By Jaboner Jackson 8 a.m. | The Oakland Raiders' cutting of cornerback Stanford Routt last week was popularly cited as being related to salary cap issues. But in reality, the transaction was part of an attempt by new owner Mark Davis and incumbent CEO Amy Trask to improve on the franchise's poor cash flow situation. The Raiders have ranked near the bottom of the NFL in terms of cash flow from operations for years. Before his death in October 2011, Al Davis had been using financing activities, such as the sale of equity positions in the Raiders to non-managing partners, to help fund daily operations. But Mark Davis can no longer afford to sell off parts of the team to pay player salaries due to pending estate tax concerns. Therefore, he has focused on cash flow from operations to field a team.
Cash Flow and Revenues
The lay media has focused on General Manager Reggie McKenzie's statement during his press conference of player contracts being "out of whack" as being relevant in the release of Routt but such is not the case. Rather, Routt's contract put a strain on cash flow from operations. Cash flow from operations for the Raiders refers to the generation of real money from the basic day-to-day operations of playing football in the NFL. Revenue is realized through two primary sources: shared revenue and unshared revenue.
Shared revenue refers to revenue that is split evenly amongst all 32 NFL teams. The largest component of shared revenue relates to television contracts. For the 2011 season, shared revenue from television contracts amounted to $3 billion. Additional shared revenue came from merchandise and licensing agreements.
Unshared revenues refer to local revenues that an NFL team does not share with other teams. These revenues include luxury box suites (most of the time), concessions, and parking. The bulk of unshared revenues come from stadium sources.
Table 1: Shared and Unshared Revenues
Type of Revenue
Revenues are shared equally by all 32 NFL teams.
Generally makes up 2/3 of a team's revenues.
Licensing and sponsorship agreements
The NFL team keeps the bulk of this revenue and does not have to share it with other teams.
Generally makes up 1/3 of a team's revenues.
Stadium luxury box suites (most cases)
Accordingly, each NFL team gets an equal amount from a jersey sale regardless of which jersey is sold. Merchandising revenue is shared. No matter how many Tim Tebow jerseys are sold, the Denver Broncos share equally in the licensing fee with the other 31 NFL teams.
Therefore, NFL teams will employ onsite stadium apparel stores to supplement this shared revenue. For example, in 2011 a Tim Tebow jersey that sold for $90 to the public was in turn sold by Reebok to the store for $45. So when the Broncos sell the jersey in their own stadium store, the Broncos get to keep the $45 gross profit on the jersey. (Of course, the Broncos must pay for expenses associated with running the stadium apparel store, which in turn will net a profit far less than $45, but the point is clear.)
In the case of the Oakland Raiders, unshared revenue has been near the bottom of the league for several years, which in turn has been a direct consequence of playing in antiquated O.co Coliseum. The Oakland Raiders are at a distinct financial disadvantage to NFL teams that have newer stadiums and greater unshared local revenues.
Cash Flow From Operations For NFL Teams
NFL teams try to fund their day-to-day operations exclusively through shared and unshared revenues. Put simply, they try to make enough money from football activities to fund player salaries, coaching salaries, travel expenses, and all other day-to-day operations.
On average, an NFL team will generate approximately $15-20 million in cash flow a year. This means that the NFL team is taking in $15-20 million more cash revenues than they are putting out cash expenses. But in the case of the Oakland Raiders, cash flow from operations is thought to be in the range of $5-8 million per year. Cash flow from operations for the Raiders has been compromised due to low unshared local revenues and high player salary expenses.
Al Davis and Cash Flow From Financing
In 2007, Al Davis sold a 20% ownership stake in the Raiders to three east coast financiers, David Goldring, David Abrams, and Paul Leff, for $150 million. A portion of these proceeds were used for estate tax planning. But a significant amount of this money was used to finance player salaries, including big money contracts in 2008 and 2009 for Tommy Kelly (seven-year, $50.5 million), Shane Lechler (four-year, $16 million), and Nnamdi Asomugha (three-year, $45 million), all of whom became the highest paid players at their respective positions at the times of the contract signings.
Al Davis continued to spend lavishly for 2010 and 2011, including new contracts to Richard Seymour (two-year, $30 million), Kamerion Wimbley (five-year, $48 million), and Routt (three-year, $31.5 million). The Raiders used the financing activities of 2007 to partially fund these contracts rather than only using cash flow from operations, a concerning situation for any business.
Mark Davis Refocuses On Cash Flow From Operations
Mark Davis does not have the luxury to sell portions of the team to finance large player contracts. The Davis family (Mark Davis and his mother, Carole Davis) currently owns 47% of the Raiders. Per NFL bylaws, the Davis family must own 30% of the team to maintain operational control. Since estate tax considerations will likely require Davis to sell close to 17% of the team upon his mother's death, Mark Davis can ill afford to continue to finance daily operations by selling off chunks of the team.
Accordingly, he has already started the process of using only cash flow from operations to run day-to-day operations. The decision to cut Routt saved the Raiders $5 million in real cash expenditures that would have been due as a roster bonus. For a team like the Raiders that would have generated only $5-8 million in cash flow for 2012, the release of Routt has the potential to almost double the team's cash flow situation.
Raiders' Offseason Financial Outlook
The Raiders will never generate the league average of $20-30 million in cash flow from operations with their current stadium situation. The lack of unshared local revenues will continue to hinder them while playing in O.co Coliseum. Furthermore, the new Collective Bargaining Agreement's salary cap floor mandates that NFL teams spend 95% of the salary cap on player salaries. Therefore, the Raiders cannot completely gut their roster. Until the Raiders get a new stadium, they will struggle to compete financially with the rest of the NFL. Fortunately for the Raiders, the San Diego Chargers, who also play in the AFC West, have a similar stadium issue.
Shared and Unshared Revenues (06/2011)
Mark Davis and Estate Tax Planning (12/2011)