How “Finding The Floor” During COVID-19 Highlights The Challenge Of Sponsorship Valuation

BY ADAM GROSSMAN

In an op-ed contribution for Sports Business Daily, Jack Morton senior vice president and managing director Matt Pensinger talks about the importance of “finding the floor” in sponsorship valuation. Pensinger’s goal is to use the current impact of COVID-19 to lay out a strategic framework for how to handle sponsorship valuations going forward that “reimagines the future in a new and promising light” in large part by “building [partnership] agreements from the floor up.”

Pensinger’s proposed floor is essentially that partners need to define company-specific objectives for sponsorships and share their approach with properties. This floor creates a “focus during negotiations” to both deal with the unique challenges of COVID-19 (such as no fans in the venue) and facilitate an ongoing dialogue between partners and properties after the disease has passed.

Why is Pensinger creating a long-term solution in the first place? COVID-19 is exacerbating a well-known sponsorship problem. Pensinger states that the make good process stemming from game cancellations or changes “is a daunting undertaking made more challenging by the fact that sponsors and properties lack universally accepted and objective measures of value for what key sponsorship assets are worth.”

Current and potential clients have often said to us that this challenge is the “Holy Grail” of sponsorship valuation. While it is right to use COVID-19 to highlight the sponsorship “Holy Grail,” Pensinger’s op-ed does not complete the quest. In fact, his proposed solution seems to contradict his own problem articulation. How can there be a “universally accepted and objective measure of value” across all sponsorships if each individual company needs to “decide on your objective” as the “floor” for sponsorship valuation?

This contradiction is likely not an accident. In fact, Pensinger seemingly developed this new approach to sponsorship valuation because it seems there is no systemic approach to solving the valuation challenge given that different companies have different objectives. His process at least facilitates dialogue between partners and properties so that everyone is aligned to metrics idiosyncratic to that sponsorship.

A limitation of this approach, however, manifests itself in one of Pensinger’s recommendations where he seemingly tries to implement his strategy. He states, “Ideally, your sponsorship contracts directly address a formula for this, such as: Sponsorship fees x % of games canceled = sponsorship fee reduction.”

Yet, this formula is not a good way to create universal alignment because different games have different values. For example, contests at the beginning and the end of the year (particularly playoff games) can often have higher attendance, ratings, and engagement than those in the middle of the season. The recent headline and story in Sports Illustrated stating, “NBA television ratings 'unremarkable' after solid start to return” demonstrate a microcosm of this problem. How can you define a universal sponsorship metric of value if even individual games can result in different values?

Pensinger’s problem can directly be solved with an objective measure of value that takes into account company-specific objectives but not using the method he describes. The Block Six Analytics (B6A) Corporate Asset Valuation Model (CAV) was designed specifically to enable our clients to create company-specific partnership valuations using a systematic approach.

The foundation of our solution is to value sponsorship assets in a similar manner to how investment banks, hedge funds, private equity firms, and venture capitalists often treat assets on a balance sheet. More specifically, they use discounted cash flow (DCF) models to examine how assets generate cash flow (primarily in terms of profits) for a business. This focus on cash flow enables a unified valuation approach to a variety of different asset type classes including (but not limited to) inventory, factories, software and / or intellectual property. 

The CAV takes a similar approach to sponsorship asset valuation. Sponsorship assets refer to in-venue, media, digital, event, hospitality, and intellectual property (IP) activations. The model examines how likely each activation is to help a company increase incremental revenue or brand growth. Brand growth typically refers to increases in a company’s sentiment, engagement, consideration and / or awareness. 

Different companies achieve revenue and brand growth in different ways. For example, a well-known business-to-business (B2B) company typically focuses on fewer number of potential customers that make larger purchasing decisions. A new business-to-consumer (B2C) company focuses on a larger number of customers that make smaller purchasing decisions. The primary goal of the B2B company is likely to acquire or retain its enterprise customers while the primary goal for the B2C company is likely to maximize brand awareness with as large of an audience as possible.

These considerations are factored into the CAV model and applied directly to assets in a systemic and clear way for both partners and properties. The CAV would find that the B2B company should obtain more value from unique experiences created by a sponsorship, such as a virtual event featuring a coach or player. The CAV should find that the B2C company would find more value through assets designed to maximize exposure such as television viewable on-court signage.

Pensinger is exactly right in his problem articulation concerning sponsorship valuation and that this issue has been exacerbated by (rather than caused by) COVID-19. That is why the CAV, developed before COVID-19, is the best solution for partners and properties during and after COVID-19 to solve the valuation challenge.