WHY BRANDS NEED TO RETHINK SPONSORSHIP VALUATION

JUNE 2014 White Paper

Consulting Group

Mitch ThompsonMitch is a Senior Analyst with the Consulting Group at TrojanOne who has several years experience in sponsorship consulting - both sponsor-side and property-side. His work with blue chip Canadian sponsors has included sponsorship valuation, sponsorship strategy, sponsorship measurement, and other sponsorship management practices.

Mitch holds a BBA from York University’s Schulich School of Business, as well as a certificate in Sport Administration from York.

An Intro to “Valuation”

In this section, I’ll look to provide an overview of some other approaches to valuation that can serve to inform the conversation around sponsorship valuation. With any investment, whether it be the purchase of an automobile for a family, the hiring of a new manager at a company, or the acquisition of sponsorship rights, the purchaser looks to make sure it is not overpaying, and usually it wants to get a good deal. But how a “good deal" is defined varies from case to case.

While I will touch on approaches to valuation or “appraisal” in real estate and artwork, as well as stocks, a major focus of this section will be on valuation practices in the world of financial management. With an educational background in finance, I see a clearly logical application of financial management valuation practices to the valuation of sponsorship. After all, looking at sponsorship investments from a financial management perspective makes a lot of sense when most

Presidents, CEOs, and Boards who sign off on a company’s annual marketing budget view that company’s activities through this same lens.

In a publicly traded company, the pressures to tie every investment back to an improvement in shareholder value are formalized and undeniable… it is the fiduciary responsibility of managers to act in the best interest of shareholders at all times. Therefore, an investment (including an investment in sponsorship rights and assets)

1. O’Reilly, N. et. Al (2013) 7th Annual Canadian Sponsorship Landscape Study. http://www.sponsorshiplandscape.ca2. (2014) Sponsorship Spending Growth Slows in North America as Marketers Eye Newer Media And Marketing Options. http://www.sponsorship.com/iegsr/2014/01/07/Sponsorship-Spending-Growth-Slows-In-North-America.aspx

3. To be clear, the same term of ‘sponsorship valuation’ is applied when a property conducts some sort of analysis to determine a price point for selling a sponsorship opportunity. In this white paper, I will be focusing on valuation from the sponsor’s perspective.

In 2012, Canadian companies spent an average of $3.46M each on sponsorship, with the average deal being an $82,8191 rights fee expenditure. In North America as a whole, $19.8B was spent on sponsorship in 2013, with $53.1B being spent globally2.

One would think that the acquisition of sponsorship packages for such large amounts of money would be undertaken only after conducting significant due diligence to confirm that the investment’s expected return is sufficient. In many cases, sponsors do perform plenty of analysis around a sponsorship opportunity before deciding to pursue it at a given price point. In many other cases they do not.

Thorough sponsorship valuation practices are typically undertaken by sponsors that are large enough to afford an internal sponsorship team or the services of a sponsorship consulting agency.

But do these practices, as they’re currently performed, really help sponsors?

Does sponsorship valuation as we know it tell a sponsor what they should pay for sponsorship rights?... Or does it merely tell them what others might pay for those same rights?

What is Sponsorship Valuation?

When a sponsor, and/or its agency partner(s), conduct a level of analysis to determine an appropriate investment level for a given sponsorship opportunity, the practice is known as sponsorship valuation3.

This process takes place BEFORE the decision is made to enter a sponsorship agreement with the property at a specific price point. Sponsorship evaluation, on the other hand, is a term used for the process that includes measurement, tracking, and analysis practices that take place after sponsorship begins, in order assess the effectiveness of the sponsorship.

This white paper focuses on sponsorship valuation practices.

Consulting Group

2

Consulting Group

must be undertaken with the objective and expectation of positive financial returns in mind as an eventual outcome.

Nowadays, this pressure to prove a tangible return on each marketing initiative is greater than ever. As digital platforms become a part of consumers’ lives, and digital marketing solutions evolve in their relevance and scalability, the willingness of company leadership to invest in digital initiatives grows - because digital is measurable. As digital marketing grows its share of a finite marketing budget pie, budgets have to be cut elsewhere. Unless your team can prove your efforts are driving positive financial returns, your budget is at risk.

Relative Valuation

The approach of relative valuation is common across various fields… from valuing real estate and artwork, to valuing a company prior to acquisition. Investors want to make sure they get a ‘good deal’ when purchasing an asset or package of assets. When a relative valuation approach is used, getting a ‘good deal’ means paying less for the asset than others might pay.

Relative Valuation in Real Estate

In real estate, the Sale Comparison approach to valuation applies the general principles of relative valuation to the potential purchase of a home or property. In this approach, the property of interest

is compared to those that are considered comparable (in size, location, quality, etc.) which have been recently sold under typical market conditions. The sale price of these comparable properties are then adjusted to account for any significant differences between the property of interest, and the properties in the comparable transactions. Ultimately, a conclusion around a fair market value for the property of interest is determined based on what others have paid for comparable properties.

Relative Valuation of Artwork

The Sale Comparison approach is also used in artwork valuation practices, and according to Kathryn Minard, a Toronto-based certified appraiser of fine art, this approach is the most commonly used in artwork valuation. The method involves looking at the selling price of comparable pieces of art, and making price adjustments according to how the piece of interest compares on key characteristics. It is a method that conforms to the Uniform

Standards of Professional Appraisal Practice (USPAP) that works to ensure that all personal property appraisal practices are credible, transparent, and understood by both appraisers and their clients.

Relative Valuation in Corporate Finance

In corporate finance, relative valuation most commonly takes the form of a Price-to-Earnings multiple analysis, Enterprise Value-to-EBITDA analysis, or other another form of ratio analysis. In any case, the purchaser reviews how others (the market) have valued the company of interest relative to its score on a key variable (i.e. income), and looks at the same relative calculation for comparable companies.

For example, with the P/E Multiple Method, the purchaser would determine sustainable after-tax earnings from operations for the company of interest (a key variable that should drive company value), and then look at its market cap4

(the company’s equity value). The purchaser would calculate the ratio between these two figures, determining the “Price”-to-“Earnings” ratio (“P/E ratio”) for the company of interest. The purchaser would then conduct the same exercise for other companies

Understanding the Asset of Interest

In all valuation methods, relative or absolute, it is important for the purchaser to understand the asset, its future, and its environment thoroughly. This includes assumptions or forecasts about an asset’s future performance and how that performance will change under evolving marketplace conditions, changing economic conditions, and under new ownership.

When a relative valuation approach is used, getting a ‘good deal’ means paying less for the asset than others might pay.

3

Consulting Group

with similar risks and growth opportunities and calculate their P/E ratio (or use an industry average P/E ratio), and draw a conclusion as to whether the company of interest is currently under-valued or over-valued in the market place. If the company is under-valued, the investor is supposed to

assume that its value will increase in the future, implying the time is now to acquire the company. This method assumes that, on average, the market caps of the comparable companies represent accurate representations of those firms’ present value of shareholder income.

While these relative valuation methodologies can be further analyzed and modified, at their core these methods make the assumption that market values of comparable assets, as defined by recorded transactions in the marketplace, are a good starting point for determining the value of the asset being considered for purchase. In a nutshell, the conclusion is drawn that “if others were willing to pay $X for that asset, I should be okay with paying $X+$5 for this asset… based on how it scores on key variables vs. the comparable.”

Absolute Valuation

Like relative valuation, absolute valuation is also applied across numerous fields that involve the acquisition of an asset or package of assets. Unlike relative valuation, absolute valuation does not rely on

the assumption that buyers in comparable marketplace transactions have paid appropriately for an asset’s benefits. Instead, the desired outcomes of an acquisition are forecasted and monetized, allowing the purchaser to calculate a maximum price that should be paid5. The purchaser forecasts these desired outcomes based on his or her plans for leveraging the asset, and based on an understanding of how those plans will impact any desired outcomes of the acquisition.

Absolute Valuation in Corporate Finance

In financial management, the Discounted Cash Flow methodology looks to attach a present value to the one eventual outcome that truly matters to a company that’s looking to acquire another entity. This outcome, of course, is profit. More specifically, the purchaser calculates its expectations for “Free Cash Flow” (used as a proxy for profit to avoid any accounting trickery) of the target company for as long as it intends to own the firm. This forecast includes accounting for synergies that will arise due to the target company’s new ownership, any changes in its competitive and/or economic environment, and any other factors that will affect its profitability. Using time value of money calculations, these Free Cash Flow projections are then translated to a present value in order to determine the appropriate price that should be paid for the company of interest.6

4. A company’s market capitalization is the total dollar market value of all of a company’s outstanding shares. In other words, it’s how the stock market values the company’s total equity.

5. The purchaser does not want to spend more to acquire the asset than the asset’s benefits are worth (otherwise it would be an unprofitable transaction).

6. The value of any redundant assets are added to the Present Value of Free Cash Flow, while the market value of existing debt is subtracted, in order to calculate the full present value of the company’s equity.

Conclusion from a relative valuation: “if others were willing to pay $X for that asset, I should be okay with paying $X+$5 for this asset… based on how it scores on key variables vs. the comparable(s).”

In absolute valuation, the desired outcomes of an acquisition are forecasted and monetized.

4

Consulting Group

Absolute Valuation in the Stock Market

Similar to the Discounted Cash Flow methodology, the Dividend Discount Model (DDM), which is used for valuing a share in a company’s equity, calculates the present value of a single relevant purchase outcome. For this model, that outcome is the stock’s expected dividends. By ignoring the possibility of capital gains (or losses) derived from selling the stock7, an investor can conclude that dividends are the only relevant benefit obtained from the stock purchase. Therefore, the present value of the expected future dividends from a purchased stock can be considered the asset’s value. If an investor is able to purchase the stock for a price that is less than this DDM-calculated value, it therefore predicts a positive net present value for the investment - implying the purchase should be made at this price.

Absolute Valuation in Real Estate

The Income Capitalization Approach looks at real estate valuation through a focus on the net income that a property produces. This method is typically applied to properties such as apartment complexes, office buildings, and shopping centres, whose owners all look to earn financial returns on their investment in land, construction, and property maintenance. In this approach, net annual operating income is forecasted for the property of interest, and time value of money calculations are again used to translate these projected cash flows to an appropriate up-

front price that should be paid for the property.

Absolute Valuation of Artwork

While it is less common for a piece of art to be viewed as an income-producing property to the potential buyer8, there are certain situations in which an artwork valuation is conducted through this lens. For example, when a museum looks to purchase a piece of artwork, it must consider the income it expects to earn as a result. Everything from admissions, merchandise sales, and other revenue streams would be taken into consideration.

In such situations, another USPAP accepted approach, the Income Approach, is used for artwork valuation. This approach resembles Discounted Cash Flow, Dividend Discount Model, and Income Capitalization methodology in that it looks to monetize (and discount to present value) those expected future cash flows.

Understanding the Differences between Relative and Absolute Valuation

All in all, it’s obvious that absolute valuation methods take a fairly different approach than relative valuation methods. Absolute valuation requires the purchaser to have a tangible and quantifiable desired outcome from the acquisition. In the case of a family buying a house, or an art lover buying a painting, there is no tangible desired outcome, and so relative valuation is used.

For investments with desired quantifiable outcomes, an absolute valuation approach allows the purchaser to assess the value of the asset’s expected net benefits. Unfortunately, absolute valuation is much more time consuming than relative valuation, and projecting an investment’s results is not a perfect science. Assumptions must be made around the asset’s performance and the environment in which it will be operating.

In absolute valuation, it is the purchaser who makes these assumptions and estimates, whereas in relative valuation, the purchaser assumes that the assumptions made by others will apply to the investment under review.

7. Or by assuming that the stock’s price when it is eventually sold is equal to the present value of its future dividends anyway

8. This is often because purchasers of artwork have objectives beyond financial returns for the piece of interest.

5

0

Consulting Group

Relative Valuation Approaches in Sponsorship

In the world of sponsorship marketing, the most commonly practiced methods of sponsorship valuation are relative valuation approaches.

The most popular method is an asset-by-asset valuation approach, and it has been made popular by IEG - a Chicago-based company that is a global industry leader. IEG is a tremendous source of sponsorship news, industry research, and hosts an annual conference that has been a top event in the industry for 31 years. The valuation approach that IEG developed first takes a granular approach to valuing each asset within the proposed sponsorship package. Tangible sponsorship assets are valued in various ways, depending on the type. Signage and other sponsor brand integration is valued by multiplying cost per impression (CPI) amounts by projected impression tallies. Sponsor integration in media assets is valued by making adjustments to media equivalency values, and hospitality assets included in a sponsorship package are valued at face value or by benchmarking against similar assets’ market values.

Once these asset-by-asset calculations are made, they are summed in order to determine the total value of tangible benefits, which is then adjusted based on an “Intangibles & Geographic Reach Factor” multiplier. This multiplier is calculated from the sponsorship property’s scores (out

of ten) on various intangible benefit categories (i.e. Prestige of Property, Degree of Sponsor Clutter, etc.). Finally, the property’s value is adjusted as needed based on market factors that might affect supply and/or demand for the proposed sponsorship package. These factors may include the sponsor’s category, the supply of similar opportunities, and the sponsor’s proposed promotional commitment.

IEG has developed this approach based upon 25 years of tracking the sponsorship industry, and based on its review of hundreds of

sponsorship contracts each year9. Other approaches like IEG’s have been developed by sponsorship marketing professionals, including one by Bernie Colterman of the Centre of Excellence for Public Sector Marketing in Ottawa, ON.

While these approaches have been adopted by many, and are of tremendous value to the sponsorship community, the underlying methodology is not grounded in understanding how a sponsor will benefit from a particular sponsorship package, but is instead based on what

9. M. Ording and T. Perros (2011) Determining the Fair Market Value of Sponsorships. http://www.sponsorship.com/images/ieg2011/handouts/IEG-DeterminingFairMarketValue.pdf

Example of IEG’s “Fair Market Value” Approach

In the popular IEG sponsorship valuation methodology, assets that make up a proposed sponsorship package are valued based on tangible benefits first, and then based on a intangible benefits and geographic reach. Market factors are also considered as price adjusters after these two sets of calculations are made.

A sample valuation for a single asset is outlined below:

Sponsor Branding on SIgnage On-Site: ‣ Attendance of 20,000, assume 75% of attendees will

notice branding (15,000 impressions)‣Multiply by a CPI of $0.02 for a tangible benefit

value of $300‣ Intangible & Geographic Reach multiplier = 2.5‣Multiply tangible benefit value of asset by 2.5 to

calculate the asset’s fair market value of $750

In this example, the CPI value that is used is based on an IEG-provided range for each asset type, as well as guidance around the asset characteristics that determine whether a higher or lower value within this range should be used. The Intangibles & Geographic Reach multiplier used would have been calculated by translating how the property rates on various intangible benefit categories (i.e. Degree of Sponsor Clutter, Awareness of Property, Protection from Ambush, etc.).

The valuator would then make any upward or downward adjustments it feels are necessary based on market factors that affect supply or demand for the opportunity (“Price Adjusters”).

6

Consulting Group

others might pay for an asset or what has been paid in the past10.

Another common approach to sponsorship valuation is that of quantitative benchmarking analysis. While no standard method exists for benchmarking, at its core, the method is about comparing the sponsorship opportunity of interest to other similar sponsorship opportunities that have been purchased by a sponsor in the past. Analyzing what sponsors paid for these comparable opportunities, and quantitatively adjusting that amount based on the relevant differences between the opportunity of interest and the comparables (i.e. attendance figures, TV viewership, age, location), allows the sponsor to conclude what sponsors might be willing to pay for the sponsorship package they’re reviewing. In a nutshell, the sponsor is able to conclude: “If other packages, similar to the one I’m considering, were acquired for an average of $X by sponsors, and the package I’m looking at is actually better (or worse) than those packages by Y% in terms of how it scores on key variables, it could be concluded that sponsors would be willing to pay $Z for the sponsorship package I’m considering.”

Because most companies keep their sponsorship valuation practices confidential, it’s difficult to know just how many different approaches to sponsorship valuation exist. Based on TrojanOne’s combined decades of experience in the sponsorship space, it is our understanding that variations of relative valuation

methods are the most commonly practiced approaches. However, there are some companies and agencies that have developed unique models which combine relative and absolute valuation – integrating the forecasting of desired business outcomes into their methodology.

It’s worth noting that relative valuation is a very logical way to go about sponsorship valuation from the property side of the equation. By understanding what sponsors have paid for comparable sponsorship packages, and what comparable properties earn in sponsorship revenue, a property can effectively determine its expected organizational sponsorship revenue as well as price points for individual packages. As a reminder, this white paper is exploring the logic behind sponsorship valuation practices as they relate to sponsors, not properties.

Why is Relative Sponsorship Valuation so Popular?

It seems obvious that a company acquires sponsorship rights in order to achieve certain desired business outcomes. In the case of a bank, a desired business outcome may be that new accounts be opened because people feel more comfortable with the bank’s brand. In the case of a beer company, a desired business outcome may be a lift in sales at bars during the sponsorship’s annual time period of relevance in a region. A sponsorship is an investment that has a return, and that means it is crucial to understand the expected returns

from a sponsorship before determining what amount should be invested. Why then is it so common for sponsorship professionals to spend thousands, sometimes millions, of dollars on rights fees without conducting absolute valuation analysis first?

Reason #1: Relative Valuation is Quick and (Relatively) Easy

As the field of sponsorship marketing has grown in recent decades, various break-throughs in how sponsorship marketing is practiced have taken place. Among these breakthroughs are the clearly defined models for sponsorship valuation that were referenced in the previous section. IEG and TrojanOne itself are among the agencies that have developed step-by-step processes for sponsorship valuation that have since been adopted by thousands of sponsorship professionals around the globe.

Anyone who has utilized one of these methods to conduct a thorough sponsorship valuation on an opportunity knows that it is not easy. It can be very time consuming, requiring hours of research to find the best data points and to make the best calculations and estimations. That said, because the processes have been so well defined, and can be applied to any sponsor of any category, it is possible for a team of one or two to conduct a sponsorship valuation in isolation, without having to bother the sponsor company’s research department, sales personnel, or accounting team. And while sometimes a thorough and

10. You’ll notice that the only dollar values being utilized in the IEG calculations are those that represent market values or historical transactions (CPI ranges, media asset values, ticket face values, etc.)

7

Consulting Group

complex sponsorship valuation can take over a month to complete, more often than not a sponsorship valuation takes lessthan two weeks to finalize – especially when a template spreadsheet is utilized.

Reason #2: Relative Valuation can be Conducted by a “Third-Party Expert“

In many cases, a company’s sponsorship team looks to their agency partner to provide an expert’s opinion on an opportunity, in order to justify the rights fee being asked. The agency’s blessing to move forward with a sponsorship, or their recommendation to only spend up to a certain amount on the opportunity, is more about adding credibility to the decision-making process than it is about understanding how the sponsorship might benefit the company’s business. The request of the agency is that they use their expertise, industry accepted methodology, and determine the appropriate “value” of a sponsorship opportunity. The company’s sponsorship team does not want this process to take long, and they don’t want to bother other people at their company with the process. After all, if their agency partner is an expert on sponsorship valuation, this type of request should not be too much hassle.

In this context, a relative valuation approach is really all that’s possible. A relative valuation approach doesn’t require the agency to become an expert on the company’s profit margins, target consumer purchase funnel, or marketing research practices. A relative valuation approach allows the agency to apply essentially the same sponsorship valuation methodology to a CPG company’s

sponsorship opportunity as an airline company’s.

While I don’t want to paint all sponsors and all agencies with the same brush, this type of situation is a common occurrence. This situation also translates very seamlessly to the media buying practices at many companies, large and small… Just because other companies are willing to pay $10,000 per month to advertise on that billboard, should you? Keep in mind that many sophisticated agencies and sponsorship teams are taking strides towards integrating absolute valuation approaches into their sponsorship practices. I will touch on how this is being done at a later point in this paper. It’s important to know that integrating such approaches requires a long-term view and a willingness to think about the big picture of a company’s sponsorship function. The approach cannot just be property-to-property or month-to-month.

Why Sponsors Need to Avoid Going ‘All In’ on Relative Valuation

When a sponsor conducts a form of relative sponsorship valuation for a sponsorship opportunity, and considers the conclusions drawn from that exercise to be sufficient in determining an appropriate rights fee to pay, that sponsor is undertaking a practice grounded in faulty logic. Here are two examples to explain why relying solely on relative valuation is a bad idea.

In Situation A outlined below, a property has asked a sponsor, Good Guys Inc., to pay $500,000 in annual rights fees for a particular sponsorship opportunity. After conducting a relative sponsorship valuation, the Good Guys Inc.’s sponsorship team has concluded that the market value of this same opportunity is $600,000.

As we’ve learned though, relative valuation tells you what others might be willing to pay for an opportunity, based on what rights fees have been paid for comparable opportunities in the marketplace.

$0

$150,000

$300,000

$450,000

$600,000

Asking Price from PropertySponsor Companyʼs Relative ValuationSponsor Companyʼs Absolute Valuation

Situation A - The ‘Good Deal’ Fallacy

8

Consulting Group

If Good Guys Inc. conducts no further analysis, and does not conduct a form of absolute sponsorship valuation, it might conclude that the proposal represents a “good deal”. It’s entirely possible, however, that the value of the expected business outcomes that are derived from this potential sponsorship amount to only $350,000 in annual net income to the Good Guys Inc.’s bottom line. If the company decided to pursue the opportunity, it might be paying $500,000 in annual rights fees, while only benefitting its business by an incremental $350,000 per year.

In Situation B outlined below, a property has asked Good Guys Inc. to pay $400,000 in annual rights fees for a particular sponsorship opportunity. After conducting a relative sponsorship valuation, Good Guys Inc.’s sponsorship team has concluded that the market value of this same opportunity is only $300,000. If the company were to conduct no further analysis, and no absolute sponsorship valuation, it might conclude that the proposal represents a “bad deal” and that it should counter offer with a proposed annual rights fee of

$300,000 and let it be known to the property that they will not spend any higher. In that case, the company’s competitor, Bad Guys Inc., might come in and acquire the sponsorship opportunity for $420,000 in annual rights fees.

Bad Guys Inc. may have conducted the same relativevaluation as Good Guys Inc. did, and determined that the market value of the opportunity was around $300,000. But Bad Guys Inc. also conducted an absolutevaluation and determined that the opportunity was worth $500,000 in incremental net income to its business. Therefore, it concluded that even though other bidders, like Good Guys Inc., might only be willing to spend $300,000 on the opportunity, it was willing to spend $499,999. Had Good Guys Inc. also conducted an absolute valuation, it might have concluded that it should be willing to spend $600,000 for the opportunity, allowing it to eventually outbid Bad Guys Inc. with an offer of $520,000 in annual rights fees, acquiring sponsorship rights for the opportunity.

While these two examples are purely hypothetical, you can see how they demonstrate the role that both relative and absolute valuation play in acquiring sponsorship rights at an appropriate investment level. Without conducting an absolute valuation, a sponsor doesn’t know what the maximum price it shouldbe willing to pay for an opportunity is. Therefore, it might end up paying too much, and not receiving sufficient benefits from a sponsorship to warrant the expenditure. Without conducting a relative valuation however, a sponsor doesn’t know what other potential bidders might be willing to pay for an opportunity. Therefore, it might end up offering to pay more in sponsorship rights fees than it had to (imagine if Bad Guys Inc. offered to pay $499,999 instead of $420,000 in Situation B).

In conclusion, a sponsor needs to conduct a form of absolute sponsorship valuation in order to understand what it should be willing to pay for an opportunity, but relative valuation can be a very useful exercise for negotiation prep.

$0

$125,000

$250,000

$375,000

$500,000

Asking Price from PropertySponsor Companyʼs Relative ValuationCompetitorʼs Absolute Valuation

Situation B - The ‘Bad Deal’ Fallacy

9

Consulting Group

Absolute Valuation in Practice

It’s one thing to understand why absolute sponsorship valuation is a logical practice to implement, and to comprehend the pitfalls of relying too heavily on relative valuation approaches. It’s quite another to take the initiative to implement new processes and a new perspective within your sponsorship team.

In most cases, for most companies, a fully comprehensive absolute valuation is not realistic - not immediately at least. There are too many sponsorship outcomes that cannot be measured and/or monetized.

How can a sponsor monetize the effects of their brand being perceived as more affiliated with a specific property, sport, or activity? What about the effects of their brand being considered more philanthropic and involved in the community? What about product sampling? How does it translate to long-term sales? These are some examples of desired sponsorship outcomes that would be difficult to monetize with precision.

But even though achieving perfection may not be realistic, that doesn’t mean that steps can’t be taken in the right direction by your team.

Here are some recommended practices that can kick-start the process towards absolute sponsorship valuation:

1. Be Aligned on the Meaning of “Value” and “Worth”

I have seen many misunderstandings around sponsorship valuation simply because two parties are not aligned on the meanings of the terms “value” and “worth”.

When a client asks its agency to tell them what a sponsorship package is “worth”, or to tell them what the package’s “value” is... are they asking for the price that others might pay for that package? Or how the opportunity will benefit their business?

Making sure your team understands the differences between relative and absolute valuation is the first step in avoiding any confusion around such asks.

2. Be Selective in the Assets and Rights you Acquire

It is important that your team takes the extra time to work with properties to create customized sponsorship packages that best meet your brand objectives.

As discussed, there are many sponsorship assets and rights that are of value to other companies, but may not be of value to yours - based on your unique objectives. A property may very well offer your brand a sponsorship opportunity that is rich in these types of unneeded assets, and the relative values of these assets will drive up the package’s asking price.

If your team doesn’t constantly ensure that your sponsorship portfolio consists of rights and assets that are on-strategy, before

you know it you will be paying for many sponsorships that are made up of benefits you don’t need.

3. Practice Relative INTERNAL Valuation Practices

When reviewing a new opportunity, it can be a very useful exercise to understand the expected cost/benefit ratio11 of that opportunity in comparison to your existing portfolio of sponsorships. In particular, knowing how the opportunity stacks up against what you know are your “best” sponsorship properties can tell you a lot.

While much of this white paper warned against the pitfalls of relative sponsorship valuation, it’s important to remember why. By conducting relative valuations utilizing sponsorship fees paid by other sponsors, your conclusion around what should be paid for an opportunity is grounded in the assumption that what others paid

for comparable opportunities was logical or appropriate.

When your own sponsorships are utilized in a relative valuation, you can be more confident that the costs of a sponsorship have been decided upon based on projected (or confirmed) sponsorship outcomes that are relevant to your company.

4. Conduct Absolute Valuation Whenever Possible

For every desired sponsorship outcome that is very hard to monetize, there is one that can be monetized within feasible parameters.

10

11. Of course, cost/benefit ratio means the expected cost of the sponsorship, in rights fees and activation costs, compared to the projected benefits of the sponsorship (monetized or not)

Consulting Group

The table above lists a few examples of common sponsorship assets and rights that can realistically be valued by your company using absolute sponsorship valuation principles.

Implementing absolute sponsorship valuation practices may require using some sponsorships as tests in order to develop your conclusions around the value to your company of certain sponsorship assets/rights.

And it may require spending hours of back-and-forth with your accounting team, with your sales team, and with your marketing research team. Getting these people to sit down with you and understand why you need certain information and insights might be tough. But when all is said and done, being able to determine appropriate investment levels for

future sponsorship opportunities will justify all the hard work.

5. Implement Process Discipline in Sponsorship Spending

When absolute valuation methods are incorporated into your sponsorship team’s processes, the desired outcomes of a sponsorship and the cost of that sponsorship (in rights fees and activation costs) are assessed using the same unit of measurement (dollars).

Therefore, when an absolute sponsorship valuation tells you that your company should be willing to pay no more than $X for a sponsorship, it is because the best and brightest minds within your company projected that it would earn your business at least $X+$1 (present value) in return.

When a thorough absolute sponsorship valuation is conducted, there is no need to talk yourself into a sponsorship that will cost more than the expected benefits are worth. Even if one of your competitors is willing to pay more for a sponsorship opportunity, that does not change what it is worth to your business.

11

Sample Asset/Right

Sponsorship Outcome Determining Absolute Value

Supply Rights, Sales Rights

On-Site Product Sales

Project the number of units expected to be sold on-site via the sponsorship (possibly from historic sponsorships). Multiply this amount by an appropriate profit margin per unit.

Activation Rights, Use of Marks

Indirect Product Sales Off-Site

Utilize previous sponsorships of various types, in test regions, to gauge what an expected off-site lift in sales would be for the sponsorship opportunity of interest. Multiply this amount by an appropriate profit margin per unit.

Tickets, Unique Hosting

Experiences

Improved Client Relationship via

Hosting

Work with sales team to study the effects of past hosting experiences on the future revenue gained from prospects/clients hosted. Come to conclusions around the present value of future business gained from hosting certain types of prospects/clients at certain types of events. Determine the number of prospects/clients that will be hosted via the sponsorship opportunity of interest, and apply these present values accordingly.

On-Site Activation Rights

Gaining Future Clients via Lead Capture On-Site

Analyze the average net business gained from leads at previous sponsorship properties of each type. Draw conclusions around the average present value of this business, and apply it to the sponsorship of interest based on projected leads and property type.

Table - Absolute Valuation Approaches for a Sample of Assets/Rights

Consulting Group

Striving for an Improved Status Quo in Sponsorship Valuation

Implementing absolute sponsorship valuation practices requires long-term thinking. And it requires buy-in from company leadership that there is a need for such a process of re-thinking sponsorship’s role in the company’s operations. As we all know, sponsorship is not just leveraged by a company’s marketing team, but also by its sales team, its HR team, and more. An absolute approach to sponsorship valuation therefore requires input from personnel from many departments within your company.

Even while certain sponsorship benefits cannot be monetized, and while your team struggles through the short-term difficulties of implementing a new approach, you can feel confident that you’re on the right track... Because despite these complexities and difficulties that come with absolute sponsorship valuation, your new approach is grounded in logic that you strongly believe in...

12

Just because someone else would spend $1 million on a sponsorship doesn’t

mean you should!

We work with blue chip corporations, major charities, and sport & entertainment properties to identify your business’s value and maximize its potential.

We work collaboratively with clients to understand their business, bring insights about the environment, and develop actionable strategy.

Consulting Services:Strategy & Growth

- Business & Strategic Planning- Event Development/Reinvention- Feasibility Assessment- Ownable Property Development- Revenue Generation Models & Plans

Marketing & Activation

- Audit & Strategy- Activation Concepts & Plans- Marketing Plans- Measurement & ROI

Sponsorship

- Audit & Strategy- Asset Valuation & Packaging- Contracts & Negotiations- Naming Rights Strategy- Sponsor ROI Assessment- Sponsorship Management AOR

Research & Insights

- Competitive Analysis- Top Trends in Sport & Cause Marketing- Sponsorship Landscape & Future Outlook- Proprietary Research Studies

Consulting Group