Factoring for Your Existence
Global sports executives are still focused on many near-term stabilization efforts, as well as longer-term planning in anticipation of the next normal. Few have probably encountered the degrees of uncertainty they are experiencing now or been asked to conjure up a crystal ball to make the most important decisions their organizations have ever faced.
In this period of economic uncertainty, they will be faced with many challenging decisions, particularly concerning working capital, debt exposure, liquidity, and risk evaluation. Executives working on agile strategies to enable their organizations to emerge as strongly as possible on the other side of this situation are left with many questions:
- Do we dilute our ownership?
- Do we incur additional debt?
- Do we liquidate some assets?
- Do we furlough revenue-generating employees?
Executives need to articulate clear thresholds or trigger points that suggest what financial actions their organization will take and when.
“Sports executives are seeking to drive near-term savings to the bottom line and preserve cash in the face of uncertain health and economic outcomes,” says Paul Linden, founder of Endorser, a live events financial service company. “It’s also critical for these executives to maintain financial flexibility for the long term, especially in rapidly changing markets.”
A viable and preferred solution that has emerged over the past few months is invoice factoring. It works by assigning the collection efforts on your commercial income agreements to a third party, like Endorser, in exchange for upfront cash.
Organizations will need to clarify their cash-conservation approach in a COVID-19 world, including a near- and midterm evaluation of cash flow. Once concerns about cash preservation and collection have been addressed, executives need to ensure that the organization is positioned to operate effectively in this next normal.
“Invoice factoring boosts your cash position,” says Linden, “and it is debt-free financing, since you are exchanging two current assets (accounts receivable and cash) for each other. All you are doing is asking us to invoice your revenue partners on your behalf, and we provide your organization immediate cash.”
Since April, the sports world has already seen the bankruptcy of the XFL and USA Rugby. Ticketmaster’s parent company, Live Nation, received a $500 million cash investment from Saudi Arabia’s sovereign Public Investment Fund to seemingly help offset their cash exposure toward chargebacks and overall event cancellations. Endeavor Group secured a $260 million emergency loan after selling some of its minority stake in Fortnite publisher Epic Games.
June brought more developments. Josh Harris and David Blitzer, who own the Philadelphia 76ers and New Jersey Devils, bought a nearly 5% stake in the Pittsburgh Steelers. In Europe, the announcement that the racing company, McLaren Group, and Italian Soccer league, Serie A, are both looking to sell equity positions.
Not only has the pandemic reduced valuations, but it has also created a need for financing for teams previously not on the hunt for investors. Savvy investment groups are persisting with the view that sports have significant growth potential, and that this is a good time to shop. Yet, Linden feels dilution and/or high-interest debt are often the knee-jerk reactions as a cash infusion.
“Our opinion is dilution and senior debt should be avoided whenever possible, and used as a last resort,” he explains. “There are hundreds of non-equity financial solutions available that are sitting on billions in dry powder right now.”
When the COVID-19 crisis started, the natural first call for many operators was to contact their depository financial institutions to discuss options regarding weathering any prolonged closures.
“The unfortunate reply that most received from their financial institutions was that they did not fit the low-risk profile that banks view as their sweet spot,” says Linden. “Times of financial uncertainty have routinely demonstrated that banks do not have an obligation and/or desire to serve the needs of our industry beyond depository activities.”
COVID-19 has been a sweet spot for alternative financial service firms like Endorser. It is the first global factoring company focused entirely on live events. For the sports industry, this means Endorser can use its expertise with sponsorships, media rights, player transfers and much more to provide near-term cash to organizations.
“Our leadership has deep roots as operators of global-scale events, so we understand what our peers are experiencing right now,” says Linden. “We launched Endorser by asking the question: What if we advanced $8 million on your $10 million title sponsorship agreement? Could this help ease the cash-flow financial burden everyone is currently experiencing?”
Around the world, economies are cautiously reopening. Sports executives are keeping one eye firmly on the here and now but also tentatively looking ahead to what is shaping up as a great financial reset.
No one knows how long the pandemic will last, but in time, sports and daily life will find a new equilibrium. Executives are key to ensuring that their organizations not only survive the current crisis but also thrive in the next normal, and cash will be the key factor to existence.