Minor League Team Acquisitions: A Trial by Fire

by Josh Schaub

The number of minor league and team acquisitions and divestitures are on the rise throughout the United States. The cause? It can mostly be attributed to the growth of summer collegiate sports, new sports (such as Ultimate Disc, eSports, etc.), and the continual transition of mom-and-pop businesses being acquired by larger portfolios. But this recent trend is causing some unique hurdles in sports business.

Unlike purchasing a business in the open market, there's one more layer of bureaucracy to overcome in a sports. That extra layer is the league’s approval or disapproval of a new buyer (i.e., the Miami Marlins acquisition attempts). Sports team purchases come with great uncertainty as closing can't occur until the league approves its new "partner." And this process can be quite complicated depending on the league. So, below we've outlined the typical considerations and steps during the purchasing process in order to help leagues and buyers ensure their acquisition or divestiture deals go as smoothly as possible. This information comes from years as a sports executive, owner, lawyer, and now league commissioner.

Barriers to entry

Before we get into the process, there are some barriers of entry that must be considered. The legal aspect of negotiation means being familiar with the governing rules within each league and the laws governing team transfer. Some leagues have hard and fast rules, while others leave discretion to the Commissioner’s office. A buyer or their attorney should review those documents carefully before such acquisition, including potential exit strategies and attempted liquidated damages for leaving the league.

Sports team buyers are typically seeking to become part of a more exclusive club than buyers who are looking to acquire “regular” businesses. This is true due to minimum net worth requirements, background requirements, as well as being allowed in the “treehouse,” otherwise known as professional sports leagues. Essentially, you are being vetted by numerous future partners who will determine if you can live your dream of owning a professional sports team.

If you made it over the initial hurdles, get ready, because the process is just getting started. If you're in the market to buy a team, there are two sides of the process you must consider: league and acquisition due diligence.

The Process

League Due Diligence

First, you must have the ability to pass league due diligence efforts. These requirements typically consist of providing the league proof of proper financing, which also includes the need for proper disclosure. Many buyers are leery of such a disclosure and the financial requirements within. Notably, most leagues are looking for net worth and liquidity so they know an owner can bring struggling teams through financially rough waters. Leagues often have debt ceilings for teams, and most minor leagues don't allow for security interests to be placed on the team.

Leagues also reserve the right to conduct audits and monitoring of debt and performance (not unlike many bank requirements for large debt). Additionally, the timing of league approval is critical if you're seeking to have a minimum time to sell for the upcoming season. If the league's due diligence efforts occur too closely against a playing season, you may run into some difficulties in terms of beginning sales and missing budgets. Further, if the league does not become involved until too late in the process, only to be denied membership, you or the seller may have claims.

Acquisition Due Diligence

If that wasn't enough, you, as a buyer, must also prepare for acquisition due diligence efforts. There are some pertinent questions that must be asked and answered in regard to the investment. For example, if approved, there are often restrictions put on the owner's ability to transfer ownership of the team. Are there any add backs in the profits and loss statement? If the team was drowning in losses, are you assured that outstanding bills are paid?

But that's not all. There are many more questions and considerations you must take into account as a buyer.

Valuations, for example. How do we assign valuations to minor league and Summer collegiate teams? The short answer is, there are several methods and approaches for determining a team's valuation which we'll save for another blog post.

And member rights? Some leagues have more ability to control individual teams than others. For example: certain higher echelon leagues require all owners to grant the league a proxy on their ownership interest in the team, which allows the league to take control of a team under certain circumstances. Other league’s limit your right to compete or have interest in other teams within the league.

Don't forget about potential liabilities to fans, athletes, and employees. Will you be set up to protect yourself against the risks related to spectator safety, for instance?

Worker’s compensation, too. It varies from state to state, but on top of that, can drastically change from year to year. Are you aware of your state’s draconian worker’s compensation boards and applicable laws?

Another thing to consider is the venue lease/license. How does this impact ticket sales? What partnerships exist between the facility and the team? What is the potential run up in fees for change in and change out? Is this a union arena or stadium subject to potential increases or political pushback?

How about potential player union matters and interplay. Is a union possible at your league’s level?

Lastly, community relations and involvement. Teams that are taken from financially insolvent owners can sometimes come with a lack of goodwill in the community. How do you handle those obstacles?

There are many more considerations to take into account – too many to list here. We know what you're thinking: this can seem like an overwhelming list of questions to answer when acquiring a minor league sports team. But that's why we're here. Gutwein Law will help you think through all these questions, so you don't have to. If you're in the market for a sports team and are ready to talk, give us a call at 651.423.7901.