Minor League Baseball in the crosshairs

Will most minor league baseball franchises survive if there are no games in 2020? The short answer is, yes — probably.

“Will some teams go under?” asks Andrew Zimbalist, the Robert A. Woods Professor of Economics at Smith College in Northampton, Mass., and the author of several books on the economics of baseball. “It is possible. It comes down to the ownership team. If they are heavily leveraged, they could be in trouble.”

But, he says, if the franchises are one of the 120 “that Major League Baseball wants to keep, they will probably be fine. If a franchise or owner is heavily leveraged and has to sell, either Major League Baseball will step in to help the team or it will find a new owner.”

In a typical year, he notes, about two-thirds of minor league teams are profitable. Zimbalist says several minor league teams have already received Paycheck Protection Program funds from the federal government to better manage cash flow issues.

It is unclear how vulnerable White Sox minor league affiliates are. Financials are not disclosed, though most of the upper levels of the White Sox minor league teams are thought to be in good shape, based on attendance figures alone. Though that doesn’t mean layoffs and hard times are not in their future.

Fortunately, Major League Baseball has detailed rules that try to prevent minor league franchises from getting too exposed.

“Rule 54(b) in the Rules of Baseball stipulates debt-to-equity ratio limits for minor league teams so that no one is out there leveraging the entire equity of a team,” explains Tommy George, president and managing partner of The Sports Advisory Group, a mergers and acquisitions advisory firm that specializes in professional sports, including MLB and MiLB.

Rule 54(b) seeks to ensure that franchises adhere to certain financial guidelines, with regular audits and penalties for non-compliance. But ownership groups certainly aren’t debt-free and can still find themselves too leveraged to avert troubles, especially in times like these.

George says most acquisitions of minor league franchises are cash transactions, with minimal financing, so they are on reasonably solid financial footing at the outset.

“Financing from banks or lenders for sports ownership is rare,” he explains. “MiLB franchises typically trade at multiples of cash flow that are significantly higher than banks are comfortable. And very few franchises change hands every year. So demand typically outstrips supply. MiLB tends to be a steady, conservative investment.”

Over the last 20 years, George says, most MILB franchises have had a typical annual appreciation of 2-5%, regardless of cash flow or annual financial performance.

“Still, it is going to be tough in the short term,” he says. “They are all financially vulnerable. We are still in the infancy of COVID-19 in terms of determining the long-term financial impact financially on sports teams.”

Of course, the economics of Minor League Baseball look nothing like the major leagues. Not only are the dollar amounts dramatically smaller, it is a radically different business model.

According to George, Minor League Baseball franchises can value at well over $40 million, depending on the level, market and financial performance. He said revenue streams include ticket sales, advertising/corporate sponsorships, concessions and merchandising (which have more than doubled in the past decade). Other streams can include parking, catering, luxury boxes (not included in ticket sales totals) and non-baseball events held at the ballpark.

“They are small businesses like anyone else,” adds Noah Frank, a former MiLB and MLB executive who is currently a journalist in the Washington D.C. area. “The biggest thing is how much uncertainty there is. So many things are out of Minor League Baseball’s control. It really is a shame to see them pushed to the brink for things beyond their control. The return to normalcy is likely to be a multi-year process.”

Frank points out that the upper-level teams are generally located in bigger cities, with wealthier owners, and are in better shape — assuming they haven’t become highly leveraged.

“As you go down levels, to smaller cities,” he says, “you get less certain about a franchise’s viability. The good news, I guess, is that front office payrolls are low and overhead is low now.”

Minor league teams are active community partners. Their livelihood depends on it and Frank says that has created a lot of support for the franchises.

“Unlike with major league teams, minor league fans are not asking for refunds on their tickets,” he said. “Neither are sponsors. Right now there is a lot of good will and community support. The question is if this goodwill will continue.”

Also working in their favor, he says, is a willingness and openness to try new things.

“They are a lot less structured than the majors,” Frank says. “They are flexible, proactive. They’ll try new things, even some non-baseball things, to generate revenue, like movie night, as an example, when 100 people sit, socially distanced, in the outfield.”

Major League Baseball may end up playing games in 2020 without fans, but that isn’t an option for the minor leagues.

“People don’t realize how much money Major League Baseball gets beyond putting fans in the seats,” Frank says. “In 2015, the Rangers’ financials were leaked and, for the first time, ticket sales accounted for less than half of the team’s revenues. And other teams have even bigger TV packages than the Rangers.

“It is a different economic model for the minor leagues. It is tickets and sponsorships and both are compromised. Minor league games without fans is a non-starter. The economics don’t work.”

Both Zimbalist and Frank agree that the COVID-19 crisis couldn’t be worse-timed for the 42 teams that Major League Baseball wants to eliminate.

“For the 42 teams on the chopping block this is the worst thing,” Frank said. “Before COVID-19, they had public sentiment behind them, political pressure working on their behalf. But all that momentum is out the window. They lost all their leverage.”

Among those 42 teams is the Great Falls Voyagers, the Montana-based advanced rookie affiliate of the White Sox since 2003. In a recent episode of the FutureSox podcast, Baseball America’s JJ Cooper said teams like the Voyagers may have an opportunity to transition into a summer collegiate or independent league, but there is no formal plan by MLB to facilitate that process yet.

Want to know right away when we publish a new article? Type your email address in the box on the right-side bar (or at the bottom, if on a mobile device) and click the “Subscribe” button. Our list is completely spam free, and you can opt out at any time. Also, consider supporting FutureSox on Patreon! You can get early access to special articles and Patreon-only posts, in addition to more benefits you can read about here. Shop our exclusive merchandise! Show your support with the latest FutureSox apparel.