The Art of Translation: Private Equity in Collegiate Athletics

In the high-stakes world of college athletics, athletic departments face the challenge of securing funding to enhance facilities, support student-athletes and maintain competitive programs. The added financial pressures of name, image and likeness (NIL) contracts, and the potential of revenue sharing and employment, make the financial landscape increasingly complex. Enter the realm of private equity—a potential game-changer in college sports financing, whether we like it or not.

However, there’s a catch. The gap between the operational language of college sports and the financial language of private equity presents a big challenge. Understanding the breadth of the process is crucial for preparing your athletic department for scrutiny and showcasing its value to potential investors.

Understanding the Landscape and Preparing for Due Diligence

As you start down this road, recognize that private equity investors will conduct a thorough due diligence process. This will likely include an audit and other investigatory measures to examine every facet of your athletic department. From financial health to operational efficiency, every aspect will be under the microscope.

Preparing for this requires a strategic approach to ensure your department isn’t just ready for evaluation but positioned to highlight its unique strengths.

Key Due Diligence Considerations

Financial Preparedness and Reporting

Before engaging with potential investors, ensure your financial records are accurate, up to date and prepared according to Generally Accepted Accounting Principles (GAAP). (Read: Not your EADA or NCAA financial report!)  Private equity firms often focus on EBITDA (earnings before interest, taxes, depreciation and amortization) as a key metric to assess profitability and operational efficiency. Other metrics, like revenue growth rate and return on equity, are also considered. Determine how to translate your financials to reflect these metrics, and make sure these figures are readily available and well-supported.

Historical Performance and Projections

Be ready to present detailed historical performance, including revenue, profit margins and cash flow. Provide realistic and well-justified financial projections. Private equity firms will scrutinize these for growth potential and sustainability. Make sure one- or limited-time revenues are identified; they make the program temporarily look more financially stable but present a risk. While you don’t need to divulge every strategy, demonstrating financial health and potential is essential.

Strategic Value Proposition

The unique value your department brings extends beyond the field. This might include brand strength, fan engagement or exclusive media rights. By effectively communicating your value proposition, an athletic department can attract private equity firms looking for investments with deep-rooted brand equity and high engagement levels—offering a compelling case for long-term growth and profitability.

Management Team

Private equity investors emphasize assessing the management team’s capabilities, scrutinizing their leadership skills, past performance and potential controversies. This involves analyzing their track record for financial acumen, strategic decision-making and adaptability to change. This aims to ensure that the leadership approach and business philosophy are conducive to achieving the growth and profitability objectives of the private equity partnership.

Operational Efficiency

Investors will be interested in how efficient your athletic department manages its resources and maximizes the impact of investments in facilities, coaching and athlete development. Review operational processes for any inefficiencies or areas of improvement and evaluate the decision-making process for spending across the department. Emphasize the importance of strategic financial management, prioritizing investments that promise both streamlined operations and optimal returns. Operational efficiency can be a significant value driver in private equity evaluations.

Risk Management

Addressing potential risks upfront—from competitive performance to market dynamics—showcases a mature approach to risk management. Outline how your department identifies, assesses and mitigates risks. This demonstrates not only your commitment to stability and growth but also your ability to navigate the unpredictable nature of college athletics. Risk management is crucial for maintaining the department’s competitive edge and ensuring you remain resilient under internal and external pressures.

Other Hidden Skeletons

A detailed review of all contracts is essential to identify hidden liabilities like large buyouts for coaches or unforeseen contractual obligations. Likewise, be transparent about plans to start new sports, which could be a drain with added expenses. These potential financial burdens are often overlooked and can significantly impact your organization’s stability. Additionally, any debt for which revenue streams are collateralized should also be evaluated. Early identification and assessment of these items allow for strategic risk mitigation, ensuring a more stable and predictable path forward.

Strategies to Mitigate Risks

Understanding the private equity process involves identifying and mitigating several risks to ensure a successful partnership and sustainable growth.

Valuation Discrepancies

One of the primary risks involves disagreements over the valuation of the athletic department or specific programs. To mitigate this, back valuations with robust, transparent financial data and realistic projections. Engaging a third-party evaluator can also provide an unbiased perspective.

Cultural Misalignment

The culture and values of the private equity firm might not align with those of your institution, potentially leading to conflicts. Reduce this risk by conducting thorough due diligence on potential partners. Focus on their investment history, approach to management, public reputation and their understanding of the unique aspects of college athletics.

Regulatory Compliance

The complex regulatory environment of college sports — especially concerning NCAA bylaws and Title IX regulations — poses a significant risk. This should go without saying, but mitigate this by ensuring general counsel reviews all investment proposals and agreements for compliance.

Loss of Control

There’s a risk that accepting private equity investment could lead to a loss of control over certain decisions or strategic directions. Carefully negotiate the terms of the investment to ensure your department retains significant decision-making power and any changes reflect its mission and core values.

Financial Overreach and Dependency on Funding

The influx of private equity funding could lead to unsustainable spending or financial commitments. Use the investment to enhance revenue-generating capabilities and operational efficiencies that secure your department’s long-term financial interdependence. Develop a detailed financial plan that outlines how funds will be used to promote alignment with long-term strategic goals and financial stability. And by all means, don’t spend it all before you even receive it!

Monitoring Financial Performance

To encourage sustainability and growth within a private equity partnership, it’s essential to establish and monitor key financial performance indicators (KPIs) through robust, real-time reporting systems. Adopt practices like regular financial reviews, dynamic forecasting and transparent communication with investors. This allows for early identification of trends and potential issues so you can make proactive adjustments. Leveraging technology for advanced analytics and fostering a culture of financial discipline further strengthens your department’s financial health and investor confidence.

This strategic approach to financial management ensures your athletic department remains aligned with both its goals and those of its private equity partners, maintaining a path of growth and sustainability.

Understanding Your Exit Strategy

Crafting an exit strategy for private equity investments is going to be unique. In traditional businesses, exit strategies might include a sale or public offering. In college athletics, the focus should shift to ensuring sustainable growth and operational independence post-investment. This could involve setting milestones for financial performance, operational improvements and revenue generation. Achievement of these milestones will signal the readiness for the private equity firm to step back.

The strategy must also consider the long-term welfare of student-athletes and the overall integrity of the sports programs (considering educational mission and values of the institution).

Bridging the Gap Between College Athletics and Private Equity

Engaging with private equity investors becomes a strategic dialogue. It combines a common tongue of athletic-director-speak with sophisticated financial acumen you’ve never had to speak before. (“Profit? What is profit?”) You’re not just responding to inquiries by the investors but presenting a compelling case for your athletic department’s value.

This approach to communication underscores the importance of having knowledgeable representatives who can navigate these discussions effectively. First and foremost, the CFOs need to be at the table through the entire process. They should understand that the private equity’s auditors will not understand the business of college athletics. Also consider experts who speak both languages by applying financial analysis to athletic operations.

Having someone on your side of the table who can convert the financial reporting to a format potential investors understand is critical. James Moore’s collegiate athletics CPAs and consultants are ready to help you tell these investors your department’s financial story.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.