Question

Discuss and contrast the best techniques for determining the value of a business, in sports finance.

Answer 1

Broadly in finance there are 2 approaches to value a business

1. Based on Costs

2. Based on Revenues

While Costs approach looks at what it actually costs or would cost to re-build the business, Revenues approaches looks at potential value creation which will be derived by a business. Since cost approach is generally followed where it is possible to certainly quantify costs it would largely be used by business dealing in tangible commodities. Sports finance in present day's situation would understand to be largely intangible and hence a revenue based model like the Discounted Cash Flow ('DCF') would prove to be the best technique to value a sports based model.

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where cash flows into the future and costs are brough to present value using the businesses cost of capital. A DCF analysis is performed by building a financial model and is one of the most widely used business valuation approaches. DCF model is based on various assumption with respect to future inflows etc, however assumption if correct also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios, and even perform a sensitivity analysis.