(warning, this post is hugely speculative and its conclusions are certainly wrong in a material way - now keep reading please!)
People call Mike Brown a good businessman from time to time. Given how rich he has made himself off of the Bengals, it is hard to argue. But nevertheless, I have.
Basically I think a) he does not deserve credit for stumbling into a hugely popular monopoly and b) he leaves large amounts of money on the table by not bringing the franchise into the modern era with a front office and better facilities (a rather minor investment, quite frankly).
I think a lot about why the Bengals pursue this strategy of profitability - playing it safe with a bare-bones operation, knowing the fans will take the shit they give them, instead of building out a winning and potentially more lucrative organization.
Okay, so Mike fancies himself a football man, and the Brown's a football family, and this is how they have always done it so dammit that's the way they will continue to do it. Surely that is part of it.
But I think more and more the estate tax might have quite a bit to do with it. Clearly, family trumps everything in the Brown world. They want the team to remain in the family. It is just assumed that Mike can pass along the team to Katie but things changed post stadium deal. The Bengals, before just nicely profitable, became hugely valuable, worth between $500 million and a $1 billion. With an estate tax rate of about 50%, and assuming Mike Brown owns at least 51% of the team, that is at least a $125+ million liability the IRS will ask for upon Mike's death (Nancy's if she outlives him I suppose).
They cannot meet that kind of cash liability without selling the team.
Now, the whole family is lawyers. Likely well versed in the laws pertaining to closely-held companies and taxes. So they have a plan. My former boss used to be an estate tax lawyer. He, and another small business owner I spoke to, both seemed to think they likely have set up already or will set something up where Mike sells the team to Katie while he is still alive to avoid the estate tax.
How they do this is the question. Both seemed to think it would like something like this: Mike sells the Bengals (at a family discount, of course) to Katie and simultaneously loans her the money (at very favorable rates of 0% - borrowing against the value of the franchise) to make the purchase. Katie would then use the profits from the Bengals to slowly pay down the loan Mike gave her to buy the team.
Voila, estate taxes avoided.
(The devil is in the details of course, and I don't know those. Also, I don't know how this avoids capital gains taxes, which should be large. However, they are currently only 15% as opposed to 50% - so maybe 15% of whatever gains there are is small enough for the Brown family to be able to pay without having to sell the team)
Anyway, the point is the Bengals make nice coin right now, probably enough to make a scheme like this possible. But if indeed they are doing something like this, they have a huge incentive not to risk their profitability, even if the Bengals aren't as profitable as they probably could be with some changes.
My take: I suspect much of the reason why no practice facility will get built on the Brown's dime, why we probably won't keep all our young talent (JJ & Leon) when they become free agents even though we can afford it, and why no serious effort is made to hire more people in the front office is that the Brown's need to be as safely profitable as possible, so their precious team can stay in the family. Not just because they're tightwads.
After the fold, I'll post some of the Q&A and I had over email about the these issues with a small business owner.
I was wondering how much you actually knew about the structures the Bengals have set up for ownership and what, if any, possible mechanisms they could use to transfer the team to Katie after the death of both Mike and Nancy without forcing them to sell to meet the estate tax liability.
First off I am going to make a couple of assumptions.
- Mike does not have a pre-nup (he has been married over 40 years)
- His wife has little to no interest in taking over for him at his death
- Katie does want to take over for him
- His brother and son have somehow been financially compensated and agree to the plan.
Mike does not own 100% of the Bengals. The Dutch Knowlton estate owns a big chunk (I think like 35 %) and I do not know if that suit is settled or not. There are other owners like John Sawyer. All of these people combined own the team. However, Mike owns or controls I believe 51% of the team. I know that Katie, Troy, Pete Brown, and Paul Brown II all own a piece of the team. I know this because Troy said a distribution was made to cover shareholder’s income tax responsibilities (which is common thing to do).
Being in the NFL, all owners no matter how small must be approved by the NFL. So, we will assume these people have been. In most companies, there is some sort of buy/sell agreement for the sale of shares. It is very common that when say Mike dies, his shares are offered to the remaining shareholders (not his wife, she is forced to sell by contract). If none of the remaining share holders want to purchase her shares then they go on the open market or she can keep them. Usually in a tightly held corporation like this one the person selling the shares finances the sale, but because of the dollars involved I doubt that is the case here.
The most typical way to pass the team on to Katie would be to sell her Mike's shares with Mike retaining what is called the voting share. In other words they would break Mike’s 51% ownership of shares into one lump of regular shares and 1 voting share. Katie would buy the 50% regular shares with a loan provided by Mike at a reduced costs.
Mike gets a nice cash flow income until his death and then his wife gets it until her death at which time it is forgiven. Katie pays her loan to her dad with dividends she receives on the 50 shares (last year that was $21 million). Mike retains the voting share which is the share which determines who makes decisions. This allows Mike to stay in control until he sells that share to Katie or Katie inherits it at his death. This way she only has to pay estate taxes on that one single share since she technically bought the others. This is a safe a proven method to transfer the team to her and minimize estate taxes.
Now, I have some question whether they are actually going this or not. First off, if they were then Katie would be technically owner of the Bengals now! That would require NFL approval (I am sure they would give it to her, but maybe not if the other owners are pissed at Mike). Matter of fact, all of this would have to be approved by the NFL. However, if they are not doing this then they are doing nothing (I strongly doubt that ), or Katie has enough to cover estate taxes (I doubt that too), or some other combination of the above.
How much do you think the Bengals are actually worth?
Hard to say. From a business deal perspective, I would put them at ten time EBITDA (earnings before interest, taxes, depreciation, amortization). Last year they earned $21 million (that's 2008, not 2009 folks). Add back in the money they paid themselves and it goes to $30 million. Ten times that is $300 million (that is for 100% of the team, not just Brown's share). However, we all know that people that buy football teams do it for the ego. Factoring that in and the NFL rule that says you can only finance 60% (they might waive that?) and I think a solid offer for the Bengals as is would be $650 to $700 million dollars in this economy.
Just your gut feeling, do you think the Bengals will remain in the Brown family after Mike/Nancy pass?
Not if someone offers north of $700 million for it. Personally, I think Mike would sell for $800 right now. He has too many issues facing him in the future.