Even for some of us who are not good football fans, have recently taken note of some developments in this aspects of sports — the matter of financing our football clubs and their ownership. Discussions have ranged from share ownership, to leasing of a club for a period of time, to debt financing, etc.
We had to take note because these three key words i.e. club’s ownership by way of shares purchase, or leasing a club for a shared return on investment or debt financing of club’s activities are financial terms, whose broad meaning may not so understood to many of us as they represent financing mechanisms for enterprises as well as determines the manner in which businesses are owned, financed and operated.
As is for any form of businesses, football sports organizations included, and I may be corrected, are entertainment enterprises. I understand professional football sports teams sell entertainment for an income, they are (or may be) businesses whose investment can be financed through various means; equity financing, debt financing, lease financing, members’ contributions, corporate sponsorships, etc. For obvious reasons, I will limit this article to equity (share) financing.
‘Stadium bonds’
Before I dwell into share financing, it is important we underscore the fact that, in whatever form of financing — success, progress and revolutions anticipated depend on plans and strategies as to what is it that a club intends to achieve, for example why the need for financing, and why in this form and not the other? what is it that funds will be used for? is it for funding of sports facilities such as a sports arena, a ballpark or a stadium in which games are played and hence provide the quality of experience that such facilities will offer to fans? is it for investment in people/players or is it for investment is sports technology? what is it for? — the answer to these questions will inform the choice of financing tools; for example, if the need for funds is to construct a stadium, then many sports strategists would recommend teams to “Stadium Bonds”, which may be a better option because bonds, especially under special-purpose vehicle (SPV) structure and “ring-fenced” revenue sources, typically offers investors a periodic repayments compared to share financing. Shares issuance are not often used in to pay for facilities (such as stadium) construction, why? mainly because of ownership restrictions and public involvement which make share financing less desirable and unnecessary.
And once financed — what kind of governance and management structure that the club/company will pursue to guarantee investors returns? where will the money to repay investors returns come from? Yes, the usual revenue sources for sports clubs are: tickets sales; sponsorship revenues; merchandising sales, media outlets/audiences fee, etc — but the real question is, how will these revenue streams be well managed so that investors returns are guaranteed? I presume these questions can properly be addresses, now let’s focus into the intended topic, shares ownership in sports clubs.
Issuing of shares means selling a percentage of the company to an investor or investors in exchange for cash that gets invested so that periodically the company give its investors profits. For publicly traded companies, equity (or share) financing means that the company will sale shares to many people, sometimes with minimal choice as to who should be a shareholder.
For a sports club to sell shares, like for many other business formations i.e. sole proprietorships, partnerships, companies limited by guarantee, clubs; cooperatives, etc it has to change its legal form into being a company limited by shares — such a company may choose to be either a private company or a public company. A public company is the one that invites members of the public to subscribe into its share capital, it may then be publicly traded by being listed in a stock market, or not. I will come into this later.
As we know, club ownership may take different forms and each has its benefits and drawbacks; i.e (i) community ownership, (ii) fans ownership or (iii) company ownership.
Let us briefly describe the first: community ownership; this is not so common in professional sports, this despite the fact that community ownership of a club does not necessarily mean that the team will be a publicly traded company, no — it may either be a publicly traded company or a club owned by local organization or a local government may own a team in one way or another. It could also mean local residents owns some forms of shares in the team.
When this exists, there is usually some local board that control the team and it may be operated through either a local government, or a municipal or city, or another entity, or a community organization. As said, this is not so common as a means of club or team ownership.
Fans ownership — there are many examples and experiences of a club being owned by fans which then allow fans to make key decisions about the club. I would not dwell on this, because it is commonly known.
‘Artificial beings’
In company ownership form: let me start by clearly stating that, a company is a legal entity with all of the rights of citizenship, except for the right to vote; companies in essence, are considered “artificial beings” created by the law and given all of the rights in business that individuals enjoy.
Normally, companies are governed and overseen by a board of directors who are chosen among shareholders or represents shareholders interests. Shareholders (who owns shares in a company) owns the company. Those shares could be held by a single individual, or a small group of family members or unrelated individuals, or by many people.
The shares themselves could be publicly traded in the stock exchange; but the shares and the company may elect not to be listed on a stock exchange. If a company is not listed, then shares can not be publicly traded, but could be privately traded among individuals. Shareholders benefits by receiving profits in the form of dividends from the company.
Although the company might retain some current profits to increase investments in future profits; the goal of most companies is to maximise the value of shareholders interests. The board of directors, elected by shareholders, makes general policies for the company and addresses the use of profits, among others matters.
The benefit of company over other ownership structures is that it limits owner’s liability, in the sense that investors can loose their investments, but they are not legally liable for any fiscal losses and can not be held financially responsible in any lawsuit against the company, except for shareholders who are also directors.
So, what have we said? what we have tried to say so far is that shares represents equity financing in a company where in return investors depends on the dividend payments that will normally rise and fall according to the company’s performance. Shares also gives investors the voting rights and decision making power to a company — this is very critical for any company’s governance and decision making, those will majority shareholding in a company has more power for decision making compared to those with minority shareholding or mere members and fans of a club, but who are not shareholders.
Benefits
If by issuing shares, the company will elect to be listed in a stock exchange (such as the Dar es Salaam Stock Exchange) and publicly traded, the following are some of the benefits: a potential for capital growth following appreciation of shares prices where shares are efficiently priced based on market forces; it enhances more transparency and good governance of a company for its own growth and sustainability; there is a potential for issuing more shares or corporate bonds in the case of any future needs of financing by the company; listing into the stock exchange provides an efficient exit strategy for shareholders who would want to liquidate their investments and exit from the company at any moment; it also provides free publicity to a company mainly because listed companies tends to attract media attention; listed companies tends to attract and retain good employees — people likes the prestige that goes with working in a company that is listed in the stock market; and it is easy for mergers and acquisitions to be arranged for a listed company compared to non-listed, this aspect is key for enterprise growth that is non-organic. In the case of Tanzania there are several fiscal (i.e. tax) incentives provided by the government for both listed companies and its shareholders.
Despite of many benefits that accompanies a company that sales it shares and get listed into the stock market, there are some perceived disadvantages as well; i.e. the cost of issuing shares can be costly in some cases; going public can be a burden on the company; all inside information is open to competitors (team’s prices, margins, salaries, and future plans); owners may not own 50 percent or more of the business — this makes it easy for key shareholders of a company to be voted out by others; with a listed company strategic flexibility may be limited; and accounting and tax requirements may somehow be expensive. In many cases the benefits of being listed outweighs the perceived disadvantages.
Finally, for one to tell how much money is for what percentage of ownership of a company which owns a club — valuation and hence share price based on various analysis has to be thoroughly carried out by professional investment advisers.
Mr Marwa is chief executive officer of the Dar es Salaam Stock Exchange
