Could the Brewers spend more?

[jerichoholicninja]

Interesting Fangraphs article.

 

http://www.fangraphs.com/blogs/creating-an-expected-payroll-for-all-mlb-teams/

 

According to this guy's research using "know financial aspects and attendance" for franchises as well as examining correlations between payroll and other factors he's determined what teams should be able to spend on their payrolls. He's found the Brewers could be spending $10M more on their payroll this season and could have been spending an average of about $12M a season the last 5 years.

 

I'm not sure how much stock you can put into this research but it is interesting.

[Roderick]

Interesting Fangraphs article.

 

http://www.fangraphs.com/blogs/creating-an-expected-payroll-for-all-mlb-teams/

 

According to this guy's research using "know financial aspects and attendance" for franchises as well as examining correlations between payroll and other factors he's determined what teams should be able to spend on their payrolls. He's found the Brewers could be spending $10M more on their payroll this season and could have been spending an average of about $12M a season the last 5 years.

 

I'm not sure how much stock you can put into this research but it is interesting.

 

The article is using team valuations as part of the data to how much a team can afford. That is not the same as cash flow.

 

So they are saying the team's value is going up enough to pay for borrowing costs to pay for current payroll. Not necessarily how I would do business.

[fondybrewfan]

Borrowing money on your businesses' "enterprise value" to basically fund operations is not a smart way to do business at all. Brewers should treat their ongoing operations like most individuals would like to treat normal living expenses: If you can't pay for it in cash, don't buy it.

[monty57]

Borrowing money on your businesses' "enterprise value" to basically fund operations is not a smart way to do business at all. Brewers should treat their ongoing operations like most individuals would like to treat normal living expenses: If you can't pay for it in cash, don't buy it.

 

Yeah, that's sort of like the people in the early-to-mid 2000's who took home equity lines of credit out of their ever-increasing home values so they could live a more expensive lifestyle than their income would allow. Or, another example would be Keynesians using debt-to-GDP to advocate for more borrowing to cover ever increasing expenditures.

 

Income from operations should pay for your expenses. Any expenses above that leads to debt, which has to be repaid with interest in future years, leading to less money available at that time. Sometimes that debt can be "good debt," which pays for itself by having a higher ROI than the interest rate on the loan. An example was buying the advertising banners, where a one-time cost adds yearly to the income stream. Payroll doesn't fit that classification.

 

Borrowing against the franchise value on a yearly basis to add payroll sounds like a good way to end up over your head in debt with your only options being to sell the team to pay off the debt, or to slash payroll to be able to cover your debt expenditures.

[Ennder]

Every year they talk about having salary flexibility so it wouldn't surprise me. Years where we look to be in the playoff hunt they have always been willing to add payroll mid season.

[Thurston Fluff]

Borrowing money on your businesses' "enterprise value" to basically fund operations is not a smart way to do business at all. Brewers should treat their ongoing operations like most individuals would like to treat normal living expenses: If you can't pay for it in cash, don't buy it.

 

I don't think you can compare franchise costs to individual living expenses. Living expenses is dictated by the amount of income one makes. Like a lot of investments owning a team is less about how much the owner makes annually than it is how the value of the franchise grows while he owns it. Given the value of the franchise is at least partially dependent on the competitive value of the team borrowing against the team can actually increase the overall profit margin the owner makes when selling it. Not to mention operating at a loss also help when it comes to taxes. Especially considering annual losses can be carried over year to year to cover profits made from other business ventures.

It also outlives the person who owns it. So all the person who owns it has to do it make sure the money he owes is less than the difference between what he paid and the value of the franchise when he sells it and he makes a profit on the team.

[monty57]

Every year they talk about having salary flexibility so it wouldn't surprise me. Years where we look to be in the playoff hunt they have always been willing to add payroll mid season.

 

Once in a while it can be beneficial, but not as an ongoing practice. Getting into the playoffs adds a lot of additional revenue, so in a year in which it looks like adding an expensive player at the deadline will get you into the playoffs, the additional revenue from the playoffs should make up for the increase in payroll. Borrow mid-season to pay for the player and pay it back when the playoff revenue arrives.

 

That's a lot different than going into every year with a plan of borrowing money to make opening day payroll. I much prefer keeping a "cushion" in payroll so that you can add if necessary, but you will still be okay if things don't turn out the way you'd like.

[monty57]

I don't think you can compare franchise costs to individual living expenses. Living expenses is dictated by the amount of income one makes.

 

There's a reason most people don't have any money saved up when they retire, and the top 20% line for Americans is having a net worth of around $200,000. Most people believe in spending up to or above their income, and don't believe that accruing lots of debt is a bad thing. This is also true with many businesses (which are run by individuals) and it's why most businesses fail. Individuals and businesses that don't abide by this norm tend to be the ones society dubs as successful.

 

As much as I go on about the Brewers' payroll situation, I do think that Attanasio is good at making sure the team doesn't overspend themselves into obscurity.

[3and2Fastball]

Getting into the playoffs adds a lot of additional revenue....

 

This cannot be emphasized enough. Success breeds success. If the Brewers were able to field a true World Series contender year in & year out (or 5 years out of every 10, allowing for rebuilds) their revenue would be through the roof. Merch sales, ticket sales & most importantly TV money

[Thurston Fluff]

I don't think you can compare franchise costs to individual living expenses. Living expenses is dictated by the amount of income one makes.

 

There's a reason most people don't have any money saved up when they retire, and the top 20% line for Americans is having a net worth of around $200,000. Most people believe in spending up to or above their income, and don't believe that accruing lots of debt is a bad thing. This is also true with many businesses (which are run by individuals) and it's why most businesses fail. Individuals and businesses that don't abide by this norm tend to be the ones society dubs as successful.

 

As much as I go on about the Brewers' payroll situation, I do think that Attanasio is good at making sure the team doesn't overspend themselves into obscurity.

 

Had we not spent every dime we had in the 80's and 90's we would not be in business today. We would have stagnated and been passed up by competitors. There simply is no comparing household debt to business debt. For one household income is not tied to debt. In business you borrow to make more money. In households you borrow to get something that most likely makes you poorer. For the most part the only investment people borrow for that increases in value is a home. Other than that borrowing loses you money. IF you borrow for a car you pay more than if you pay cash. That is not how it works in business. In business you borrow to make more than the interest paid on debt.

Then there is the issue of how long personal income can last as opposed to how long businesses can make money. Individuals know they will eventually not make what they are now. they will eventually retire. Thus individuals have to take into account a finite number of years of making the money they do now. Businesses don't. Even if an individual owns the business that business can continue to make money long after any individual owner is gone. Then there is the issue of value.

No matter how well I take care of my car is loses value. I can even add cool rims and a new sound system in the car but eventually it will become worthless. Not only that but if I borrowed for that stuff it's cost increases making the cost to value ratio go south even faster. Same goes for everything other than a house. That is not true with businesses. Generally speaking a business that has expanded is worth more than one that didn't. So expanding not only covers the interest it adds value all on it's own. Thus businesses and households are not working within the same parameters.

Granted business do have to have enough cash reserves to survive tough times. No team should borrow to the point where they don't have enough liquidity to survive a tough stretch. But that is not the same as needing to prepare for a day when you will never make money again and have to survive solely on what you saved. In fact business liquidity is usually measured in how much you can borrow if necessary as opposed to how much cash reserve you have at any given time. There simply isn't any comparison between the two. Even if it seems like it should.

[3and2Fastball]

Mark Attanasio bought the Brewers for $200 million. Does anyone have any reason to doubt that if he sold the Brewers today he'd get at least $400-$600 million? The notion that the Brewers can't afford to spend more or that they are just breaking even is completely illogical.

 

Forbes estimated the Brewers value at $565 Million in 2014 http://www.forbes.com/pictures/mlm45fdgdd/25-milwaukee-brewers/

 

So Mark has nearly tripled his money in 10 years but some fans actually buy into the notion that we cannot spend more money on talent? What a frustrating franchise to root for! I'll stick with 'em but wow.

[MrTPlush]

Mark Attanasio bought the Brewers for $200 million. Does anyone have any reason to doubt that if he sold the Brewers today he'd get at least $400-$600 million? The notion that the Brewers can't afford to spend more or that they are just breaking even is completely illogical.

 

Forbes estimated the Brewers value at $565 Million in 2014 http://www.forbes.com/pictures/mlm45fdgdd/25-milwaukee-brewers/

 

So Mark has nearly tripled his money in 10 years but some fans actually buy into the notion that we cannot spend more money on talent? What a frustrating franchise to root for! I'll stick with 'em but wow.

 

So you provide a link to show they have the 6th worst valuation in MLB and have one of the smallest revenues....yet middle of the pack in payroll.

 

But somehow you think Attanasio is cheap.

[Thurston Fluff]

Mark Attanasio bought the Brewers for $200 million. Does anyone have any reason to doubt that if he sold the Brewers today he'd get at least $400-$600 million? The notion that the Brewers can't afford to spend more or that they are just breaking even is completely illogical.

 

Forbes estimated the Brewers value at $565 Million in 2014 http://www.forbes.com/pictures/mlm45fdgdd/25-milwaukee-brewers/

 

So Mark has nearly tripled his money in 10 years but some fans actually buy into the notion that we cannot spend more money on talent? What a frustrating franchise to root for! I'll stick with 'em but wow.

 

So you provide a link to show they have the 6th worst valuation in MLB and have one of the smallest revenues....yet middle of the pack in payroll.

 

But somehow you think Attanasio is cheap.

 

I didn't read that as saying he was cheap. It looks more like he's saying he can do more if he wants to. There are precious few investments that will land you more than double the value in 10 years time. He got some of that value by essentially going from bottom feeder to middle of the road. If he could take the next step imagine what that would do for the value in the next ten years. It is a risk and it does take some money. If he fails to invest well the value of his franchise may not be worth much more than he paid for it But nobody said owning a sports franchise was for the meek.

[3and2Fastball]

People in Wisconsin go completely and fanatically nuts for a winner. Look at the Packers, Badgers Football, Badgers Basketball, etc.... if the Brewers were a truly great team that went to the World Series 3 or 4 times a decade the revenue would be incredible. Miller Park would be sold out for every game and the TV money would quadruple.

[monty57]

If someone can prove to me that spending an additional $5-10 million per year will guarantee the "3-5 playoff appearance and World Series appearances" people are trumpeting, then I am all for spending that money. I'm sure Attanasio would take out a second mortgage on his house to come up with that money if there were only that guarantee. However, there is no evidence to show that increasing payroll by $x will guarantee anything other than that they are guaranteed to have to pay more money to players.

 

There are still 25 players on the team, so increasing payroll only means that those 25 players will make more money. Theoretically, you only spend more on better players, but we all know that's not the case. If we upped our offer on Sabathia, then the Yankees would have just raised their offer. Ditto Greinke. Ditto every other "A list" free agent. We cannot spend with the big boys. Rather, by increasing their price tag, we shoot ourselves in the foot by raising the price tag for everyone (except pre-arby guys) and end up paying as much for secondary talent as the premiere guys were getting 5-10 years ago. The payroll goes up, but the talent level does not.

 

Now, for those who propose spending into the red, that adds debt. I understand ROI, but that means "R" has to return a greater rate than the "I" costs. That is far from a given, and often teams with big payrolls suffer lower attendance/revenues, because "I" does not equal "W" (wins). However, adding debt does assure that the debt repayment cost in future years rises, which means that money that could have gone to payroll, or to player development, or to some other useful cause now has to go to paying principal and interest on the debt accrued in the past. Continuing this for any period of time could be catastrophic. So, I'll re-assert that going over budget (playing in the red) occasionally, when it has a high likelihood of increasing your "R" by making the playoffs and selling tickets in a playoff race, is justifiable. Simply playing in the red because the value of the franchise value is rising is not.

[Thurston Fluff]

If someone can prove to me that spending an additional $5-10 million per year will guarantee the "3-5 playoff appearance and World Series appearances" people are trumpeting, then I am all for spending that money.

 

Nobody can guarantee that with a $500 million payroll either. But I think it's a pretty good guess that it would help us get to that goal. To say that boosting the payroll should only be done if it guarantees us something is an argument that could be used if we had a $20 million payroll as easily as it could with what we spend now. Does that mean we should reduce our payroll to $20 million?

[monty57]

If someone can prove to me that spending an additional $5-10 million per year will guarantee the "3-5 playoff appearance and World Series appearances" people are trumpeting, then I am all for spending that money.

 

Nobody can guarantee that with a $500 million payroll either. But I think it's a pretty good guess that it would help us get to that goal. To say that boosting the payroll should only be done if it guarantees us something is an argument that could be used if we had a $20 million payroll as easily as it could with what we spend now. Does that mean we should reduce our payroll to $20 million?

 

No, it means the finance department should take an educated guess on their projected revenues for the coming year. They then should determine what their costs will be (including "mundane" things such as paying the vendors, scouts, electric bills, insurance, property tax, operations staff, cost of the draft, etc). That will give them a projection of how much money is left over. They can either decide to spend less than that amount on payroll, giving them a "cushion" in case things go bad, and to increase payroll if things go well, or they can decide to spend over budget, borrowing against "franchise value" in order to increase payroll beyond what the revenues will likely allow.

 

You argued that businesses "borrow to make more than the interest paid on debt." That is called Return on Investment (ROI). As I mentioned in the part of my post you did not quote, in order for that to work, your the rate of return ® has to be greater than your cost of investment (I). It is far from a foregone conclusion that increasing spending will guarantee a return on investment greater than the interest paid on the loans taken out. That was probably true in Attanasio's early days, when payroll was artificially low (brought there by the Seligs in order to sell) and upgrades to the stadium brought back significant return. We now have team record payrolls, and adding another $5-10MM in payroll may not even make the team better, much less sell more tickets/merchandise, etc. All it guarantees is that money is spent and if you have to borrow to increase the payroll, it guarantees that you will have to pay off those loans in the future, cutting into what the team will have for available funds in the future.

 

You're going "strawman" on me with the $500MM vs $20MM argument. What we're looking at in this thread is whether the Brewers should borrow against their franchise value in order to add a few million to the team's payroll.

[DoubleSwitch]

Credit is cheap right now and has been for some time. Even when the Fed raises rates sometime this year credit will remain cheap relative the amount of growth baseball has been seeing.

 

Mark has access to the books and he's a finance guy so I'm sure he knows better than anyone when the right time to borrow is. I would never accuse him of being cheap, especially relative to other team owners, but there are few better places to make an investment right now than in baseball, because it has done very well . The Brewers included.

[FVBrewerFan]

If the extra $5-10MM was added to the money saved by not having Broxton and ARam, then we would really have something. All those guys do is make the 2015 team respectable, not a contender. $23MM for those two guys is crazy.

[monty57]

If the extra $5-10MM was added to the money saved by not having Broxton and ARam, then we would really have something. All those guys do is make the 2015 team respectable, not a contender. $23MM for those two guys is crazy.

 

 

That's case in point that simply spending does not guarantee anything. The Brewers need to get value out of the dollars spent. Gomez and Lucroy are tremendous values. Because they're pre-arby, Gennett and Davis can be tremendous values even if they're "just average" MLB players.

 

The Brewers are never going to spend with the "big boys," so they need a strategy that is not dependent on "let's break the budget." As long as the Brewers get value out of their positions, they have a payroll that should allow them to be competitive. However, not being a "big market" means that they have to be smarter, and making a trade for Broxton at $11MM (roughly 10% of payroll) can hurt their chances. $11MM for a closer is a lot of money, but they don't even trust him as a closer, and had to go out and spend more money to get a closer, putting close to 20% of their payroll into the back of the bullpen.

 

Of course in a perfect world money wouldn't matter, and we could just throw money at the problem to solve it, but that's not reality. Just listen to the Red Sox after the Moncada signing whining that they have to spend $60MM to get him because with all the recent rule changes it's one of the only ways they can "get an advantage." In the Brewers' world, it has to be about getting value. The two best ways to do that in baseball are through pre-arby/arby players, and through extensions given to pre-arby players. Free agency by nature means that you have to be the highest bidder to land a player, so it is really hard to find a value there.

[FVBrewerFan]

Agreed. A team like the Brewers shouldn't be spending large amounts of money on a declining 3B and a "sorta" closer. Bank that money and use it when the stars start to align so you can jump the payroll up another $5-$10MM when it can really make a difference.

 

But the Brewers strategy is now clear. Start the season every year with a "competitive" team. Then come July/Aug make a decision whether to be a buyer or seller.

[Thurston Fluff]

As I mentioned in the part of my post you did not quote, in order for that to work, your the rate of return ® has to be greater than your cost of investment (I). It is far from a foregone conclusion that increasing spending will guarantee a return on investment greater than the interest paid on the loans taken out.

 

As I mentioned in the part of my post you did not quote nobody said it was guaranteed to work. I mentioned specifically that nobody said owning a major league baseball franchise was for the meek. Your claim that unless we can guarantee something like several championships and a World Series title or two as the threshold to invest as much as possible seems to me to be more than a bit out of line. Nobody can guarantee any future event. Which was why I used the argument about $550 million vs $20 million. Which by the way is not a straw man argument. It is an argumentum ad absurdum. By saying something had to guarantee a certain outcome you set your criteria at level that cannot be met. I used argumentum ad absurdum to show how doing so could be used to justify spending virtually nothing. After all nobody can guarantee spending any amount would do anything. It is simply impossible. If you wish to change your assertion to it not getting us any closer to our goals fine. But that isn't what I was addressing. Speaking of straw man arguments when you said "If someone can prove to me that spending an additional $5-10 million per year will guarantee the "3-5 playoff appearance and World Series appearances" people are trumpeting, then I am all for spending that money." was a real straw man. As far as I remember nobody said it would guarantee that. Merely that it would have helped get there more than not spending it would have.

 

You're going "strawman" on me with the $500MM vs $20MM argument. What we're looking at in this thread is whether the Brewers should borrow against their franchise value in order to add a few million to the team's payroll.

 

I've already addressed the straw man aspect. However I think you are short changing what the thread is about. We are looking at whether we can spend more or not. Borrowing against franchise value is one aspect of it. I mentioned the profit to interest margin as one way borrowing against the franchise value can actually lead to short term gains as well as increasing the long term value.

All it guarantees is that money is spent and if you have to borrow to increase the payroll, it guarantees that you will have to pay off those loans in the future, cutting into what the team will have for available funds in the future.

 

It does not guarantee any such thing. While it is one possibility it is not the only one. And far from the guaranteed outcome. Another is it increases the value of the franchise while also creating a short term profit that could either be used to pay off some of the debt load, thus increasing our future spending capabilities, or it could be redirected to payroll or other improvements to increase short term prospects. All of which increases our future spending potential more than saving a few bucks would if it didn't also increase the franchise value. It is also possible to be revenue neutral. Only one of three outcomes is going to hurt long term. And even then when the time comes where we have to spend less I think that is the time to spend less. Seems silly to me to be so worried about being able to spend more at some undetermined future that you neglect to do what you can to make a better present. There is always a tomorrow we can wait for. It is also a crutch that can be used to enable an owner to just make money. If he can pay all of the debt off without winning he will be able to continue to make money by paying even less afterward. Then he doesn't need to ever win does he? Sure it might be nice and he may want to win anyway but separating winning and making money is hardly an incentive that helps create a winning team.

[monty57]

It does not guarantee any such thing. While it is one possibility it is not the only one.

 

Note I said the guarantee was that the money was spent. Contracts in baseball are guaranteed, so if you sign someone, you are on the hook to pay them, regardless of team or player results.

 

I followed that by saying "if" you have to borrow to increase payroll, you will have to repay the loan. I never said it was guaranteed that they would have to borrow, although I think there would be a pretty good likelihood that that would be the outcome.

 

I don't really want to continue this "debate," because it seems something I have said has upset you. That seems to be that I said I would not want to go "in the red" unless there was a really good chance that the additional spending would land us in the playoffs or sell a lot more tickets (both of which would increase revenues, hopefully at least offsetting the extra payroll expenses). I'm cautious that way. I've seen too many businesses fail because they shoot for the moon and don't reach it. I have tried to present an argument to explain my reasoning, and I'm sorry that my terminology was upsetting, as that was not the intent. As I don't believe this is anything worth getting upset over, I'll just stop posting in this thread.

[Thurston Fluff]

Note I said the guarantee was that the money was spent. Contracts in baseball are guaranteed, so if you sign someone, you are on the hook to pay them, regardless of team or player results.

 

My bad I misunderstood your meaning there. Yes you are correct it will guarantee we spent that money. But again that is the only guarantee ever. No matter how much, or little, is spent. So couldn't that same argument be used to justify spending next to nothing? Wouldn't waiting for that someday to arrive were we spend all that money we saved act as an incentive to allow the owners to just reap the profits and never invest in winning? When tomorrow never comes one shouldn't wait for tomorrow to do try to accomplish the goal.

 

I don't really want to continue this "debate," because it seems something I have said has upset you. That seems to be that I said I would not want to go "in the red" unless there was a really good chance that the additional spending would land us in the playoffs or sell a lot more tickets (both of which would increase revenues, hopefully at least offsetting the extra payroll expenses). I'm cautious that way. I've seen too many businesses fail because they shoot for the moon and don't reach it. I have tried to present an argument to explain my reasoning, and I'm sorry that my terminology was upsetting, as that was not the intent. As I don't believe this is anything worth getting upset over, I'll just stop posting in this thread.

 

It is perfectly fine to outline you views and give reasons for it. You did. I outlined why I thought your reasoning didn't hold up by using a fairly common debate tool. As far as being offended by something you said not at all. I merely pointed out what I thought was a mistake in reasoning and attempted to explain why I thought it was so.

As far as seeing businesses fail I have seen plenty fail trying to save a buck as well. If you aren't moving forward you are falling behind is a pretty good principal to follow when trying to decide to spend or not. Usually it isn't a question of whether to spend more or not. It is question of where to spend it. Reopening a baseball academy, spending on international free agents, and boosting the scouting or player development are probably better than spending it on a free agent or two.

However that wasn't what the thread was about. It was whether we could spend more on FA's and should we. To that I would rather they spend than not.