Valuation Remains the Achilles Heel of Sports Partnerships

As they have for decades, the questions of what a company should pay, would pay, could pay and ultimately did pay for a sports partnership underlie every deal in our business, as they have for decades. Setting prices and valuing opportunities in the sponsorship marketplace—in which the “product” has so many variables, including tangible and intangible benefits—has never been, and will never be, an effortless process.

Starting with the introduction of the first independent valuation service nearly 30 years ago and continuing with today’s increased access to quality deal data, the industry has made strides in its quest to help both sides determine fair market value for packages of sponsorship rights and benefits. But two takeaways from some recent conversations with brand marketers, rights holders and agencies point to the fact that we still fall far short of a rational market for buying and selling sponsorship.

One or two deals do not establish the market. For many properties, the fallback in determining what to charge for sponsorships has long been to look at what similar packages were sold for and price accordingly. Although widely employed, this is a deeply flawed strategy.

For one, it is often based on poor data. Reported deal prices can be wildly inaccurate. Unless you have seen the signed contracts, you are working with educated guesses by actual experts at best or fantasy numbers put into circulation by sources with their own agenda at worst.

But let’s assume the figures are correct. One buyer meeting one seller’s price does not equate to what the market will bear. This is especially true when a deal is done at a level far exceeding any price previously paid for a similar partnership.

Although it is abundantly clear when a deal is reached in which the buyer is a true outlier—either because of a unique market situation, or simply because it was some combination of desperate, uneducated or overly emotional about the purchase—too many in our industry jump at the chance to declare a new standard for the value of naming rights, official league sponsorships, or whatever package was just sold.

Moonshots are for spacecraft. Even though Norman Vincent Peale’s inspirational exhortation to “Shoot for the moon. Even if you miss, you’ll land among the stars,” is bad personal advice and an even worse negotiating tactic, sponsorship sellers continue to employ it.

The hope, of course, is to land one of those outlier marketers referred to above. That possibility admittedly exists. But more often than not, a scenario plays out that is much closer to the following recent example.

A pro sports team seeking a new naming rights partner approached a Fortune 200 company with a proposal that valued the venue at about three times the league average. The company’s CEO was enamored with the idea and was set to sign off before cooler heads in the marketing department were able to slow the train, including bringing in a third-party to conduct a valuation.

At that point, best-case scenario for the team would have been the sponsor coming back with a counteroffer and a negotiation that ended with a number both parties could live with. But what it ended up with was pretty close to worst case.

The inflated asking price led the brand to see the team not as a partner looking to create value for everyone, but as a self-interested organization looking to pad its bottom line at the buyer’s expense. The potential partner walked away from the deal.

Whether it’s using a clear outlier to set a base, or taking a flier with an outrageous price, sellers don’t do themselves any favors and make it more difficult for the rest of the industry by continuing these practices.