EXECUTIVE SUMMARY This report examines the plausibility of beginning an Arena Football League (AFL) Franchise to South Florida.

The purpose of this report is to provide the AFL Miami Private Investor Board with the information necessary for assessing the effectiveness and feasibility of this business venture. South Florida is an ideal location to begin a new AFL franchise. The reason for this is due to Floridas powerful demand for sports, and football in particular. A relatively large percentage of Floridas GDP is due to a stable sports industry that successfully weathered the recent economic recession. The geography of Florida helps create a loyal fan base with in the region any professional sports team operates. These fan bases are driven by intrastate rivalries, and the fans are not hesitant to pay to see their teams play. These fan bases for the AFL in Orlando, Jacksonville, and Tampa Bay have proven to strong enough to sustain the operations of the franchises. With the closest arena football team playing four to five hours away, this distance is more than enough to dissuade most South Florida natives from attending and supporting the AFL. However, bringing a team to Miami would increase their awareness of the sport and prove to be sustainable. A loyal, lucrative, and intrastate rivalry driven market is what will sustain an AFL Miami franchise. Additionally, the AFL adheres to a spring schedule so as to not compete for fans with other football leagues. In order to properly market this franchise an aggressive marketing campaign will be necessary. Given that Miami is the one of the most diverse regions in the nation, recognizing the target market is key. After determining the diversity of this market, deciding on an appropriate marketing platform that will portray a professional image and efficiently inform the target market will garner the greatest awareness and support for the franchise. The recent restructuring of the league to a single entity model has lowered the operating costs of the franchises and has stabilized the leagues operations. A private investor will need to finance this 17 to 20 million-dollar venture through debt and private equity. The investor should focus on financing the franchise with about 60% private equity and 40% debt. A majority of your revenues will comprise of ticket sales, merchandise sales, food and drink sales, corporate sponsorships, and broadcasting revenues. I have estimated that this will create 5 million dollars of operating revenue annually. With is capital structure and operating revenues of 5 million dollars annually it is possible to receive pay back within 3.5 to 4.5 years. Based on my research and findings, I have concluded that an AFL Miami franchise is a sustainable and profitable venture. The decisions I have proposed in my report will provide the private investor board with a detailed plan for this project and I am confident that my findings will prove to be accurate and informative.

INTRODUCTION This report examines the possibility of bringing an Arena Football League franchise to the city of Miami. The idea came to me when I realized just how much Florida loves football and that Miami lacked an extremely profitable venture. After this realization I was able to conduct in-depth research on this proposal. My research sources consisted of online sites, AFL articles and letters to the public, lectures, documents submitted by different companies and teams, outside sources, and the knowledge I have gained through being an AFL fan and employee of the Chicago Rush. Florida plays home to one of the larges largest sports markets in the United States. They have over ten professional teams including three professional football teams, two professional basketball teams, two professional baseball teams, two professional ice hockey teams and three professional arena football teams. A committed and loyal fan base is a key, but not the only reason, aspect in the success in the Florida Sports Market. With so many teams in one great state it is no mystery as to what drives the Florida sports market. Intrastate rivalries are the backbone of sports in Florida. Fans from all over the state love supporting their local teams, and, perhaps, love rooting against fellow Florida teams even more. These unique intrastate rivalries are a key factor is Floridas sports market, and are the main reason as to why such a large percentage of Floridas revenues are supported through the sports industry. Even in the face of economic adversity in 2008 this fact remained true, and during these trying times the sports industry remained a one of the most steady and stable factors in Floridas GDP. Stated plainly, Floridas demand for sports is huge, they love their football, the fans spend money, and this means dollars in your pocket. Southern Florida is an extremely dense area of the state, and Miami, in particular, plays home to a vast majority of the South Florida natives. South Floridas residents are privileged because they, unlike residents of other major parts of Florida, enjoy the luxury of playing home to four professional sports franchises. This allows fans to frequent games more often, build a heightened sense of loyalty, and of course spend more money on their home teams. Thus it is reasonable to conclude that the market for sports is the most largest and lucrative in South Florida. Unfortunately, this simple fact is not true for the Arena Football League. A Miami native that is a fan of the AFL does have a choice of three teams to support, but, however, this fan will also have a to travel an extremely large distance to support one of these three teams. The closest one, the Orlando Predators, is a five and a half hour car ride from central Miami. A lack of exposure is the sole reason why arena football is not as popular in South Florida as it could be. Because of the geography of Florida, Miami has literally been distanced and uninformed of this sport. Its common knowledge that Florida natives love their football, and if Miami were to implement a strategic plan for introducing an AFL franchise focusing on a strong advertising scheme, limiting costs, and playing up the intrastate rivalries, a Miami AFL team has the potential to be extremely successful. Couple this fact with a spring schedule and it is a recipe for success. It the private investors lucrative opportunity to bridge this gap, and give Miami an AFL team support.

However, due to the 2009 season shut down some may refute the possibility bringing an AFL franchise to Miami. Before I begin my main analysis on this topic, I believe it is thoroughly important to touch on the 2009 season the AFL endured and shed some light on what truly occurred.

2009 AFL SEASON Contrary to popular belief, the 2009 AFL season (or lack there of) may be the most strategic move ever made in good conscience by a professional sports league. Their league operations and business model was changing rapidly and needed restructuring. The AFL was forced to cease operations in 2009 due to a mixture of greed and growth. Arena football popularity was growing and demand for the sport by everyone involved was increasing. The AFL was outgrowing its current business structure. Players, coaches, owners and league administrators failed to recognize the true rate at which arena football demand was increasing. Because of this failure, salaries were set to high, costs to operate grew to fast and by the end of 2008 player salary caps were upwards of 2.2 million, an extremely large number for any team in the AFL. Costs to operate the AFL grew exponentially fast due to league expansion because league administrators failed to realize that their costs were exceeding their revenues that in turn were the primary way of funding the league. In hindsight, if the AFL had taken a more responsible approach in managing its operating costs and recognized that their costs were exceeding their revenues, perhaps a 2009 AFL season may have occured; but this is easier said than done. Restructuring the New AFL In December of 2009, all assets owned by the AFL were purchased by a group of firm believers in the AFLs potential. These men recognized the profitability of the league and decided to continue it, but with an entirely new business model. They restructured the league as a single entity in order to reduce costs, increase management efficiency, and create a system of checks and balances system to avoid repeating history. The AFL resumed operations for a profitable 2010 season, and are currently on pace for an even better 2011 season. In conclusion to this summary of the occurrences in 2009, the important point to remember is that revenues and demand, or profitability, of the league consistently grew. It was the costs to operate the league that grew to fast, and a new business model was enacted.

MARKETPLACE As stated earlier, Floridas geography makes for a sports market haven where multiple teams within the same league can be successful. Because of Floridas size, traveling to multiple locations to attend and support different teams of the same sport is impractical and, more importantly, undesirable. As a result each team creates an extremely rivalry driven, loyal fan base that is highly lucrative. This lucrative sports industry has

contributed to roughly 8% of Floridas GDP. Furthermore sports industry related sales during the economic downturn remained profitable and weathered the storm well. This suggests that Floridas sports market is relatively inelastic. In other words, when the purchasing power of the dollar goes down, like during a recession, people look to cheaper substitutes and refrain from purchasing luxury goods and services. Goods and services that have an inelastic or consistent demand, like the ones involved in the sports industry, are not given up or substituted for during difficult economic times. Demand for a Mimi AFL Franchise and Competition With already three professional AFL franchises in Florida, some may argue that Florida is a saturated market. However, this argument is flawed. The three Florida teams that exist are the Tampa Bay Storm, the Orlando Predators, and the Jacksonville Sharks. Therefore a fan of the AFL that resides in South Florida has driving distance of four to seven hours to support their team, which is long enough of a drive to dissuade a vast majority of South Floridians from attending games. Creating a Miami AFL franchise would tap in to this untapped market and provide South Floridas natives a team to cheer for. Prior to the 2009 AFL shutdown, all three Florida AFL teams had record setting attendance ratings and, subsequently, their largest revenues yet. They were as follows:

Figure 1.1 2008 Season Attendance Rates for AFL Florida These three teams constituted three of the five top attendance and revenue ratings out of the league, suggesting the profitability of the Florida AFL Market. An AFL team stationed in Miami, the densest area of Florida, would have no problem gaining a loyal fan base and attaining similar numbers. The driving force behind these excellent numbers is that Florida citizens cannot get enough football. The AFL begins its season in April and ends in August, and therefore does not compete against the NFL for fans, attendance, or in any other aspect. An AFL Miami franchise will give Miami an exciting and profitable football season during the college football and NFL offseason; something Tampa Bay, Orlando and Jacksonville have been enjoying for years. In addition to large attendance rates and revenues, the AFL signed a two-year deal with the NFL network in 2010, proving that the AFL is becoming mainstream sport. It is important to note that although these three teams will be directly competing with one anther in the league, they will not be directly competing for popularity. A team in Miami will gather its own following and be completely self-sustaining. 4

The Market for Players The AFL is not a farm league or any other type of amateur league; it is a professional football league with a large talent pool. The AFLs recruiting methods are similar to that of the NFL, and there is variety of players to choose from in Florida. Historically, Florida has three of the top twenty-five division one college football teams in the nation. As such, there is an extremely large talent pool of players in the state of Florida alone. A majority of these players do not go to the NFL for various reasons for example being undersized or not being ready. The AFL is viable option that allows these players to make a living doing what they love all while getting better at playing the game. This extra time allows the players to develop their skills more, and possibly have the chance to play In the NFL is they choose to. A prime example of this is Kurt Warner. He played in the AFL before beginning a hall of fame NFL career. Recruiting a large amount of players from Florida for an AFL Miami franchise would be beneficial to all involved. It would lower recruiting costs for the team and give excellent football players the chance to make a living doing what they love.

HOME STADIUM Every team needs a home stadium, and after conducting research on various venues I have determined that there is a choice of two venues that suit an AFL Miami franchise. The first option is the American Airlines Arena (AAA), and the second option is the Bank Atlantic Center (BAC). American Airlines Arena (AAA) Located in the heart of Miami, home of the Miami Heat, American Airlines Arena is a prime location for a home stadium. Furthermore, sharing a stadium with the Miami heat would increase franchise awareness and only help foster a good relationship with Miami. After converting the stadium to suit the needs of an arena football game there will be ample seating for approximately nineteen thousand fans and more than enough parking. Making AAA the home stadium for a Miami team will have a good effect on the teams relationships with local business, but not as large as the effect it will have at the Bank Atlantic Center. This is to be expected due to Miamis already large appeal to tourists and residents alike. Because of the prime location a higher lease expense will be expected; however, at this venue there is a larger chance attendance ratings will be greater. Assuming revenues are positively correlated with attendance, I estimated attendance ratings of eighty 83% at AAA and 76% at BAC; this difference of 7% may be more than substantial to fund the more expensive lease agreement at AAA. The Bank Atlantic Center (BAC) Located in Sunrise, Florida, (about a 45 minute car ride from downtown Miami) and the BACs more central location is readily able to tap into multiple markets such as Miami, Ft Lauderdale, and West Palm Beach. This location allows for the easiest access for South Florida, shortest average driving time for a large majority of South Floridas residents, and a quicker gain popularity. Like AAA, the BAC has after set-up seating for 5

nineteen thousand fans and ample parking. However, I estimate that attendance would slightly suffer due to less Miami natives in attendance, but not drastically suffer due to the tapping of more markets. Since the AFL franchise would not be sharing a stadium with a popular team like the Miami Heat and would be located in a less valuable property area, the lease expense would be lower. Also, the teams effect on local business would be greater, and the chance to build stronger symbiotic relationships, such as sponsorships, with local businesses would be more fiscally beneficial therefore cutting the attendance/revenue differential of 7% to about 5.5%-6%.

MARKETING THE MIAMI FRANCHISE The key to success for this franchise will be the marketing. As a private investor, recognizing your target market is the single most important aspect of this entire endeavor. South Florida is one of the most diverse regions in the nation, and, as such, every aspect of the franchise should appeal to people of different ethnicities, races, cultures, and socioeconomic statuses. Choosing the appropriate mediums and methods to reach these individuals will while minimizing costs will be a difficult, but plausible task. Marketing Mediums It is important to remember that the AFL is a professional football team and must be portrayed this way. This means that unflattering marketing mediums such as human billboards, paper flyers, and Internet pop ups should be avoided for fear of ruining the franchises professional image. However, local news paper ads, internet adds on sports related sites and local radio commercials are all great forms of marketing that have the best chance of reaching the masses all while minimizing costs. The best way to market a franchise in the new millennium is undoubtedly the Internet. Having a website specific to your franchise where everyone can get all the information and tickets they need is vital to the franchises success. Although websites are relatively expensive compared to other forms of marketing mediums their power as marketing tools should not be ignored, and should be thought of as an investment rather than a cost. Television commercials may also be a great way to garner interest amongst the target market, but can be expensive depending on the network the franchise contracts with. It is important to remember the diversity of the target market; for a majority of initiatives and mediums have to be geared towards specific groups of people and in a different language. Charitable Initiative Being professional sports teams comes with great responsibility to the community in which they play. The NBA Cares is a program committed to helping underprivileged and mentally handicapped peoples, and the NFL Play 60 is committed to ideal that every child should have 60 minuets of playtime a day. It is the duty of the Miami arena football team to support a specific charity or create an outreach program that tackles an issue Miami South Florida residents feel strongly about. This initiative should be included in the initial business plan and implemented to as soon as the franchise is operational. Although this will take time, effort and funds, it should not be thought of as an expense;

moreover, it should be though of as an investment in the future success of the franchise. Ultimately this initiative will increase support for the franchise, create an excellent rapport with the community, and cause larger future returns. Specific Appeal to Miami Although operated by the private investors, this franchise truly will be Miamis arena football. Therefore every aspect about the team should reflect the fans that will be supporting it. The franchise owner should strive to make starting a team in Miami as exciting and personal as possible. The team colors, name, and logo should represent the city it calls home. When making these decisions there are two options; one is to select these franchise aspects internally, or have them selected externally. The first option would be the cheapest and easiest way to make these decisions. On the other hand, having the fans vote on a selection of choices or encouraging fans to submit then vote on fane created aspects would drastically increase awareness and hype. Unfortunately this would educe higher costs, but the benefits may outweigh them. As far as in-stadium aspects are concerned everything must yet again have a specific appeal to the target market. This means carrying a highly selective concession stand inventory. It is preferable to carry the low cost highly demanded food and drink items such as pizza, popcorn, hot dogs, and popular beers and soft drinks. Yet the private investor must realize the diversity of the target market and provide food and drink options that appeal to all so as not to miss out on any possible sales. A thorough analysis of the target market will also give the private investor insight as which sponsors to ally the franchise with. Since a majority of the fan base will be middle to upper-middle class Caucasians and Hispanics it would be beneficial to develop sponsorships with other business that this demographic supports. This creates the best mutually beneficial relationship where both parties involved prosper.

FINANCING THE MIAMI FRANCHISE As stated earlier, the AFLs remaining assets were purchased and reorganized into a single entity model. Under this new model all rights of the franchise including the name, colors, uniforms and other team aspects remain under the ownership of the AFL. The owners purchase the right to operate the team and receive revenues. In turn all of the franchises pay a franchise fee and make payments into cost pools. These cost pools reduce each franchises operating costs through a subsidy system for larger costs that are common to all franchises. These expenses include hotel rooms, flights to and from games, and other operational costs. This system creates larger cash flows, larger revenues, and lowers operating expenses for the private investor.

Figure 1.2 The Single Entity Model Specific Costs Under the Single Entity Model Although the single entity system works great for reducing operating costs for AFL franchises, a fairly large sum of money will need to be invested to begin this project. To begin, a franchise acquisition fee of between five and 6 million dollars will need to be paid to the AFL. This number is based on the present value of the future cash flows this team can potentially produce. The private investor will also need to finance the costs of the playing field, equipment, furniture and fixtures, merchandise, food and beverages. These costs will total to around 7.5 million dollars. In addition to these costs a salary and wage system must be determined. During the season salaries and wages of all employees including players, coaches, administration and staff will be larger than during the offseason. However, annual salaries and wages will constitute roughly 25% percent of gross sales, which amounts to about 1.5 million dollars. Depending upon the aggressiveness of the marketing campaign and types of mediums used, costs for this endeavor will vary. Assuming the investor takes on a fairly aggressive marketing plan implementing mediums such as web sites, TV, radio, and newspaper ads in multiple languages and allowing fans to vote and suggest ideas for colors, a name and a logo, marketing costs will be around 3.3 million dollars for the first year and decrease annually thereafter. Finally, the last large expense the franchise will incur is the lease agreement. The main point to remember when negotiating a lease agreement of this size is that you do not want to pay for space you do not use. This may sound obvious, but this is a very easy way to reduce your fixed costs and hedge against the risk of empty seats. Negotiating a lower base payment on a per-game basis along with the lease holder receiving a percentage of money from each ticket sold is a the best way to ensure that you do not pay for space you do not use. In total, an AFL Miami franchise will cost the private investor around 17 to 20 million dollars depending on initiatives taken. The decision of how to subsidize these costs is up to the Private investor.

DETERMINING A CAPITAL STRUCTURE The private investor must decide on a capital structure that will best fit the franchises needs and what the private investor is personally willing to invest in this project. As far as financing the costs of the franchise the investor has two options: Debt and Equity. Debt When starting a professional sports franchise a significant portion of the assets are going to be financed through debt. The reason for this is because a franchise is not a publicly traded entity, thus there is no public equity in the company. Two main forms of debt that will be used to finance the franchise will be a revolving line of credit and bank loans. A revolving line of credit is a system where the private investor pays a commitment fee, principle and interest to a bank and is then allowed to use the credited funds when they are needed. This will be used to provide liquidity for some of the day-to-day operating costs of the franchise. The amount borrowed each month will fluctuating each month depending on the customer's current cash flow needs. Overtime, as debts are reduced and cash flows from operations increase, the amount borrowed from the bank will decrease and eventually become unnecessary. The large bank loans will be used to finance a portion of the immediate assets the franchise will require to operate. Like the line of credit, the bank loan and interest payments will be paid off by the operating cash flows. When an investor uses debt to finance their assets they are said to be leveraging their business. Leverage helps investor invest in assets and operations for the franchise. By doing so, the investor can invest in business operations without increasing his private equity. In essence, leverage magnifies the gains on your private equity. Unfortunately, if the investment goes in the opposite direction leverage also magnifies your losses by the amount of the interest expense and the credit default. Equity In addition to debt the private investor or private investors will fund the AFL Miami franchises costs through personal investments also known as private equity. Gains and ownership rights will be divided between the investors proportional to the amount that each investor contributed and sum to 100%. The benefit of having a majority of the capital structure invested in private equity is extremely beneficial. The primary reason is because it reduces the amount of debt used and thus reduces the credit risk of default. Also, the investor, not the bank, owns assets purchased by private equity. Therefore in the in the unfortunate case of default a larger proportion of assets can be liquidated to pay off a smaller portion of debt, and the remainder can cover the of the private equity lost.

Figure 1.3 Capital Structure

FREE CASH FLOWS The ultimate goal of this franchise is to make large profits that are both sustainable and can pay off all outstanding debt; thereby function solely from revenues and a minimal bank credit. A large portion of the revenues will be derived from ticket sales, merchandise sales, food and drink sales, and media broadcastings of games. Another major source of revenue will be corporate sponsorships. As I stated earlier, it is beneficial to both parties involved if the sponsor and franchise target similar markets. The reason for this is because sponsorship revenues adhere to the same principles of loan agreements. The sponsor does not want to pay for advertising that is not reaching the target market. Therefore the sponsor and the investor will come to a mutually beneficial arrangement where the sponsor will make a base payment and relinquish a small percentage of sales to the franchise for the ad space. Since this franchise will own valuable assets it is important to decide on a depreciation schedule that allows the investor to payback their debt more quickly. I firmly believe that a mix of an accelerated form of depreciation and a straight-line style is the ideal way to manage your assets. An accelerated form of depreciation will allow you to write off more depreciation in the beginning years of the assets useful life. This will reduce your taxable income thus lowering your tax liability. Although this will cause the reported net income to be smaller the free cash flows will be larger. Since your debts will be largest and your revenues will be smallest during the start of this project, the larger free cash flows in the start will allow you to pay off your outstanding debts more quickly. The other type of depreciation is a straight-line style where the asset is depreciated at a constant rate over its useful life. This would keep free cash flows and net income steady. Using a mixture of the two depreciation styles and carefully selecting which assets will be depreciated in what way would allow the investor to take a short position on his debts and hedge against the risk of annual revenue fluctuations. Price Points and Payback Period It is very important that the private investor(s) realizes their franchises true value and do not price themselves out of the market. It does not matter if prices are to low or two high because the same result will occur. Over all revenues will decrees and the profitability of

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this franchise will fail. It is important to remember that this franchise will appeal to many people of different socio-economic backgrounds. Figuring out a pricing strategy that is affordable for all fans while implementing and efficient cost structure will yield maximum profits. I have estimated that at franchise cost of between 17-20 million dollars will take roughly 3.5 to 4.5 years to payback given 5 million dollars in operating revenues.

CONCLUSION South Florida is a prime location to begin a new Arena Football League franchise and presents a completely untapped, profitable market. Although some may say the Arena Football League is too risky at the present time, the reality is the reconstruction of the AFL under the single entity model has proven successful. An AFL franchise would thrive in South Florida and expand awareness of the sport. Floridas geography makes for a sports haven that creates loyal and lucrative fans. The intrastate rivalries are a key driver in the success of the sports market. Throughout the years, sports industry related sales have remained steady despite the economic downturn. I have proved that the sports industry in Florida is fairly inelastic and that the three Florida AFL franchises are highly successful. A Miami AFL franchise would create more intrastate rivalries, offer the citizens of South Florida a geographically desirable team to root for, and give people the chance to enjoy football in the spring season. A Miami AFL franchise has two options for a home stadium: the Bank Atlantic Center or American Airlines Arena. Both stadiums come with their individual pros and cons, and it is truly up to the private investor to decide which one to call home. It is important to remember that an AFL franchise in Miami is a professional football team. Therefore, it is important to represent the franchise in a professional manner by using appropriate making mediums, conducting charitable initiatives, and embody the Miami culture. Because Florida represents such a diverse population it is also important to understand the target market and to market the franchise in a way that appeals to and is understood by the masses. The single entity model works well for this articular league. It reduces the teams operating costs and ultimately puts more money in the investors bank account. The total price of the franchise given all the start up expenses will cost the investor 17 to 20 million dollars. In a private venture such as this I would recommend a capital structure of 60% private equity, 10% in revolving line of credit, and 30% in bank loans. Having 40% leverage in the franchise would be beneficial to the investor because it would provide liquidity for day-to-day operations and debt financing for the purchase of larger assets. Depending on the depreciation schedule used your payback period will be between 3.5 to 4.5 years. In conclusion, bringing an AFL franchise to Miami is a plausible and profitable venture if marketed and financed with the recommendations enumerated in this project proposal. 11

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<http://www.gazette.net/stories/01122010/burtspo104707_32547.php>. Musey, and Suppes. "BankAtlantic Center." Hockey Arenas. Web. 02 Dec. 2010. <http://hockey.ballparks.com/NHL/FloridaPanthers/newindex.htm>. Tan, Kerry. "The Costs and Benets of a Franchise to a City." Letter. 21 Oct. 2010. Ohio State, 21 Oct. 2010. Web. 15 Nov. 2010. <http://web.econ.ohiostate.edu/~tan/E583/lecture_ch7.pdf>.

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