts as they contain several complex clauses and to ensure that the players receive adequate consideration for their performance.
Do sports teams have stocks
The short answer is no. Sports teams do not issue public stocks, with a few exceptions like Manchester United, AS Roma, Juventus, and Borussia Dortmund and few teams in the NBA.
The reason why sports teams don’t issue listed stocks is that they are not profitable. Sports organizations generally operate at a loss because of expensive player contracts and the fact that these organizations cannot raise the necessary revenue from TV rights, stadium sales, and merchandise. Sports teams are not the best investments for an average person. Owning a team is like owning art or collectables as their economic value appreciates over time. Billionaires own sports teams either as a hobby or for the enormous benefits which they get from owning it.
For example, the governing bodies of major sports championships operate as non-profit entities. They have enormous tax advantages when coupled with the private structure of teams such as using the losses of the team to balance their non-team related incomes.
If you still want to participate in the functioning of your favourite team, you can consider the following options:
- Affiliations: Several professional teams have fundings from big companies. In some cases, these companies have associations with the owners of the club. In these cases, you can buy the stocks of these companies, but you won’t be associated with the teams directly. Here are a few sports organizations funded by companies.
- Miami Heat – owned by the CEO of Carnival Corporation
- New York Knicks & New York Rangers – owned by Madison Square Garden Sports Corp
- Mumbai Indians – owned by Reliance Industries
- Delhi Capitals – owned by GMR and JSW group
- Exchange-traded funds: Investing in ETFs which have investments in companies with teams having sports exposure is another option. Given below are a few to consider:
- Invesco Trust Dynamic Leisure & Entertainment Portfolio – PEJ
- First Trust Consumer Discretionary AlphaDEX Fund – FXD
Role of governing legal bodies
The Olympic Charter (International Olympic Committee, 2013) lays down the guidelines for governance in sports by the International Federations. The primary reason for establishing governing bodies is to make laws, expand and promote sports. Ensuring the use of democracy, fairness, independence, and natural justice is necessary for good governance. The governing bodies only exercise power as trustees. The governing body exercises power on behalf of its members through direct or indirect representation. To protect and safeguard the interests of its members and other interested parties, so the governing body should declare their roles and functions.
For example, in 2014, the NBA announced the banning of Donald Sterling from the NBA and imposing a maximum fine of $2.5 for expressing racial views because the NBA’s constitution clearly states the required conditions to impose a fine and ban a player.
Private investment in sports: What governing bodies must know
Private Investment in sports is not only relevant to teams and events but also for the entire sports market. Globalization, along with a more mature market, is most likely to make private investments an integral part of the industry. In 2018, Kosmos, a sports investment group, signed a $3 billion agreement with ITF (International Tennis Federation) for 25 years to give the Davis Cup a facelift. These agreements involve several complex financial, corporate, commercial, and regulatory issues. A middle ground between the interests of the investors and the regulatory bodies are necessary for the proper functioning and growth of the industry. The following are the different methods of private investment:
- Equity: An investor buys the shares of the company that manages the sports team. There have been cases of equity investments in an entire event. For example, CVC invested in Formula One, which was then, for a big profit, sold to Liberty Media.
- Purchasing assets: Purchasing assets such as stadiums to generate income is a relatively recent trend.
- Collaboration/Partnerships: The already mentioned Kosmos-ITF agreement is an example of a partnership in private investment. A collaboration between regulatory bodies and private investors involves granting the rights to the investor to conduct certain parts of a sporting event for a fee to the regulatory body.
The internal structure of a sport or a sporting event determines the ease of investments. Freedom to control the sport is necessary for investors. The governing bodies are hesitant to give control to private individuals to protect and preserve the integrity and traditions of the game. Investors must thoroughly check the political affairs of the team and the timings of the playing seasons. Striking a balance between the investors and regulators is necessary, so the investors should consider the effects of the investment on the industry, and mustn’t be overly interested only in the commercial gains. A well-defined exit plan will protect the rights of both the investors and the governing body if the partnership terminates.
Relevance of sports financing
Sports had a rather humble beginning, played only for enjoyment by people without any profit motives. Now the sports industry is one of the most rapidly expanding industries with an estimated global worth of over $500 billion. Sports play a crucial role in culture, education, and economic development. With better financing and investments, sports can make changes in the world. A well-financed sports team provides better opportunities for the players, thereby giving an incentive for other investors to join in. From a sociological perspective, better sports financing will lead to the inclusion of sports in the curriculum, leading to a more physically and mentally healthy population in the long term.
Emergence of sports law in India
Unlike other countries, India does not have a central legislation on sports because sports are present in the state list (entry 33 of the 7th Schedule). The contribution of the judiciary to develop the sports jurisprudence is also negligible. Autonomous bodies mostly govern sports activities in India, such as the Board of Control for Cricket in India (BCCI), Hockey India(HI), and Sports Authority of India (SAI).
The administration of sports is necessary for its development. We follow a three-tier structure, clubs at the bottom, the district and state sports federation, which finally merge into the national sports federation.
The following are the regulatory and governing bodies relating to sports activities:
- Sports Authority of India
The Government of India, on March 16, 1984, set up the SAI for the IXth Asian Games. The purpose of SAI was to implement the enacted laws, to promote and to develop sports through sponsorship and research in sports. The main aim was to arrange accommodations for players and other sports staff. Construction and maintenance of stadiums and training structures was the duty of SAI. SAI had different wings for carrying out tasks such as the Academic wing, operation wing, and team wing, etc.
National Sports Policy
The national sports policy formulated in 1984 aimed at improving the standard of sports in the country. It also included a review of the implementation of the policies for setting future policies. However, it wasn’t able to achieve its goals, so in 2001 the Union Cabinet reformulated the National Sports Policy. This policy aimed at the collective participation of the centre and states along with the Indian Olympic Association (IOA), and the National Sports Federation for achieving the targets.
Sports Law and Welfare Association of India (SLAWIN)
For regulating the sports law in India, SLAWIN, a nonprofit professional association, brings together persons from the legal field and sportsperson. It also aims to understand the developments, ethical issues, and legal constraints in the sports fields.
The Sports Broadcasting Law in India
The Sports Broadcasting Signals (Mandatory Sharing with Prasar Bharati) Act, 2007, is aimed to broadcast sporting events to a bigger audience. It also provides for the sharing of sporting events of national importance with Prasar Bharati.
Private equity set to continue investment trend
The already mentioned CVC buyout of Formula One pioneered the private equity investment in the sports sector, which made private equity firms, venture capitalists, and other specialized investment institutions invest in the sports sector. The linking of sports to other developing areas such as science and technology has also facilitated in attracting investors.
Let us look at some of the private equity investments in sports:
Football: $500 million investment for a 10% share in City Football Group, which owns Manchester City F.C by Silver Lake.
Motosport: In 2019, Bridgepoint sold the stake it had in the MotoGP promoter Drona to another Bridgepoint fund.
The considerations of the investors are:
- The performance of the team is necessary for the organization to enter into profitable markets. Other legal and financial factors such as a lucrative tender process for media rights, developing and conducting next-generation events, and easing the regulatory obstacles for investments make investors hold onto their sports investments.
- As the profits from sports increase, we’ll see a transition from the regular buyout model to a sale or even an IPO.
What next for investment into the sports industry
Newer markets like e-sports, women’s football will come up. Sports-related technology and media companies will emerge and attract investors as our sports consumption becomes more digital.
A few recommendations to expand the scope of sports law:
- Enacting a comprehensive sports law.
- Conducting free and fair elections in the administrative bodies.
- Proper Implementation of the legislation.
- Due to the unpredictability of sports, players often resort to unfair methods. Prevention of such practices is necessary for ensuring fairness in the sport.
As we have seen, the sports market is evolving. Many changes are coming into sports finance and regulation. However, the situation of sports law in India is pathetic. Inclusive legislation and proper implementation are necessary for the development of sports in India.
- https://www.linklaters.com/en/insights/blogs/sportinglinks/2020/march/private-equity-set-to-continue-investment-trend-in-sport#:~:text=The%20swelling%20interest% 20 a nd%20activity,set%20to%20continue%20throughout%202020
- https://www.businesswire.com/news/home/20190514005472/en/Sports—614-Billion-Global-Market-Opportunities-Strategies-to-2022—ResearchAndMarkets.com#:~:text = The%20global%20sports%20market%20reached,nearly%20%24614.1%20billion%20by%202022
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