Accounting in Sports Entrepreneurship and Event Production: How Similar, Dissimilar, and Interchangeable are Sponsorship Revenue/Value and Stockholder Equity?

 

While there are many options available to entrepreneurs planning sporting events like marathons, sponsorship stands as the least compromising option for properties and both the most creative and most exploitable option for the property and sponsors alike. The accounting equation is positively affected on both sides of the equals sign by sponsorship, which is not always the case with loans or even transactions involving stockholder equity.

Introduction

This week, General Motors took the last steps to finalize the sale of about $500 million of stock to SAIC Motor Corp. of China.  In addition to the deal with China’s largest car manufacturer, GM will sell an estimated total of $1 billion in shares to foreign investors, according to an article published on Yahoo! News (see: http://news.yahoo.com/s/ap/20101112/ap_on_bi_ge/us_gm_foreign_investment for the full article).  In General Motors’ effort to increase assets, it will release 365 million shares of common stock and an undisclosed amount of preferred stock; the latter will pay a 5.5-6% annual dividend.

With the “accounting equation” in mind (represented as:  Assets = Liabilities + Shareholder Equity + Retained Earnings), it appears that GM will dilute control of its business over a pool of owners larger than the current list for the sake of increasing its assets.  “Cash” accounts and “Accounts Receivable” may increase on the left side… but shareholder equity – as well as “dividends” – will follow proportionally.

Which leads us to the next issue.  Exactly what does this have to do with sports entrepreneurship?  Observe…

Stockholder Equity and Entrepreneurship (think about what the following section means to someone who would like to create their own sporting event)

Manager and Philanthropist Alfred P. Sloan of General Motors, as featured on the cover of Time Magazine 27 December 1926

Over time, through the sale of common and preferred stock, General Motors – once the world’s largest company and formerly run by Alfred P. Sloan through the company’s halcyon days of the 20th century – has relinquished more control over its own destiny to an ever-increasing field of investors who seek success and fortune through increased stock values and decreased costs in the company’s annual reports.  As stated in the introduction, GM will sell preferred stock and pay an annual dividend that could reach 6%; consequentially, due to the time value of money, amortization will lead to a loss in the long run if GM does not reconcile dividend expense with either new – or improved – revenue streams, or amplified cost reduction initiatives over the next several years.

Every entrepreneur faces the same problem: how in the world do I raise sufficient capital to start/maintain my own business?  Loans invariably lead to interest payments and are an inevitable reality in entrepreneurship in many cases (but not always).  They may increase cash accounts, but they also inflate those “____ payable” accounts on the right side of the accounting equation, otherwise known as “liabilities.”  Entrepreneurs could also count on stockholder equity, or the sale of corporate control (i.e. shares, common stock, etc.) in exchange for cash. “The Aviator” Howard Hughes detested the idea of having shareholders interfere with his plans, since shareholders have an interest in seeing the value of their shares rise over time and will work to maximize their ROI by the end of each fiscal year.  Their plans do not always resonate with management and tensions mount, as a result.  Expressed in dollars and cents, financial statements – the black-and-white result of all business accounting – report the company’s fiscal performance to shareholders, help determine the outlook for the upcoming year, and directly affect share value.  Lastly, the entrepreneur could sell bonds, but a new business venture cannot leverage itself as well as an established entity; thus, buyers may not be as willing to assume the risk and interest may be high.  In addition, the time value of money would make interest payments by the bond issuer amortize over the bond’s lifetime (in other words, until it reaches maturity), resulting in larger payments to the bond holder.

This is not an indictment of the above methods of capital generation.  Rather, this is a presentation of the risk involved in the use of these options by business leaders.  An entrepreneur must be aware of the effects of each and exercise due diligence in financial planning.  Either armed with sound accounting knowledge or assisted by a good accountant, the entrepreneur can use these tools to grow her business.

These are not the only options available, however.  Sponsorship can both supplement revenue generation strategies and inject capital into a new venture.  For example, an entrepreneur could produce a sporting event with the assistance of a good sponsor lineup.

Sponsorship and Entrepreneurship: The Best Option through Proper Execution and – Most of All – Excellent Activation

As with all business ventures, if you would like to plan a sporting event (i.e. a marathon), you need capital.

Bank of America's title sponsorship of the Chicago Marathon not only makes the event possible, but also helps define corporate values and reinforces its presence in the Chicagoland area.

Sponsorship presents a long list of benefits to all parties involved.  Interest payments and dividend disbursements such as those following loan and bond sales, respectively, are not an issue.  Sponsorship agreements do not necessarily require the event producer to surrender long-term control of the business to sponsors (as in the case of shareholders), unless both parties concur.  In fact, an entrepreneur/event producer could create an event and a list of assets to sell as inventory (i.e. mobile apps, interactive fan and guest zones, etc.) and recover ownership of that inventory at the end of the sponsorship agreement.  Here, assets increase on the left side of the accounting equation and revenue increases on the right.  Liabilities – such as notes payable or interest payable – are minimized while “right side” accounts, like “unearned revenue”, may also rise.  The latter, however, is reconciled upon the event’s completion and through proper activation.

As assets increase after successful execution of the sporting event and proper sponsorship activation, “inventory,” like our mobile apps and interactive fan zones, will appreciate over time and could be packaged with other assets to drive the value of our event’s sponsorship upward.  Unlike tangible inventory, solid and proven assets as those created in sporting events (take our marathon example) do not usually depreciate over time and return to the property at the end of the sponsorship’s duration.  They can then be resold to the highest bidder or repackaged in another sponsorship deal.

Nevertheless, the property (i.e. the event) and our entrepreneur must be accountable to sponsors.  To ensure sponsor ROI and maintain a mutually beneficial relationship, the property must always overdeliver.  This dynamic resembles the relationship between a company and its shareholders, with the exception that sponsors cannot impose their will on the property in the same way that shareholders influence a company’s business decisions for an unspecified amount of time.

Conclusion

Sponsorship is an excellent tool for the entrepreneur who plans a sporting event and needs capital to start.  Unlike stock sales in the GM example, sponsorship does not require the property or business to sell shares of itself or control to investors.  It does not involve interest payments or dividend disbursements, like loans and bond sales, respectively.  Lastly, sponsorship positively affects the left side of the accounting equation (remember:  Assets = Liabilities + Stockholder Equity + Retained Earnings) while boosting revenue and “unearned revenue” accounts.  Loans, interest payable, and bonds payable are liabilities while the sale of common and preferred stock are stockholder equity, the latter meaning that others could have a voice in your decisions until her shares are either sold to someone else or you buy them back at a premium.  Lastly, dividends negatively affect retained earnings.

Although sponsorship could not generate the instant revenue GM needs to recover from its billion-dollar financial woes, it is an excellent tool the company can use to repair its image, increase its relevance, and generate capital without relinquishing corporate control or paying interest. Sponsorship is also the most creative method to increase sales and differentiate itself in a competitive and currently depressed - though always relevant - market.

Again, I am not asserting that loans, bonds, and stockholder equity are not good tools in the entrepreneur’s utility belt.  Rather, I wish to underline the consequences of using said tools without considering the beneficial role sponsorship plays in the creation and funding of a sporting event.  Sponsors want you to succeed since they are borrowing brand equity, exposure, and other intangible benefits from your event unavailable elsewhere.  Successful sporting events help define a sponsor’s role in the community, such as Bank of America’s growing presence and significance in Chicago as a result of its title sponsorship of the Bank of America Chicago Marathon; furthermore, Bank of America pays a premium to be the event’s title sponsor and helps promote the marathon through its own marketing department.  Loans, bonds, and stockholder equity cannot buy you such cooperation.  Good sponsors work with properties to ensure an event’s success.

Also, sponsorship is the only means of acquiring revenue that allows a property to create new assets (remember our mobile apps and fan zone examples mentioned above?), expand its inventory, and sell them to stakeholders (sponsors in this case) for the benefit of all involved, including participants and guests.  From the property’s perspective, both sides of the accounting equation are positively affected through the property’s acquisition of cash (left) through net income (right).  The sponsor sees gains by exploiting tangible and intangible benefits of association with the property, which are thus measured by third-party evaluators like IEG and Navigate Marketing, to name a few.

If you are an aspiring entrepreneur and plan to create your own sporting event, consider teaming with sponsors who could help you as you help them.  Research potential sponsors and identify their needs before contact.  Write a clear and concise sponsorship proposal with a specific call to action.  Mention the benefits of association with your property (not just the features you will offer).  Schedule a meeting, prepare for it, and create an atmosphere during the conversation in which the potential sponsor could comfortably do most of the talking.  Listen.  Take all feedback and integrate all relevant information with your plan.  Meet again to discuss your enhanced plan.  If all falls into place, remember… 1) communicate often enough and 2) as the property, you must always overdeliver.  You can only ensure ROI through proper activation.

Cam Suarez-Bitar.

 

Funding accomplished through sponsorships. Could it be said that the New York Yankees have lost control of their fate due to stock sales or pay more interest affected by the time value of money associated with the sale of bonds or receipt of additional loans? Sponsorships can fulfill these needs.

Advertisements
  1. hello Communications on Sports Business , i look your blog , be a nice blog and useful. Great for me. best review for Sports and Society and

  2. This is the perfect website for anyone who wishes to find out about this topic.

    You understand so much its almost hard to
    argue with you (not that I really would want to…HaHa).
    You definitely put a new spin on a subject that has
    been written about for years. Wonderful stuff, just great!

  3. Thank you for your support. If you would like, feel free to send a link and I will post it in my list on the right margin.

    Cheers,

    Cam Suarez-Bitar.

  1. November 13th, 2010
    Trackback from : World Cup Soccer Balls

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: