Hard Cap

[killbuckner]

you ruined the whole purpose of the cap in the first place, which is to keep the payrolls at a level that allows profitability.

No... thats not the purpose of the cap. The purpose of the cap is to make it so that teams in big markets don't have an overwhelming advantage in winning a championship.

[sportscrazy]

What happens if a team such as the Lakers don't go under this hard cap? Is there a penalty or fine? And if so, is it just worth the Lakers paying the fine?

[speedingtime]

What happens if a team such as the Lakers don't go under this hard cap? Is there a penalty or fine? And if so, is it just worth the Lakers paying the fine?

In the NHL at least, teams that go over the cap have to pay over 5 million in fines, face cancellation of contracts, loss of draft picks and forfeiture of games.

[JCWalters]

JCWalters wrote:
Every time a franchise had been valued or sold in recent times, the amount was a BIG POSITIVE NUMBER.

If you're saying the NBA values have always gone up from purchase to sale, so that the owners have always made a sizable profit, that's absolutely false. Which is part of the NBA problem that they're trying to fix.

In your 2 sentences, you stated multiple lies or showed multiple instances of ignorance. I am giving you the benefit of the doubt and assuming that you are just ignorant.
1) I never said NBA values have ALWAYS gone up. I said "every time a franchise had been valued or sold IN RECENT TIMES." I would not have wrote "in recent times" if I was trying to say "always" Don't try to put an absolute assertion in my post just b/c you are wrong and don't want to admit your mistake.

2) I was not talking about owners making a profit or not. The owners are saying that they took a loss-> they are implying that they are facing consistent situations of revenues < costs--> they are saying that these consistent situations of revenues < costs means a nonviable operation--> they are saying, thus, players should make givebacks so the operation becomes viable.

I was using the present value concept to PROVE that NBA franchises, at least the ones that have been "valued or sold in recent times," ARE VIABLE-->b/c they have positive present values--> and positive present values mean revenues are consistently > costs (it is an absolute in math). Thus, owners' implications that they have suffered and will continue to suffer situations of revenue < costs and, thus, that their franchises are not viable are mistakes or lies. It is IMPOSSIBLE to have a positve present value AND consistent revenue < costs. It is against the laws of math.

3) You are whining about whether or not "NBA values have always gone up from purchase to sale", whether or not "owners have ...made a sizable profit," and owner not always making a sizable profit is "part of the NBA problem that they're trying to fix." This is SO DUMB. No one owes an NBA owner a GUARANTEE of making a profit. The issue is viability of the NBA operation, not profitability of the operation for owners. When owners are talking about viabiltiy, they say, "the present NBA operation is nonviable as is, so players should take haircuts." What YOU are saying is, "We, owners, want to make more money, so players should give us some money." You see your mistake: against employees who have market power, nonviability of the business is (to some but not me) a good argument for labor givebacks; owners wanting to make more $$ (owner being greedy) is NOT a good argument.

Further, viability does not require profitability for owners; viability demands a lesser standard of breaking even on a consistent basis. So don't even try saying that profitability and viability are the same thing.

[JCWalters]

Including interest expense IS BEING DISHONEST AND INACCURATE in assessing the viabilty of a money making operation. The principle is: you must restrict your analysis to the revenue and expense from the PRIMARY business.

You speak as one who has never bought or owned a business.

There's nothing somehow "dishonest" about anyone's preferred method for evaluating a business. In my experience factoring acquisition costs and carrying costs is a VITAL part of the analysis. In fact, if you don't consider ALL the financial factors in your evaluation, I believe you're a fool, but everyone is free to buy their own way and see how it works out for them.

The concept is call EBITDA. It stands for earnings before INTEREST tax depreciation amortization. All investors and businesspeople look at EBITDA when assessing the viability of a business. Only amateurs and nonprofessionals use net income/loss.

I know the acronym, along with many others. But it's only one way of looking at a business's results, and others will tell you that it's a huge mistake to rely solely on EBITDA. Of course if you ever buy a business, you're certainly free to do it your way.

But for me, using EBITDA only is a giant mistake, since those below-the-line expense items will absolutely impact cash flow and ultimately financial viability and ability to sustain the business. Ignoring the need to consider them as part of the equation is a novice's mistake in my experience (from seeing guys wanting to bail on their business, and why they are forced to get out).

..arguing that debt servicing burden is valid for coercing workers to accept less than their market value is akin to a homeowner coercing contractors to accept less than their market value b/c the homeowner was too stupid to negotiate a less onerous mortgage. Further, how about talking to the lender to relieve the debt burden? Why is Buss asking Kobe to take less pay b/c Buss was so stupid he got locked into a buttkick rate by JP Morgan? This attitude is just too dumb to be adult.

Those items have already been addressed in this discussion, and you've totally misrepresented or ignored what was said. We've already acknowledged that player payroll is merely one part of the equation in making a franchise profitable. Players are not being "coerced' - it's a negotiation over compensation.

At the end of the day, what is "affordable" to pay for a rosterful of players to play the game of basketball is as valid a part of the discussion as the one an owner has with JP Morgan over interest rates and with the local plumber over what it costs to repair sinks. Those discussions will intermix what others charge for the same thing (nobody league in the world is paying anywhere close to what the NBA pays for players, if we want to talk about market value) against the ability of the owner to run his business without those services. The owner has to pay SOMEONE to fix sinks, and he has to pay SOMEONE to dribble and shoot, but if the $50/hr plumber can do the job as well as the $100/hr one, or the $50M roster will do the trick rather than the $65M one, those financial considerations of affordability are quite germane when talking to the plumber who thinks he deserves $100/hr or the union that wants $65M per roster.

Recognizing that, there is nothing inherently wrong with working to make those expense items land at a number that keeps the business at the right level of profitability.

1) You speak of including or excluding interest as based on one person's preference. THIS IS EITHER DUMB OR DISHONEST. VIABILITY DETERMINATION excludes nonprimary inflows and outflows of funds. Interest expense is a closer call than some others, but it is not so close as to be included. You do not NEED debt to run a bb entertainment business (thus, interest expense is not an outflow of the primary business). It is excluded.

2) You constantly spout off about when you buy a business or when you analyze a business. But you don't seem to realize that buying a business and assessing the viability of a business are different things. When you buy a business as is--> you have to value it--> then interest expense, as well, as all obligations are legitimate items to include. WHEN ASSESSING THE VIABILITY of a business, interest expense and all things not of the primary business are illegitimate items to include.

Here, the players are not trying to value a franchise to buy that franchise. The players and owners are arguing about whether or not the business is VIABLE WITH THE PRESENT LEVEL OF LABOR COSTS. You are the one talking about valuation. The worth of a franchise is irrelvant to the players and, if it gets that far, to the mediators/arbitrators. If labor costs makes the business nonviable, then that is a worthwhile argument for owners. Owner wanting their asset to be worth more = owners wanting more $$ is not a worthwhile argument. "Players must take a haircut b/c the business will end otherwise." VERSUS "Players must take a haircut b/c we owners want more $$." Compare those 2 arguments.

Interest is not included, b/c this is a viability determination. Your argument that in valuing a business you should include interest expense is correct but not relevant, b/c WE ARE TALKING ABOUT VIABILTY DETERMINATION, NOT BUSINESS VALUATION.

Agenda42 tried to instruct you on the same thing when he said, "If you bought a business that was operationally viable, but your debt servicing costs sunk the business, that's a bad business decision and I see no reason to feel sorry for you." Instead of actually trying to understand his lesson, you came back with, "No need to feel sorry. I don't create or buy a business where debt servicing makes it unprofitable in the first place - but my point is, that's always a very real consideration for any prospective owner in evaluating whether to own or not." Do you see your mistake? The owners was using nonviablity to get labor to make concessions, and Agenda42's point was that interest expense is not included in viability analysis. Your arrogant response was that interest expense should be included in the valuation of the business when determining whether to buy the business or not. You are off topic. THE ISSUE IS VIABILITY, NOT VALUATION.

[DBoys]

JCWalters

1 When I said earlier, "If you're saying the NBA values have always gone up from purchase to sale, so that the owners have always made a sizable profit, that's absolutely false" I was in part trying to clarify your point before addressing it. So ...
a - I prefaced my remarks with "if" to indicate I just wasn't sure just what you were asserting. There was no desire to misstate or ignore what you were asserting - I simply tried to reply the best I could. No need to get all hot-n-bothered if I missed, just clarify and we'll go from there.
b - In addition, there was no attempt to slide irrelevancies into the equation. I assumed you were talking about recent purchase and sales, and that's what I spoke to. No need to go into pit bull mode with an assumption that I'm using situations that occurred in prior generations, when I'm not.
c - So I'll be more specific and amend what I said if that's what it takes to make the point: "If you're saying the NBA values have always gone up from purchase to sale in recent years, so that the owners have always made a sizable profit on recent purchase and sales of franchises, that's absolutely false."
d - If that is your point, you're missing facts. If that isn't your point, then clarify so we can discuss in a rational manner.

2 When you say a basketball business does not have any interest expense as part of the framework, that's simply not true for the vast majority of franchises. The question is how you factor that into the analysis.

3 Despite your lectures, I already very well understood the nuanced point agenda was making - I simply think it's too simplistic to be valid in this situation and it focuses too much on theory and not enough on the realities of life and business. You can say I'm making a mistake in looking at it that way, but I think I'm the one who's actually being realistic.

My assessment is that all expenses of the business are pertinent to determining the true bottom line, and if your analysis rests on an assumption that the business was never worth what was paid for it in the first place, then even though you can say that shouldn't directly impact salaries, it will still have close to the same effect on an indirect basis. You're dealing with a lot of the dynamics here as you did in the US bailouts of 2008-09 where they simply can't let the business fail. In this situation the NBA (as a league, and collectively as owners) all have to work on the basis that what it cost to get a franchise was a fair and reasonable amount, and work from there with each of the 30 to make the bottom line positive. "You paid too much" or "let them fail" or "it doesn't matter if the franchise values crash" are not going to fly as outcomes.

4 As I see it, the owners will hold out for (and ultimately get) a labor deal that creates a strong likelihood for each of them to make money annually rather than lose it. No matter how you slice it, about 75% of them are losing right now, and that's a bad economic model. Since cost of labor is a bigger expense for them than everything else put together, there will have to be concessions from the 2005 program if the players want to work. It's going to be just that simple.

[Agenda42]

You're dealing with a lot of the dynamics here as you did in the US bailouts of 2008-09 where they simply can't let the business fail. In this situation the NBA (as a league, and collectively as owners) all have to work on the basis that what it cost to get a franchise was a fair and reasonable amount, and work from there with each of the 30 to make the bottom line positive. "You paid too much" or "let them fail" or "it doesn't matter if the franchise values crash" are not going to fly as outcomes.

My perspective is that there are a few owners that don't have the financial wherewithal to own a team. They either need to find partners or sell their teams. I don't think that either the players or the owners of other teams are responsible for ensuring these weakly held teams can not only turn an operating profit, but one large enough to pay their debt servicing costs.

The Hornets are a great example of the trouble you can get into here. The team is marginally unprofitable, and the financial structure of the league does need to give them some relief. However, the bigger problem facing new owners is that the team is awash in debt, and prospective buyers did the right thing staying away from the $300M asking price given the $200M debt load already on the books. Any new CBA deal should not be kicking the Hornets the extra $20M in operating profits so they can stay on that debt treadmill. Rather, the next owners should get a better purchase price so they can use some of their incoming capital to pay down that debt load to a manageable level for business success.

4 As I see it, the owners will hold out for (and ultimately get) a labor deal that creates a strong likelihood for each of them to make money annually rather than lose it. No matter how you slice it, about 75% of them are losing right now, and that's a bad economic model. Since cost of labor is a bigger expense for them than everything else put together, there will have to be concessions from the 2005 program if the players want to work. It's going to be just that simple.

I think that the CBA absolutely does need a change. Well run teams should not struggle to make a profit, and several do. Utah is maybe the best run organization in basketball, and they continue to bleed players because of their market size and consistent execution to the budget they have.

I'm not so wild about the specific changes the owners are attempting to put in place, and I'm especially not wild about the lack of change in negotiating positions over the past year from both sides. I do think a lot of the problem in the NBA is ineffectual revenue sharing, and that a new CBA can both fix the problem of significant operating losses and improve the competitive balance of the league.

[mercury]

It would seem that rookies will take a major hit... when it comes to a player vote the majority will spin the hit to those with little or no voice... the kids will accept a huge pay increase from Taco Bell.

[JCWalters]

1 When I said earlier, "If you're saying the NBA values have always gone up from purchase to sale, so that the owners have always made a sizable profit, that's absolutely false" I was in part trying to clarify your point before addressing it. So ...
a - I prefaced my remarks with "if" to indicate I just wasn't sure just what you were asserting. There was no desire to misstate or ignore what you were asserting - I simply tried to reply the best I could. No need to get all hot-n-bothered if I missed, just clarify and we'll go from there.
b - In addition, there was no attempt to slide irrelevancies into the equation. I assumed you were talking about recent purchase and sales, and that's what I spoke to. No need to go into pit bull mode with an assumption that I'm using situations that occurred in prior generations, when I'm not.
c - So I'll be more specific and amend what I said if that's what it takes to make the point: "If you're saying the NBA values have always gone up from purchase to sale in recent years, so that the owners have always made a sizable profit on recent purchase and sales of franchises, that's absolutely false."

No where did I write the word "always." I wrote "in recent times." How can anyone with common sense interpret "in recent times" to mean always? What kind of person needs clarification that "in recent times" DOES NOT MEAN "always?" EXAMPLE: Do you need clarification that "Home prices have, in recent times, dropped." does not mean "Home prices have ALWAYS dropped???"
Your claim of needing clarification does not hold water. However, given that your panties are in a bunch over being called out, I will extend a heaping dose of the benefit of a sliver of doubt and just assume that you were just mistaken instead of ignorantly dishonest. In the future, I will speak to you while keeping your reading comprehension skills in mind.
Putting aside the issue of you mistakenly asserting that I said "always," you are mistakenly asserting that I was talking about an owner's gain/loss when he sold his franchise. Nowhere in my posts did I talk about how much an owner gained or loss when he calculated the difference between his sales price and purchase price. I wrote about present value. I don't know how anyone of common sense can go from my present value discussion to your interpretation that I was saying that "NBA values have always gone up from purchase to sale." In fact, I never even wrote "purchase price." You are making a big leap; you are actually seeing words that are not even there. I hope that is just you suffering a reading comprehension failure; otherwise, ...

2 When you say a basketball business does not have any interest expense as part of the framework, that's simply not true for the vast majority of franchises. The question is how you factor that into the analysis.

3 Despite your lectures, I already very well understood the nuanced point agenda was making - I simply think it's too simplistic to be valid in this...

Everything that you wrote here is garbage. I AM TALKING ABOUT VIABILITY ANALYSIS, NOT PROFITABILITY ANALYSIS. You are still advancing the notion of interest being included in profit analysis; your new reason is "realities of life and business."
But, again:
1) Viability analysis excludes interest expenses.
2) Profitability analysis--this is what you are doing--can validly include interest.
3) BUT I AM TALKING ABOUT VIABILITY, NOT PROFITABILITY==> SO INTEREST EXPENSE IS EXCLUDED.
And this stands irregardless of your "I know the realities of life and business" BS.

[DBoys]

JC, what you're trying to explain now looks contradictory to what you originally said. But my honest attempt to reply to what I thought you said seems to have bothered you (bring out lots of insults and hollering), so let's start over and leave this discussion of semantics.

You said the following: "Every time a franchise had been valued or sold in recent times, the amount was a BIG POSITIVE NUMBER. The value of an item is the present value of all income generated by the item in a set time horizon. Therefore, the positive numbers conclusively prove that NBA franchises are not money losers at all."

What do you mean by "big positive number"? If you are NOT asserting they are being sold "every time" for a profit, I misunderstood your point. What is it?

As for your other point about viability vs profitability as so on, that's so focused on semantics and terminology that it feels like a sure recipe to lead to more insults and hollering, so I'll just walk past it. I don't think I agree with it, I think it misses some important points, it sounds like the criteria in your valuation and economic models are different than mine, but who knows?

[ranger001]

1) Viability analysis excludes interest expenses.
2) Profitability analysis--this is what you are doing--can validly include interest.
3) BUT I AM TALKING ABOUT VIABILITY, NOT PROFITABILITY==> SO INTEREST EXPENSE IS EXCLUDED.

How reasonable is it though that the players just throw out interest expenses when discussing whether a franchise is making money?

[HartfordWhalers]

1) Viability analysis excludes interest expenses.
2) Profitability analysis--this is what you are doing--can validly include interest.
3) BUT I AM TALKING ABOUT VIABILITY, NOT PROFITABILITY==> SO INTEREST EXPENSE IS EXCLUDED.

How reasonable is it though that the players just throw out interest expenses when discussing whether a franchise is making money?

Very, imo.

Warriors were just sold for 450 million. The new owner used 150 million in debt. Borrowed the most possible from the NBA, and then borrowed more.

The deal was financed with $300 million of equity, $108 million of debt from NBA credit arrangements and $42 million of debt from lenders outside the NBA's borrowing facility.

Is it really fair to say that the business of the Warriors are now making 10-15 million a year less now because the owner switched, and the new owner borrowed? Sure the new owner is making less then the old owner did, but the fundamental underlying business didn't change at all.

Heck operating income was supposedly 14 million in 2010. The interest cost is going to be basically equal that. So based solely on financing you will have a team that if sold for the 300 in equity would have been generating a solid 5% while appreciating to another team that has substantial debted and thus is no longer profitable. Even using the Forbes 360 million appraisal it would be about 4%.

But there were several possible owners willing to spend enough to own an NBA team (in SF area) that they were willing to pay and then borrow until the team was basically at break even. That doesn't make the underlying business break even, and I'm not sure that the owners keeping a greater cut of revenue will do anything to change that dynamic. Higher cash flows will just permit more borrowing.

[DBoys]

I'm not sure what you're trying to say in those last two paragraphs ...but we do know that more than half the teams lost money BEFORE factoring in any interest at all. And it's also true that some teams are further burdened by debt/interest incurred from prior year losses.

[HartfordWhalers]

Fair enough, and that speaks to the need for some change (or just an updated tv deal). But it still doesn't make sense to include team purchasing debt in any calculation of how the business (and not the indebted owner) is doing.

[ranger001]

Is it really fair to say that the business of the Warriors are now making 10-15 million a year less now because the owner switched, and the new owner borrowed? Sure the new owner is making less then the old owner did, but the fundamental underlying business didn't change at all.

I can see your point there but the NBA can't have as its business model that all franchises must be purchased with cash to be profitable.

Any time an asset costing hundreds of millions is bought there is usually some form of debt associated with it, excluding debt interest in calculating profitability would be against normal business practices. Perhaps the solution is to allow only a certain amount of interest to be considered.

[DBoys]

"Hunter said he believed the biggest issue is the division of revenues. Players are guaranteed 57 percent, and he believes owners want a system that guarantees each profits by millions.

"We don't necessarily feel it's the employees' responsibility to guarantee that," Fisher said.

"The league is projecting leaguewide losses of about $300 million and wants a reduction in player salary costs of about $750 million annually. Players have argued the system largely works and owners can help themselves with expanded revenue sharing."

[Agenda42]

Is it really fair to say that the business of the Warriors are now making 10-15 million a year less now because the owner switched, and the new owner borrowed? Sure the new owner is making less then the old owner did, but the fundamental underlying business didn't change at all.

I can see your point there but the NBA can't have as its business model that all franchises must be purchased with cash to be profitable.

Any time an asset costing hundreds of millions is bought there is usually some form of debt associated with it, excluding debt interest in calculating profitability would be against normal business practices. Perhaps the solution is to allow only a certain amount of interest to be considered.

Ultimately I think it is the new owner's responsibility to ensure that the level of debt they take on to buy the team doesn't kill the viability of the business. Last year, the Warriors sold for a record high price of $450M, and $150M of that offer was debt. I will have no sympathy for these owners crying poor, they put in a stupid bid. Certainly I wouldn't be looking to kick an extra $12M in operating income to balance the books in the next CBA.

As to how to do the accounting to strike a balance between player and owner interests, ultimately I think that compromise will be more about the relative strength of the two sides' bargaining positions rather than equitable compromise. I doubt the question will even be raised. That said, I think you could study comparable businesses and conclude that a debt to equity ratio of about 10% is reasonable for operations.

[DBoys]

"I think you could study comparable businesses and conclude that a debt to equity ratio of about 10% is reasonable for operations."

Your idea of reasonability doesn't fit real life. A "comparable" business would be an NBA franchise under the NBA cap and economic system - and when we look at those 30, there are only 6 of the 30 franchises having a debt ratio of 10% or less. Obviously 10% is not a "reasonable" number because it's not the norm.

Using the actual NBA franchise numbers (which would be the best test of reasonability), we get the average debt ratio at 37% and the mean at 33%, per Forbes.

In that light, the GS purchase (which contained 33% debt) appears to be an accurate reflection of real life and reasonability. For the players, they can't really dictate a new reality - they are negotiating to be a part of a world where you have owners are going to be encumbered with about 33-37% debt as part of their franchises, along with the payments that accompany that, and their compensation will have to work within that framework. If you think that's unreasonable, you can go to Europe (the next best place to play basketball for pay) where the framework is, "Maybe you won't even get paid."

[Agenda42]

Your idea of reasonability doesn't fit real life. A "comparable" business would be an NBA franchise under the NBA cap and economic system - and when we look at those 30, there are only 6 of the 30 franchises having a debt ratio of 10% or less. Obviously 10% is not a "reasonable" number because it's not the norm.

Using the actual NBA franchise numbers (which would be the best test of reasonability), we get the average debt ratio at 37% and the mean at 33%, per Forbes.

I strongly disagree with this method of comparison. All this comparison point does is continue a broken status quo, in which many owners run their franchises more like personal toys than profit-seeking businesses. If NBA owners want to make money, those owners need to change the way they do business.

I believe a 10% debt to equity ratio is reasonable based on a comparison to other companies in similar sectors. There's no business reason to have so much debt on an NBA balance sheet; most NBA franchises have more debt than steel mills or airlines, but they have nothing like the capital requirements of those businesses. Rather, I would compare an NBA franchise to another entertainment industry business, and the only showbiz companies that have as much debt as NBA franchises are the ones that are struggling to make marketable products.

I don't really see any business reason why NBA teams would need more debt to operate the business than NFL teams. Instead, I see leveraged acquisition after leveraged acquisition, and no wonder teams are drowning in debt.

[DBoys]

I don't research these numbers because it's not something that I've ever needed to know, but I seriously doubt that "other companies in similar sectors" (whatever a "similar sector" is supposed to mean) limit their debt to 10%. In fact, I bet the vast majority of businesses run a far bigger debt load and your 10% feels like some sort of arbitrary threshold you've created out of air.

The NFL can't be used as a realistic financial model for the NBA since their economic system is very different and is much more advantageous to the owners. But ignoring that, there are still only 6 NFL franchises out of 32 that have a debt ratio of less than 10%. That further underscores that looking at 10% debt as some sort of ideal number is unrealistic and pollyanna-like in today's world.

You call on the NBA owners "to change the way they do business" and there is absolutely no way you can unscramble that egg to the degree you propose since they can't repudiate the debt they already have. So the thing they must do is to tackle the hard job of aligning their ongoing expenses with the realities of their situation. Given the fact that player payroll far exceeds all their other expenses added together, that's clearly the primary problem to be attacked, and resistance by the players at addressing reality isn't going to change things.