Valuation of Sponsorship Opportunities in Sports

Value of Sponsor Benefits

Before determining the value of a sponsorship opportunity, the parties must first reach an agreement on the benefits the team is offering to the potential sponsor. And the value of those benefits to a potential sponsor will be affected by the potential sponsor's goals for the program. Some sponsors view a race team sponsorship as an opportunity to develop brand awareness, while others already have brand awareness and are seeking to develop brand loyalty among race fans. Two different teams may be able to offer two entirely different packages of benefits, one of which may appeal to a particular sponsor's needs more than the other.

The main benefits associated with a race team sponsorship can be divided into two categories: advertising value and personal services. First, a race team sponsor receives advertising value from the placement of the sponsor's name and company logo on the race car, uniforms, hauler and other related team equipment. Second, there is value in any marketing rights granted by the team allowing the sponsor to use the team's marks ' and the goodwill associated therewith ' in the sponsor's advertisements.

One of the most readily recognizable advertising benefits of a race team sponsorship is the placement of the sponsor's name and logos on the moving billboard that is a NASCAR race car. As such, a sponsorship agreement should clearly state the on-car inventory being provided to a sponsor with a provision such as the following: “During the races in which Sponsor is to appear as the primary sponsor of the Race Car, Team shall place Sponsor's logo on the Race Car: (1) on the hood, (2) on the B-post, (3) above the rear tires on the rear quarter panel on each side, and (4) on the decklid.” For further clarity, some sponsorship agreements include measurements of the logo size on each location on the racecar and might also incorporate exhibits containing graphic depictions of the race car bearing the sponsor's logos.

The value associated with the advertising rights will be affected by the various levels of sponsorship a team will have, and the rights and benefits to which each level is entitled. For example, a typical race team will have primary sponsors, associate sponsors and smaller trade partners, also known as “value-in-kind” sponsors. The team must ensure that within each level of sponsorship, each sponsor is consistently receiving an appropriate level of benefits, and greater benefits than any sponsors at a lesser level. The value associated with the advertising rights will also be affected by the breadth of the designations, or official status rights, the sponsor is allowed to promote.

Excluvisity

Many sponsors also place significant value on gaining a certain level of exclusivity with the teams they sponsor, and thus, a frequently heavily negotiated point is the breadth of the sponsor's exclusive category (i.e., which companies qualify as competitors of the sponsor with whom the race team cannot have a relationship). For example, if the potential sponsor is a soda company, will the team grant that sponsor exclusivity over all consumable products (meaning all beverages, foods and candies), all consumable liquids (meaning all waters, sodas, fruit juices, beer, spirits, energy drinks and sometimes even powders that can be converted to liquid drinks), all carbonated beverages (meaning all sodas, beers and some energy drinks), or just sodas? A typical exclusivity provision may read as follows: “Team retains the right to sell primary, associate, and in-kind sponsorship rights with respect to the Race Car to sponsors and others whose rights do not conflict with nor diminish the rights of Sponsor hereunder; provided, that Team shall not sell any sponsorship rights on the Race Car to any third party that competes with Sponsor with respect to [insert description of Sponsor's exclusive category].“

A sponsorship agreement might also contain exclusions from exclusivity that allow for the team's participation in races sponsored by competitors, in victory lane activities in which NASCAR may mandate the presence of product samples or advertisements of competitors, and in NASCAR's contingency sponsor program through which NASCAR-wide official status sponsors, potentially including competitors, have the right to locate a decal as designated by NASCAR on the front quarter panels of race cars and offer contingent awards to participating race teams.

Second, a race team sponsor typically receives certain personal services from the drivers, and potentially other celebrities, associated with the race team. These services may include personal appearances by the individual at company events of the sponsor (either at or away from a race track), production days during which the sponsor can film unique advertisements featuring the individual, and opportunities to host sponsor guests for trackside interaction with the individual through hospitality appearances or more simple, quicker meet-and-greets. In the past, in addition to its sponsorship agreement with the team, a sponsor might have entered into a separate personal services agreement with a driver of the race team. Recently, it is more common for a team to obtain the rights to obligate a driver to make personal appearances for sponsors through the driver's services agreement with the team, and then the team must ensure that it appropriately distributes those services amongst the various team sponsors. For example, if a team negotiates a limited number of trackside hospitality appearances that a driver is willing and able ' based on pre-race time constraints ' to participate in during each race season, the team must then ensure that it doles those out appropriately among the team's various sponsors such that the driver is not overcommitted.

When determining the cost of involvement with a particular motorsports property, it is typically the team, as the party with sponsorship inventory to sell, that proposes an initial price for the sponsorship. The determination is largely one of art, and is likely to be a reflection of the team's estimation of the amount of funding it needs from sponsorships to satisfy its operating budget for the season, the price other comparable teams are receiving in the marketplace, the perceived marketing value of those rights, and the price the potential sponsor is willing to pay. A race team views sponsorship as a key means of funding its operating expenses. A potential sponsor, on the other hand, is likely focused on the marketing value it attributes to a sponsorship opportunity.

While a number of factors could be considered when placing a value on the total package of benefits to be provided to a sponsor by a team, following are three general categories of valuation methodologies: cost, market and income. Though none of these methods is individually sufficient to determine a sponsorship value, their combination sufficiently covers the spectrum of factors that a team and potential sponsor might consider when negotiating a sponsorship.

Cost Valuation

To determine the value of a sponsorship opportunity under the cost method, the team and potential sponsor must each consider the various costs associated with the sponsorship. For a race team, these might include: the costs of placing the sponsor's logo on the race car, uniforms, hauler and other related team assets (such as decals and wraps and uniform embroidery); the costs of fielding race cars in races in order to display the sponsor's marks during such events; the costs of obtaining the tickets and credentials required for sponsor's race attendance and hospitality needs; and any personal service fees payable to the driver or other team celebrities from the sponsorship fee.

Trackside networking opportunities and promotions can be of significant value to sponsors, and thus, many sponsors request full-season hard card credentials as well as single event licenses, meaning NASCAR credentials allowing access to the garage, infield and pit areas for an individual race event. A “hot” pass allows such access during periods of competition, while a “cold” pass allows access only during periods of non-competition. Potential sponsors frequently request that a team guarantee that the sponsor's single event licenses will be “hot,” but credentials are controlled by NASCAR and distributed in limited amounts to the teams based on information that must be submitted well in advance of the race at issue. Thus, a sponsorship agreement might address this with a provision stating that “Team will use commercially reasonable efforts to obtain 'hot' passes where available from NASCAR, but such passes are distributed in the discretion of NASCAR and are subject to NASCAR and track guidelines, policies and availability. Sponsor shall provide Team with at least twenty (20) days advance written notice of its desire to use single event licenses at any particular race, together with such other information as may be required by NASCAR for the use of such single event licenses.” [Editor's Note: This provision can certainly apply and be helpful in any entertainment-related sponsorship situation. In many instances, a party other than the agent who may be representing his or her client in a sponsorship deal controls access, for example, to movie or TV sets and the talent involved.]

While perhaps not intuitively a factor in the value of a sponsorship, certain cost considerations may affect a potential sponsor's ability to accept a team's proposed value for a sponsorship. For example, in addition to the potential costs directly associated with obtaining the sponsorship (such as the sponsorship fee and any sales agency commission), a potential sponsor must consider the costs associated with activating the sponsorship. These activation costs include the production and utilization of advertisements and marketing materials capitalizing on the advertising rights granted by the team, print materials such as posters, cardboard stand-ups and hero cards, and premium items (licensed products bearing team marks to be given away at race tracks and other special events to promote the sponsor's products and services). An active sponsor should prepare for an activation budget in an amount equal to anywhere from 1 to 1.5 times the amount of the sponsorship fees with the team, and thus, a potential sponsor must ensure that it leaves ample room in its budget for both categories of expenses. Some particularly high-profile sponsors bring value to a team through especially significant activation and promotion of the sponsorship, and thus, a race team may be more accommodating of such a sponsor in an effort to bring the notoriety of the sponsor to the team and its drivers.

Market Valuation

To determine the value of a sponsorship opportunity under the market method, a party must consider what has been paid for other recent, comparable sponsorships within the same market. Many NASCAR Sprint Cup Series team primary sponsorships fall within a range of $15-25 million per year, although for various reasons, sponsorships may be higher or lower. The exact position of a particular sponsorship within that range may depend on various factors such as current and historical performance, driver or team popularity or reputation, fan base, involvement of ownership, and business-to-business and cross-selling opportunities with other team sponsors. Some sponsors have sought to link sponsorship fees to performance targets and the exposure generated by their sponsorship. Any off-track performance targets should relate to things the team can control or affect, and the nature of these targets depend on the sponsor's ability to clearly indicate its goals for the sponsorship.

The market method also takes into account what opportunities are available in other similar or competitive markets, and whether the parties have strong alternatives that can greatly affect the negotiation of a potential sponsorship. For example, a race team may be more willing to grant significant benefits at a lower price if it has sponsorship inventory remaining mid-season and knows of few companies seeking to become new sponsors. On the other hand, a potential sponsor might be willing to pay aggressively for a sponsorship if there are few teams with available inventory and it has a new product or service that targets NASCAR's demographics.

Finally, market value can also be affected by the target demographic that can be readily reached through the sponsorship. For example, properties in sports like professional golf and Formula One racing may receive a premium for being able to appeal to a higher income demographic than some other sports.

Income Valuation

To determine the value of a sponsorship opportunity under the income method, the parties must seek to quantify the potential sponsor's return on investment. Some third-party service providers specialize in providing reports containing quantifiable metrics with which a sponsor might be able to value the exposure generated by a sponsorship. Some of these services quantify the value of a sponsor's exposure on an impression basis. In a straightforward example, a report might describe that the race car bearing the sponsor's company logo was shown for 20 total minutes during a particular race and that advertising slots during the race were being offered for $50,000 per 30-second slot. Thus, the sponsor received $2,000,000 worth of exposure during the race. Most sponsors recognize that this is an imperfect science and discount the reported values accordingly. Other brand analysts seek to grade the impact of exposure rather than simply quantifying the amount of exposure. Sponsors may also attempt to study sales patterns of products to determine the success of a sponsorship, but, as with any advertising campaign, it is difficult to conclusively link an increase or decrease in sales to a particular promotion or advertising campaign.

Over the past decade, NASCAR race teams have become increasingly more reliant on securing sponsorships to offset the continually escalating costs of running a competitive racing program. As NASCAR's popularity has continued to grow, many companies are intrigued by the possibility of reaching a fan base and audience that is large, both in numbers and geographic reach, and according to research, extremely loyal to the sport's sponsors in its purchasing habits. The key threshold question for an interested company is what will be the cost of involvement in the sport?

Valuation of a sponsorship opportunity is much more art than science and it is important that a lawyer involved in the negotiation of a sponsorship agreement understand how the various factors interrelate. While this article focuses on the factors affecting the valuation of a sponsorship opportunity with a NASCAR race team, most of the factors can be applied to sponsorship opportunities in other sports as well.

Historically, a NASCAR team could fund a portion of its operating budget through a single primary sponsor and several associate sponsors. However, more recently, the sponsorship needs of teams have increased, while at the same time, the economy has forced many companies, particularly those that are publicly traded, to face tighter budgets for their sports marketing efforts. The result for some teams has been the splintering of the sponsorship for a single team across multiple primary sponsors and associate sponsors. While this change has been unavoidable in the current market for some teams, the fracturing of the traditional team sponsorship model does place greater emphasis on bringing value to each sponsor in more creative ways.

Value of Sponsor Benefits

Before determining the value of a sponsorship opportunity, the parties must first reach an agreement on the benefits the team is offering to the potential sponsor. And the value of those benefits to a potential sponsor will be affected by the potential sponsor's goals for the program. Some sponsors view a race team sponsorship as an opportunity to develop brand awareness, while others already have brand awareness and are seeking to develop brand loyalty among race fans. Two different teams may be able to offer two entirely different packages of benefits, one of which may appeal to a particular sponsor's needs more than the other.

The main benefits associated with a race team sponsorship can be divided into two categories: advertising value and personal services. First, a race team sponsor receives advertising value from the placement of the sponsor's name and company logo on the race car, uniforms, hauler and other related team equipment. Second, there is value in any marketing rights granted by the team allowing the sponsor to use the team's marks ' and the goodwill associated therewith ' in the sponsor's advertisements.

One of the most readily recognizable advertising benefits of a race team sponsorship is the placement of the sponsor's name and logos on the moving billboard that is a NASCAR race car. As such, a sponsorship agreement should clearly state the on-car inventory being provided to a sponsor with a provision such as the following: “During the races in which Sponsor is to appear as the primary sponsor of the Race Car, Team shall place Sponsor's logo on the Race Car: (1) on the hood, (2) on the B-post, (3) above the rear tires on the rear quarter panel on each side, and (4) on the decklid.” For further clarity, some sponsorship agreements include measurements of the logo size on each location on the racecar and might also incorporate exhibits containing graphic depictions of the race car bearing the sponsor's logos.

The value associated with the advertising rights will be affected by the various levels of sponsorship a team will have, and the rights and benefits to which each level is entitled. For example, a typical race team will have primary sponsors, associate sponsors and smaller trade partners, also known as “value-in-kind” sponsors. The team must ensure that within each level of sponsorship, each sponsor is consistently receiving an appropriate level of benefits, and greater benefits than any sponsors at a lesser level. The value associated with the advertising rights will also be affected by the breadth of the designations, or official status rights, the sponsor is allowed to promote.

Excluvisity

Many sponsors also place significant value on gaining a certain level of exclusivity with the teams they sponsor, and thus, a frequently heavily negotiated point is the breadth of the sponsor's exclusive category (i.e., which companies qualify as competitors of the sponsor with whom the race team cannot have a relationship). For example, if the potential sponsor is a soda company, will the team grant that sponsor exclusivity over all consumable products (meaning all beverages, foods and candies), all consumable liquids (meaning all waters, sodas, fruit juices, beer, spirits, energy drinks and sometimes even powders that can be converted to liquid drinks), all carbonated beverages (meaning all sodas, beers and some energy drinks), or just sodas? A typical exclusivity provision may read as follows: “Team retains the right to sell primary, associate, and in-kind sponsorship rights with respect to the Race Car to sponsors and others whose rights do not conflict with nor diminish the rights of Sponsor hereunder; provided, that Team shall not sell any sponsorship rights on the Race Car to any third party that competes with Sponsor with respect to [insert description of Sponsor's exclusive category].“

A sponsorship agreement might also contain exclusions from exclusivity that allow for the team's participation in races sponsored by competitors, in victory lane activities in which NASCAR may mandate the presence of product samples or advertisements of competitors, and in NASCAR's contingency sponsor program through which NASCAR-wide official status sponsors, potentially including competitors, have the right to locate a decal as designated by NASCAR on the front quarter panels of race cars and offer contingent awards to participating race teams.

Second, a race team sponsor typically receives certain personal services from the drivers, and potentially other celebrities, associated with the race team. These services may include personal appearances by the individual at company events of the sponsor (either at or away from a race track), production days during which the sponsor can film unique advertisements featuring the individual, and opportunities to host sponsor guests for trackside interaction with the individual through hospitality appearances or more simple, quicker meet-and-greets. In the past, in addition to its sponsorship agreement with the team, a sponsor might have entered into a separate personal services agreement with a driver of the race team. Recently, it is more common for a team to obtain the rights to obligate a driver to make personal appearances for sponsors through the driver's services agreement with the team, and then the team must ensure that it appropriately distributes those services amongst the various team sponsors. For example, if a team negotiates a limited number of trackside hospitality appearances that a driver is willing and able ' based on pre-race time constraints ' to participate in during each race season, the team must then ensure that it doles those out appropriately among the team's various sponsors such that the driver is not overcommitted.

When determining the cost of involvement with a particular motorsports property, it is typically the team, as the party with sponsorship inventory to sell, that proposes an initial price for the sponsorship. The determination is largely one of art, and is likely to be a reflection of the team's estimation of the amount of funding it needs from sponsorships to satisfy its operating budget for the season, the price other comparable teams are receiving in the marketplace, the perceived marketing value of those rights, and the price the potential sponsor is willing to pay. A race team views sponsorship as a key means of funding its operating expenses. A potential sponsor, on the other hand, is likely focused on the marketing value it attributes to a sponsorship opportunity.

While a number of factors could be considered when placing a value on the total package of benefits to be provided to a sponsor by a team, following are three general categories of valuation methodologies: cost, market and income. Though none of these methods is individually sufficient to determine a sponsorship value, their combination sufficiently covers the spectrum of factors that a team and potential sponsor might consider when negotiating a sponsorship.

Cost Valuation

To determine the value of a sponsorship opportunity under the cost method, the team and potential sponsor must each consider the various costs associated with the sponsorship. For a race team, these might include: the costs of placing the sponsor's logo on the race car, uniforms, hauler and other related team assets (such as decals and wraps and uniform embroidery); the costs of fielding race cars in races in order to display the sponsor's marks during such events; the costs of obtaining the tickets and credentials required for sponsor's race attendance and hospitality needs; and any personal service fees payable to the driver or other team celebrities from the sponsorship fee.

Trackside networking opportunities and promotions can be of significant value to sponsors, and thus, many sponsors request full-season hard card credentials as well as single event licenses, meaning NASCAR credentials allowing access to the garage, infield and pit areas for an individual race event. A “hot” pass allows such access during periods of competition, while a “cold” pass allows access only during periods of non-competition. Potential sponsors frequently request that a team guarantee that the sponsor's single event licenses will be “hot,” but credentials are controlled by NASCAR and distributed in limited amounts to the teams based on information that must be submitted well in advance of the race at issue. Thus, a sponsorship agreement might address this with a provision stating that “Team will use commercially reasonable efforts to obtain 'hot' passes where available from NASCAR, but such passes are distributed in the discretion of NASCAR and are subject to NASCAR and track guidelines, policies and availability. Sponsor shall provide Team with at least twenty (20) days advance written notice of its desire to use single event licenses at any particular race, together with such other information as may be required by NASCAR for the use of such single event licenses.” [Editor's Note: This provision can certainly apply and be helpful in any entertainment-related sponsorship situation. In many instances, a party other than the agent who may be representing his or her client in a sponsorship deal controls access, for example, to movie or TV sets and the talent involved.]

While perhaps not intuitively a factor in the value of a sponsorship, certain cost considerations may affect a potential sponsor's ability to accept a team's proposed value for a sponsorship. For example, in addition to the potential costs directly associated with obtaining the sponsorship (such as the sponsorship fee and any sales agency commission), a potential sponsor must consider the costs associated with activating the sponsorship. These activation costs include the production and utilization of advertisements and marketing materials capitalizing on the advertising rights granted by the team, print materials such as posters, cardboard stand-ups and hero cards, and premium items (licensed products bearing team marks to be given away at race tracks and other special events to promote the sponsor's products and services). An active sponsor should prepare for an activation budget in an amount equal to anywhere from 1 to 1.5 times the amount of the sponsorship fees with the team, and thus, a potential sponsor must ensure that it leaves ample room in its budget for both categories of expenses. Some particularly high-profile sponsors bring value to a team through especially significant activation and promotion of the sponsorship, and thus, a race team may be more accommodating of such a sponsor in an effort to bring the notoriety of the sponsor to the team and its drivers.

Market Valuation

To determine the value of a sponsorship opportunity under the market method, a party must consider what has been paid for other recent, comparable sponsorships within the same market. Many NASCAR Sprint Cup Series team primary sponsorships fall within a range of $15-25 million per year, although for various reasons, sponsorships may be higher or lower. The exact position of a particular sponsorship within that range may depend on various factors such as current and historical performance, driver or team popularity or reputation, fan base, involvement of ownership, and business-to-business and cross-selling opportunities with other team sponsors. Some sponsors have sought to link sponsorship fees to performance targets and the exposure generated by their sponsorship. Any off-track performance targets should relate to things the team can control or affect, and the nature of these targets depend on the sponsor's ability to clearly indicate its goals for the sponsorship.

The market method also takes into account what opportunities are available in other similar or competitive markets, and whether the parties have strong alternatives that can greatly affect the negotiation of a potential sponsorship. For example, a race team may be more willing to grant significant benefits at a lower price if it has sponsorship inventory remaining mid-season and knows of few companies seeking to become new sponsors. On the other hand, a potential sponsor might be willing to pay aggressively for a sponsorship if there are few teams with available inventory and it has a new product or service that targets NASCAR's demographics.

Finally, market value can also be affected by the target demographic that can be readily reached through the sponsorship. For example, properties in sports like professional golf and Formula One racing may receive a premium for being able to appeal to a higher income demographic than some other sports.

Income Valuation

To determine the value of a sponsorship opportunity under the income method, the parties must seek to quantify the potential sponsor's return on investment. Some third-party service providers specialize in providing reports containing quantifiable metrics with which a sponsor might be able to value the exposure generated by a sponsorship. Some of these services quantify the value of a sponsor's exposure on an impression basis. In a straightforward example, a report might describe that the race car bearing the sponsor's company logo was shown for 20 total minutes during a particular race and that advertising slots during the race were being offered for $50,000 per 30-second slot. Thus, the sponsor received $2,000,000 worth of exposure during the race. Most sponsors recognize that this is an imperfect science and discount the reported values accordingly. Other brand analysts seek to grade the impact of exposure rather than simply quantifying the amount of exposure. Sponsors may also attempt to study sales patterns of products to determine the success of a sponsorship, but, as with any advertising campaign, it is difficult to conclusively link an increase or decrease in sales to a particular promotion or advertising campaign.