The seventh game of the World Series ended last night with the Cubs winning. What was a 108 years drought is now history. Even though they are the best, they are still ranked fifth overall in franchise valuation. Why? Let’s look at numbers.
The Cubs are a franchise that according to Forbes in March of 2016 are worth $2.2 billion. Two thousand-fifteen (2015) revenue was $340 million, a ratio of 6.5 (value/revenue). They finished first in their division. Next on the list are the New York Mets at $1.65 billion, with 2015 revenues of $313 million a ratio of 5.2. The Mets finished second. More numbers: The Cardinals are seventh with a value of $1.6 million. 2015 revenues were $300 million a ratio of 5.3. The Cardinals finished second in their division. The Washington Nationals in at 9th - $1.3 billion, $293 million in revenue, a ratio of 5.4. The finished first.
Going through the list there are the Seattle Mariners which recently was sold from Nintendo to an investor as a 90% stake for $1.4 billion. Forbes based the entire franchise at a $1.2 billion dollar, $273 million in revenue team giving it a ratio of 4.39. They finished second. The Royals are worth a mere $865 million, $273 million in revenue, a ratio of 3.1. They finished third.
If you’re the poor person on the block that owns the Tampa Bay Rays, your team is worth $650 million based on $193 million in revenues a ratio of nearly 3.4. But at least your valuation ratio isn’t as bad as the Royals. Tampa Bay finished fifth. This is where the discussion gets interesting. In contrast, the Yankees (same division, finished fourth) have a value of $3.4 billion, $516 million in revenue with a ratio of 6.6. Why is there a stark contrast between a fourth place team and a fifth place team?
So, why all the discrepancy in ratios? Shouldn’t a business be valued at a standard ratio of between 4 and 6 to establish their values?
Quite simply put, the value of any business is not the sum of its whole minus debt or 4 times, or 5 times, or 6 times value. Every organization is different and every organization adds or subtracts from its value based upon the intangibles and goodwill. If you are selling a business don’t leave your value to a random number.