by Usman Shaikh
U.S. Law Group was recently retained by a group of investors seeking legal and business guidance on a capital investment in an India-based mixed martial arts (MMA) league expanding into the U.S. market in 2016, led by, among others, two-time boxing champion Amir Khan, as announced in this ESPN article.
This MMA league is composed of individual teams each with its own roster of fighters, a novel idea in the MMA world. One of the selling points for the savvy investors is the corporate structure of the league, based off of Major League Soccer’s model.
Corporate structures are critical to the success of any business, especially major sports leagues in the United States. The MLS found success at its inception, adapting a unique model in which the league has an ownership stake in each team. This is contrary to the NBA, NFL, or MLB where its owners wholly own each team and these owners govern the league, creating a legal cartel.
Under its then new model, the MLS maintained control of all teams from its start in 1993 while also requiring revenue sharing amongst its teams. The League thrived and expanded quickly, adding new teams in various markets over the years and collecting franchise fees along the way. Currently, the MLS handles all player contracts (whereby the players are directly contracted with the League and not any individual team), team sponsorships deals (including the introduction of front jersey sponsorships in 2007, which are ubiquitous in European leagues but were unseen in the U.S. until then), and the sale of merchandise, thus maintaining business control and allowing each team to reap in the collective financial benefits. The ability to transform a club into a brand and create a fan base has been the most difficult task. Therefore, once the MLS decides a team is able to stand on its own, and currently most are, it allows investors to buy into the team and run the organization independent of the MLS, while the MLS maintains its own stake in such team.
Conversely, the other major sports leagues in the U.S., namely the NBA, NFL, and MLB, maintain a multiple ownership structure. This is largely due in part to years in operation. This structure has allowed each such league’s respective teams to greatly exploit profits, wages, and television deals. Looking at the NFL’s most recent TV deal for $27B, NBA’s for $930M, and MLB’s for $800M, and, in addition to teams being permitted to negotiate and sign their own deals with local television providers, the multi-owner model, unlike the MLS structure, provides high profit-generating revenue that cannot be attained in the league-owned structure where a lower profit ceiling exists for each individual club. Consequently, because the league-owned model generates less income, MLS generally has a lack of available funds to attract top-dollar talent from European and South American leagues which, in turn, would attract a wider fan base.
While the advantages of the multi-owner structure adopted by the NBA, NFL, and MLB are clear (greater number of wealthy owners, greater amount of revenue for each team and, thus, greater salaries for big name superstars), the league-owned structure favored by the aforementioned MMA league is necessary for the success of a new sports league seeking to attract potential investors. Without the MMA league taking on the burden of potential failure of each of the individual teams, investors would be turned off by the foreseeable financial hardships associated with an upstart franchise. Therefore, although the multi-owner structure may be beneficial in the long run, a league-owned structure makes the most sense for a new sports league entering the market today.
U.S. Law Group specializes in providing legal and business guidance to investors, institutions, and businesses in structuring various corporate finance and capital raise transactions, bringing Wall Street experience at cost-efficient rates. To learn more about our Corporate & Business practice area, please visit www.uslawgroupinc.com/practice-areas/corporate-business.
GolLine Sports contributed to this article.