Institutional capital, including private equity, pension funds and sovereign wealth funds, are currently barred from ownership stakes in National Football League the teams. But now, the NFL is considering whether to allow institutional investors to buy. The league has been considering this issue for some time, including the study of NBA, NHL AND MLBall of which allow for some form of private equity investment in teams.

But what are the lessons from institutional players such as private capital firms investing in business format exclusivity (e.g Restaurants, fitness centers, automotive services, home repair, and 300+ other categories)? How might those lessons translate to the NFL?

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Why is the NFL considering this?

One last one ESPN article by Michael Rothstein provides an excellent overview of this question. The article notes that allowing NFL owners to sell minority stakes to institutional investors could free up cash to redeploy to other projects, such as stadium renovations. It would also represent a cultural shift, as traditionally most NFL teams have been family-owned enterprises. The question was raised recently Qatar Economic Forum. A panel discussion noted that, as the team's valuations have risen, a shrinking group of wealthy individuals can write significant equity checks. Allowing institutional capital in the NFL (albeit only minority investment – up to 30 percent) ensures the league's financial health while allowing owners to diversify into other InveStment and projects.

Franchise in business formats and private capital

PE entered into business format franchising (eg licensing an operating process and trademark, such as a restaurant) in the 1990s and has profoundly transformed that sector. As described in Big money in the franchisehave received more than 700 marks private capital investing either at the unit level, at the brand level, or both in more than 400 institutional investors. The flurry of activity has created compelling liquidity opportunities for franchisees, founders and previous investors.

In our sector, professional investors have strongly preferred to make majority control investments at both brand and entity level. But over time, new investors came in who feel comfortable making investments without control. This has provided significant exit opportunities for founders and retirement Franchisesstrengthened the companies' balance sheets, accelerated expansion and financed various remodeling and growth initiatives.

There are relevant lessons applicable to the NFL situation.

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Cross-investment

In franchising the business format, franchisors consider the potential conflicts of interest and competitive issues when allowing private capital into the system. It is very common for large PE-backed operators to be multi-brand franchises. For example, The Flynn Groupthe largest franchise in the US, operates Wendy's, Applebee's, Panera, Arby's, Taco Bell, Pizza HutAND Planet Fitness unit. But there are usually franchisor stipulations about what types of brands can be owned. For example, most franchisors do not allow franchisees to operate two pizza concepts or two burger concepts.

The NFL will have to resolve potential conflicts and the scope of the investment. For example, can institutional investors hold equity in NFL teams and sports gambling companies? How big is “too big” in terms of having a single institutional investor across multiple NFL teams?

Re-marketing

Once brands and franchise operating groups receive their first institutional capital, capital is re-traded at a predictable rate as previous investors seek to return capital to their limited partners and new investors enter. Often investors bring different important skills in particular inflection points in business. This re-trading continues until the business has enough scale to go public, is acquired by the parent company, or acquired by a long-term investor.

Since re-trading is common and equity sales are distracting owners, the NFL should consider establishing minimum holding periods. In the franchising business format, some PE firms do not invest at the franchisee level, but there are still many investors willing to invest even when there are limitations imposed by the franchisor designed to reduce i doubt. It is possible to protect the system and open liquidity options.

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Change management and scope

Professional investors who support franchises are not operators. But they have a fiduciary duty to their limited partners to speak up if they believe the franchisor is making bad decisions. Even minority investors can effectively agitate for change. Systems that find a way to constructively engage with both franchisees and the investors who support them are stronger and more likely to grow. Feedback improves the business and is not seen as a threat to management. But it takes an open-minded franchisor and strong outreach. An example can be seen in the success of Yum! Makewhich has many PE-backed as well as publicly traded franchises and continues expands rapidlyadding more than 8,300 restaurants as of 2020.

Even if the league allows institutional investors, are the ownership groups willing to bring in professional investors as partners? Will only passive investors be allowed? The choice will affect the ratings. But if NFL owners and league management can embrace the feedback of institutional investors, not just their own money, they can find valuable strategic thinking. PArtnErs.

Relevant experience

In business format franchising, most franchisors that allow institutional investment at the franchisee level strongly prefer investors with prior franchise operating experience, often within the same vertical.

Will the NFL prefer institutional capital with experience in other sports investments, or similar industries such as media, entertainment and hospitality? These connections could ultimately strengthen the league, but owners will need to be open to receiving feedback from active investors, albeit small investors, to benefit from this knowledge.

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The importance of culture

The entry of institutional capital, both in brand and in franchise level, has fundamentally changed the culture within many business format franchise systems. Smart systems understand how to leverage this resource of capital in a positive way while proactively nurturing their unique organizational culture. Even when equity shares or entire businesses re-trade, a strong culture ensures continuity and team commitment. The same will be true if the NFL allows private equity to own minority stakes in teams if each ownership group nurtures its own winning cultures and only accepts money from downline investors.

The NFL can allow some institutional investment for all the reasons mentioned earlier. But given the potential influence of professional investors, even minority stakeholders, the league is to be commended for taking a thoughtful approach on this question and not rushing to a decision.