The Complexities of Player Equity in โProfessional Sports
The concept of professional athletes โgaining equity ownership in theirโ teams โis gaining traction, but presents โฃmeaningful challenges within the existing frameworkโ of league collectiveโ bargaining agreements (CBAs). While conventional player compensation is structured around salaries governed by salary caps, offering equity โ- a stake in the โteam itself -โ introduces a new layer of โfinancial and logistical complexity.
Currently, under the NBA-NBPAโ CBA, a player โlike Paolo Banchero โฃcould sign a maximum โฃfive-yearโ contract worth approximatelyโข $40 million annually, representing 25% of โคthe salary cap. Thisโ salary, while potentially fitting within existing cap exceptions, does count against a team’s luxury tax thresholds.
An choice approach โ- offering a โlower salary,โ say $30 million per year, coupled withโฃ a 1% ownership stake in the teamโข – immediately raises valuation questions. โDetermining the value of that 1% interestโฃ is not straightforward. Sports franchise valuations typically occur only during sales of shares. Whileโฃ Forbes estimates a 1% stake in aโข team valued at $3.2 billion โขcould be worth $32 million, the actual value is contingent โon factors likeโฃ the rights associated with the ownership,โค resale restrictions, and overallโ market demand.
This valuation then leads to questions regarding how that equity should be treated under the โฃsalary cap. Should the $32 million value be applied solely to the year of the agreement, or should it be prorated over the life of โคthe contract, similar to how the โNFL treats signing bonuses? Furthermore, the tax โimplications of such an arrangement remain unclear.
Annual valuationsโ ofโฃ aโข franchise โsolely for โคsalary cap โฃpurposes would be a complex, expensive, andโข potentially contentiousโ undertaking. Selecting a neutral valuator would beโ challenging,โค given the inherent conflict of โinterest for both teams (wanting a low valuationโข for cap purposes, but a high valuation for potential sales) โขandโฃ players. The situation becomesโ even more โcomplicated if the โplayer is subsequently traded to anotherโฃ team.
The structure of modern sportsโ franchises adds another layer of difficulty.Many teams are part of larger conglomerates encompassing multiple sports teams, real estate,โฃ and related businesses. Providing aโค player with equity in such a complex entity, โwhere the basketball team is only โone component, presents unique challenges.
However, a viable path forward may exist. The NBA-NBPA CBA already meticulously defines basketball-Related Income โ(BRI), the basis for calculating the salary cap. A multiple of BRI โฃcould potentially serve as a reliable predictor of a club’s value, based on comparisons to past transactions involving minority stakes in NBA teams.Sportico estimates that NBA teams are currently valued at โapproximately 11.9 times their annual revenue, offering a potential benchmark for calculating equity value for salary cap purposes.
Despite the potential benefits, significant hurdles โคremain. Currently, ther are few definitive answers regarding the feasibility of player equity ownership. However, leaguesโค and players have a history of negotiating fair compensation structures, and it remains to be seen whether equity ownership will become a โคkey issue in future negotiations.
