The Los Angeles Lakers will face the Knicks at Madison Square Garden on Tuesday, and from a prestige perspective, it’s the equivalent of Billy Joel and Elton John touring together.
On court, it’s a different story, since both teams are having underwhelming seasons. But wins and losses are unlikely to ever significantly matter when it comes to determining the worth of each franchise. They are consistently said to be among the highest-value franchises in the N.B.A., and have been for some time, regardless of how they’ve performed on the court. The Lakers, of course, have won six championships since 2000 and have had multiple generational talents to attract fans in that span, including Shaquille O’Neal, Kobe Bryant and LeBron James. The Knicks have had the opposite experience — rarely winning or putting star players on the court since their N.B.A. finals loss to the San Antonio Spurs in 1999.
Yet, earlier this year, Sportico, a sports business publication, estimated the Knicks and Lakers to be worth more than $5 billion each, two of only three teams, along with the Golden State Warriors, to be worth that much. Last month, Forbes had a similar take, putting the Knicks at $5.8 billion and the Lakers at $5.5. billion. (In 2000, Forbes said the Knicks were the most valuable franchise in the N.B.A. at $390 million. The Lakers were the runner-up at $360 million.)
Franchises have become more lucrative in recent decades as N.B.A. revenues have skyrocketed, and generally, the super rich (on paper) have become richer.
“This gets into the next greatest fool theory of team ownership,” said Rick Burton, a professor of sports management at Syracuse University. “It suggests that there will be a next greatest fool willing to pay that amount to get that franchise. And franchise values are essentially the most important job of the league commissioner, which is to drive up the asset appreciation of the franchise holders.”
Or as Mark Cuban, the owner of the Dallas Mavericks, put it in an email: “When buyers have cash and are liquid, and business for the league involved is good, prices go up and vice versa.”
But what does it mean when the Knicks and Lakers are said to be worth more than $5 billion? Here’s a look behind the curtain. (Representatives for the two franchises did not respond to requests for comment.)
What is a valuation, exactly?
In the most basic terms: It is an estimate of how much a team would sell for if it was on the market. But it is nothing more than an educated guess.
“At the end of the day, we’re estimating what a private enterprise is worth,” said Kurt Badenhausen, a sports valuations reporter at Sportico. “No different than estimating what the value of your house is worth.”
How are the valuations derived?
Much like house valuations on online real estate sites, they are based on several factors, including location, who owns the arena the team plays in, and the team’s local television deals. James L. Dolan, the owner of the Knicks, also owns Madison Square Garden, whereas the Lakers lease the space at Staples Center, which will become known as Crypto.com Arena on Christmas Day.
“If you have two teams, let’s say one owns the building and the other leases it, what I’m valuing is the economics,” said Mike Ozanian, a managing editor at Forbes who compiles its valuations. “In other words, what are the revenues that the team generates at the building versus its expenses?”
Assets related to the team don’t necessarily factor in, at least not completely. In the case of the Knicks, while Dolan owns MSG Networks, the regional cable channel that broadcasts games for the Knicks and several other New York-area sports teams, that doesn’t figure into the valuation of the team. However, the revenue generated from the network does.
Valuators review public information on team finances, consult bankers involved in similar transactions, and consider previous sales and the scarcity of the product.
The franchise worth changes, Cuban said, based purely on “supply and demand against cost and availability of money versus expected cash flows, if any, and expected appreciation.”
What are the limitations?
In 2014, Forbes valued the Los Angeles Clippers at $575 million. Later that year, Steve Ballmer purchased the team for more than $2 billion. Much like when buying a house, sometimes it’s difficult to account for just how eager a given buyer will be.
“We do it with the best information we have based on a team’s finances, their arena situation and the market that they’re in,” Badenhausen said. “But sports teams don’t get bought and sold like traditional businesses, because there is there is an intangible factor in there because while there’s thousands of businesses you can buy, there’s only 30 N.B.A. teams that you can buy.”
Given the rarity of team sales, there aren’t many data points for comparison.
As Ozanian put it: “You could have precise information on a team and at the same time not come close to what the team sells for.”
Sometimes, the accuracy of a number can be affected by how much information a team is willing to provide.
“It’s possible there are times where, because one team speaks more than another, that the revenue and operating income numbers could be slightly more accurate for one than another,” Ozanian said. “But in terms of the valuations, the enterprise values, I don’t think that plays a role because the people that I speak to to get my valuations are very much in know, as to the revenues and expenses and therefore very knowledgeable on the valuation.”
Why are the Knicks and Lakers valued so highly?
Both franchises generate hundreds of millions of dollars from their local television deals and arenas, which drive revenue through merchandising, sponsorships and ticket sales, though some of that is distributed to other teams through the league’s revenue sharing system. And location matters, too.
In fact, it might be the most important thing.
“They are also located in markets that have tremendous wealth,” Badenhausen said. “So that if they were ever to come up for sale, you would have multiple bidders at multibillion dollar valuations. And the sky is the limit in terms of what somebody would be willing to pay for both these franchises.”
There’s also the intangible.
“You have one shot to buy the New York Knicks,” Badenhausen said. “You have one shot to buy the Los Angeles Lakers Lakers. They just don’t come up for sale, right?”
The Knicks’ renovation of Madison Square Garden a decade ago also was a big boost.
“It’s one of the oldest buildings in the N.B.A.,” Badenhausen said. “But the renovation turned it into a modern-day cash register.”
Why doesn’t it really matter if the Lakers and Knicks win?
Badenhausen argued that even while the Knicks’ value has skyrocketed independent of their play, the years of poor performance have lowered the ceiling.
“The big market teams are definitely more immune to what happens on the court than small market teams,” Badenhausen said. “But you could make a case that the Knicks would definitely be worth more if they were running out a playoff team every year that was challenging for N.B.A. titles. That 100 percent boosts teams’ finances, allows them to charge more for tickets, sponsorships and suites and all of those things. And so your revenue goes up and that helps drive valuations high.”
But the team is still flush, Ozanian said, which is ultimately the biggest arbiter. Television deals are often long-term, and are locked in whether the team is good or bad. Both teams draw well in audience and sponsorships.
“Potential buyers are not looking at the past,” Ozanian said. “They’re generally looking at the future, and the amount of incremental revenue that comes in from having a good team versus a not-so-good team generally isn’t that much more.”