Introduction
Funding sports organization is an uphill task. In the contemporary environment in which sports organizations operate, managers of these sports organizations are faced with the enduring challenge of financing their institutions in the midst of declining traditional sources of revenue. Some of these traditional sources included media revenues, entrance fees, and tax support. The dwindling sources of revenue have left the managers with minimal resources to maintain the operations and programs of their sports organizations (Bartlett, Gratton & Rolf, 2012, p.522). Managers have also learnt to look beyond this fiscal challenge. This involves the use of innovative approaches to supplement the single and traditional sources of revenue. Some of the areas from which managers have sourced financing include private sector entities, the public sector, and sport enterprises (Bartlett, Gratton & Rolf, 2012, p.522; Sotiriadou & Bosscher, 2013, p.76). The choice of the approach to funding sports organizations is dependent of various factors. This report explores these factors to make recommendations for the best approach for financing sports organizations.
Sources of Revenue
Sports organizations can either source revenue from internal sources or external sources
Internal Sources of Financing
Internal Revenue
Some of the internal sources of revenue include building rentals and lease agreements. This entails getting revenue from leasing the facilities such as the stadium for use in seasonal events. The facilities can be used by tenants such as other sports teams or travelling events, such as concerts, corporate gatherings, and gatherings of local authorities. Another valuable internal source includes sponsorships and naming rights. This is the revenue earner from assigning entitlements to names certain facilities of the sports institution such as the stadium or the team. For instance, Manchester United Football Club has sponsorship deals with Chevrolet among other companies. Manchester United’s deal with Addidas was worth 750 million pounds, money that the club can invest in various programs (Wilson, 2014). Other internals sources of revenue include advertising rights. This entails the financial considerations for advertising within the facilities of the sports organizations (Schwarz, Hall & Shibli, 2015, p.49). Sports organizations can also raise revenue from private boxes and luxury suites. These are annual leases for prime locations within sports stadia. These locations are prime because they offer the best view and several other amenities including a lavatory, wireless network connection, private parking, catered food services, and bars among others (Schwarz, Hall & Shibli, 2015, p.49). For these amenities, the sports organizations charges higher, thereby resulting in more revenue. Alternatively, sports organizations can offer premium seating. These facilities are lower in quality than the luxury boxes. However, they offer valued-added amenities for which the sports organizations charge a premium (Schwarz, Hall & Shibli, 2015, p.49).
Owner’s Investment
This source of relates to the money that the owners of a sports organization can commit towards the operations and development of the organization (Mayo, H. 2015, p.3). The owners of sports organizations have injected capital in the organizations with the aim of financing its expansion. For instance, Sheikh Mansour invested heavily in Manchester City Football after purchasing the club (Davidson, 2013, p.92).
Sale of Stock
This entails the sale of items on the balance sheet of the sports organizations to raise the financing required. In small business, this element might require the sale of the company products or raw materials. A team like Manchester United would sell some of its players to raise financing. This is often done when the team needs to fund the purchase of new and better players. In this case, fringe players are offloaded for a fee.
Sale of Fixed Assets
This relates to the sale of the organization’s fixed assets to raise the capital required. This could mean the sale of sporting installations such as training pitches and other infrastructure to other sport organizations to raise the required capital.
External Sources of Financing
Sports organizations can also opt for external sources of financing. Some of the approaches they can explore include the following:
Bank loans
Sports organizations can submit applications for loans from financial institutions (Rein, 2015, p.125). The approval of these loans is subject to the assessment of the creditworthiness of the sports organization. It is also imperative that the sports organizations meet the collateral requirements of the financial institution. Other requirements include the acceptance of the reasons for which the applications has been submitted and the availability of the financing (Rein, 2015, p.125). The demerit of this approach is that the financial institutions are within their rights to claim the collateral should the sports organizations fail to meet its loan obligations.
Issuance of Bonds
Alternatively, sports organizations can issue bonds with the right authorities for the debt financing of their operations (Rein, 2015, p.125). These bonds are availed to private investors who purchase them, thereby availing the financing to the sports institution. The sports institution has the obligation to pay the principle from the bond and the resultant interest to the authority which then distributes the money to the private investors who purchased the bonds (Fried, DeSchriver, & Mondello, 2013, p.68).
Venture Capital
This is approach of equity financing where venture capitalists promise to invest in the sports in the sports organizations (Liu & Du, 2014, p.753). This implies that the venture capitalist avails financing to the sports institution in return for a predetermined share of the sports organizations (Schwarz, Hall & Shibli, 2015, p.45). Venture capitalists are particularly attractive to small sports organizations because they have the access to expertise and knowledge in addition to the financing that the small sports organizations required to spur their development forward. The downside of venture capital as a source of financing is that these firms do not just bring the financing; they also contribute the expertise and knowledge significantly, thereby exerting themselves into the hierarchy of the organizations.
Angel Investors
Angel investors are an alternative to sports institutions that want to circumvent the liabilities resulting from debt financing. This is because this is an equity financing approach that uses investors who provide the financing to augment the infrastructure in the sports organizations as well as other operations. In return, these investors require a predetermined equity of the sports institutions (Maierhofer, 2009, p.34).
Long-term Versus Short-term Borrowing
Sports organizations can opt between long-term and short-term borrowing to finance their performance. The choice between either of these two is dependent on the reason for which financing is required. For instance, short-term borrowing, usually payable within the same operational cycle is suitable for financing the operations of the organizations. This is because normally the amount of money required is not as large as the amount needed for infrastructural development. In this instance, long-term borrowing is appropriate because it allows the management ample time to repay the debt. It also allows time to complete the development in time for it to generate revenue which can be committed to repaying the debt. The choice also depends on the cash flow. Where the cash flow is high and reliable, short-term borrowing is appropriate to avoid the high cost of long-term debts (Rao, McGuigan & Moyer, 2014, p.593).
The Stock Market
The stock market is another option for sports organizations. Many sports organizations are trading their stock in stock exchanges. For instance, Manchester United Football Club trades in the New York Stock Exchange (NYSE). By listing its stock, the company can attract new investors (Rein, 2015, p.131). However, raising capital through initial public offerings is considerably more expensive compared to accruing more debt (Rein, 2015, p.131). However, the operations of sports organizations are different from those of other organizations. For instance, the structuring of the initial public offering by Manchester United Football Club was done in a manner that allowed the Glazer Family (owners) to retain over 50% of the company’s stock, eliminate beholding to the shareholders to have the total control of the club (Rein, 2015, p.131).
Conclusions and Recommendations
The choice of financing method is dependent on various factors. While many of the methods discussed above are more traditional and the options for many organizations. However, sports organizations can use their popularity to raise financing. For instance, Manchester United’s deal with Addidas was worth 750 million pounds, money that the club can invest in various programs. It is recommended that the team uses sponsorship deals, naming and advertisement rights to raise capital. This is an inexpensive approach and taps into the brand power of the club to help it raise the capital it requires.
References
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Sotiriadou, P. and Bosscher, V. 2013. Managing high performance sport. London. Routledge.
Wilson, B. 2014. Manchester United and Adidas in £750m deal over 10 years. British Broadcasting Corporation. [Online]. Available at:< http://www.bbc.com/news/business- 28282444> [Accessed 16 January 2016].
