Buyouts and Buy-ins

Part 4

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The long and short with buyouts is that they are monetary compensation for the conference due to the trouble it has to go through to replace a member.  Nearly every conference has a buyout clause in some shape or form.  These are tied directly to membership within the conference in most situations.  If you leave, no matter what time you choose to do so, the buyout clause will be activated, be it next year or in a decade.

Generally buyouts are negotiated down, for one major reason; it is difficult to collect money from a university.   However, it is easy to retain money owed.  Almost every buyout that has occurred in the most recent realignment has been negotiated down to some variation of whatever the conference has not distributed yet.

Colorado had the lowest, because the Big 12’s buyout at the time reduced the amount needed the longer the notice the conference received.   Additionally, when they left, media contracts had not gone through the roof yet, so the amount retained was not that large.  Maryland currently has paid the largest buyout, dishing out around $30 million of a $50M buyout.

That is how most buyouts end up.  No matter how much they are listed, the conference only has leverage in how much it retains, e.g. doesn’t payout.  The ACC received $30 million because the ACC withheld two years of conference revenue to Maryland.   To get more the ACC would have had to take Maryland to collections, which would have probably have put them in Maryland courts and been more hassle than it was worth.

West Virginia’s was the outlier in regards to buyouts.  They actually paid more than their bylaws stated due to having to leave the Big East immediately.   Pitt, Syracuse and Notre Dame paid less due to sticking around another year.   Most of the buyouts are written now to be either a year or two of revenue, not a set amount.   This means it gets more expensive every year as media deals increase.

From an expansion stand point, I have yet to see a situation where a buyout prevented a school from moving conferences.   Even at $30 million they are rarely going to keep you somewhere you’d rather not reside.
The opposite side of Buyouts are what are sometimes called Buy-ins.  When taking teams in expansion some conferences require a university to either bring value to the table immediately or to earn their equity in the conference over time.   The ACC requires a one-time payment upon entry of around $7-10 million. The Big Ten, on the other hand, reduces payouts for up to six years as teams joining build up their worth to the conference. This can often have a bigger impact than the buyout for the financial future of the team’s athletic budget.

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The above chart graphs the media revenues of several schools related to the University of Nebraska and how Nebraska was effected by moving conferences.   Up until 2010 Nebraska made about the same amount as all of the other Big 12 teams, slightly more than Kansas State, who was a “success peer” to Nebraska at that time, but slightly less than Texas and Oklahoma. Additionally, the orange line tracks the media revenues of Big Ten teams.

As you can see, the Big Ten made more than the Big 12 in 2010, primarily due to selling more inventory, which we will tackle further when we talk about media contracts in detail.  However, when Nebraska moved three major changes impacted their finances going forward.

  • First, their buyout with the Big 12 severely reduced their finances in 2011 since they received no conference media revenue upon leaving the Big 12
  • Next, they had a buy in with the Big Ten with reduced payments over six years as they earned their equity into the Big Ten Network
  • Lastly, the Big 12 renegotiated its rights, including allowing its teams to sell their “member controlled rights” or the inventory that the Big Ten puts on BTN.

Between these three factors Nebraska has earned significantly less revenue than not only its current peers in the Big Ten, but also its past peers in the Big 12.  With three or so years left to go on its current buy in, Nebraska is already short nearly $50 million in earnings to Texas in Oklahoma.  The Kansas State line is shown without any member controlled rights revenue, which is the standard media revenue a Big 12 school makes without it.  Nebraska is down around $30 million to the average Big 12 school prior to selling any member controlled rights.   Kansas State makes about $3 million a year, growing annually, and Kansas makes over $6 million.   This increases the difference to over $40 million with the rank and file Big 12 school.

To date Nebraska has shrugged this off because their athletic department still makes $86 million a year.  However, that’s only good enough for 5th place in the Big 12 and 8th place in the Big Ten; basically the middle of the pack for each conference.  It will take Nebraska decades to make up this revenue difference.  Imagine what may have been if Nebraska stayed with the Big 12 and sold their own rights.   Their revenue line would most likely mimic Oklahoma’s and their athletic budget would be closer to $100 million in revenue, good enough for 3rd in the Big 12 and 5th in the Big Ten, with no lost revenue to boot.  Now add that difference up to multiple years and you’ll see where the Huskers won’t repay that change for a very, very long time.

Maryland handled it a different way.   Instead of buying in, they borrowed forward.  While Nebraska and Rutgers have diminished revenues for the first six years, Maryland negotiated to normalize their payments somewhat in order to shore up their horrible financial situation.   For them they make around full share up front, but will make less later on.   In short, they negotiated to give themselves a loan on future profits.  The larger a school’s brand is, the more leverage they will have in negotiations.

According to my SEC source, they do not have a buy in and will not have one as long as Slive is around, which at the time of this article isn’t too much longer.  Everything about him and his management team set the culture that every SEC member is a full member on day one, part of the family.   With that same philosophy the SEC has no buyout either.  If a family member decides they are best served in another situation then the SEC supports their move.

Everyone in the Big 12 I talked to waivered on how this would be approached going forward, but it would surprise me if a team with a strong brand had to buy in.   Since they have structured the new Big 12 more similarly to a mix of the Big Ten and SEC, in regards to how they do business together.   The family approach the SEC uses is becoming part of the Big 12’s new culture after Baylor put its legal foot down to threaten A&M and the SEC in a move.  While that didn’t keep the move from happening, it did make the rest of the members of the Big 12 rally together as a much more cohesive unit than the collection of individuals it had been before.  A school on par with the Big 12 member institutions, e.g. a Power Five school, will likely be treated that way from day one.

Non-Power Five schools will not have a major buyout or buy-in issue because their media revenues are not equal to the bigger conferences.  TCU, West Virginia, and Utah were able to sustain a prorated buy in when they moved to the Big 12 and Pac 12 because the revenues they made prior were less than what they made in their past conference.  The AAC pays out between $6-9 million a year, currently.  WVU and TCU were paid $11 million in year one.   In a sense, this also occurred with Nebraska, since they never saw the growth of the Big 12’s media deal.  They just had a modest gain in revenues while the rest of their past peers soared.

This does open up discussions on taking Associate Members as well as a means of hedging a bet on a project school.  In this hypothetical situation the Big 12 could pay a team less over a longer period of time until the school built up its program, much like the Big Ten is doing with Rutgers.  The Big 12 will pay out close to $33 million next year, not including member controlled rights or a conference championship game.  You could pay an AAC school half of that amount for a decade and they would still be nearly doubling their current media revenues; at that rate you could take two schools for the price of one.   However, it has to come with a plan to grow their brand and athletic support or you shoot yourself in the foot.

So buyout or not, nearly every school will need a plan to raise revenue to make a move.   To quantify this aspect there will be a point scale for every $10 million in money that needs to be raised to pay for 70% of the total buyout amount, which is most anyone generally pays, with bonus points given if the school’s brand is a Power Five school and can forgo any buy-in.

 

If you have any questions or would like some numbers discussed, contact The Number Monkey on Twitter @TheNumberMonkey or via email [email protected]

©2015 Number Monkey Media

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