Case Studies
Preferred Equity Investment and Change-in-Control Transaction Involving Minor League Professional Sports Franchise
Our client, a private investment entity seeking to acquire a controlling stake in a professional sports franchise competing in a national professional sporting league, engaged our firm to structure and negotiate a change-in-control preferred equity investment into an existing franchise. The transaction was designed as a two-tranche preferred equity commitment, with the first tranche closing upon satisfaction of league approval conditions and the second tranche to follow at the conclusion of the playing season. Unlike a conventional middle market acquisition, this transaction required navigating league-specific regulatory requirements, restructuring the franchise’s existing debt and insider obligations, and engineering a governance structure that aligned the interests of the incoming investor with the franchise’s existing operational leadership — all while keeping the deal confidential from league personnel and the franchise’s employees until approvals were secured.
The threshold challenge in any professional sports franchise acquisition is league approval, and this transaction was no exception. A change in control of a professional sports franchise requires formal league approval of the incoming principal owner, a waiver of the league’s standard change-in-control fee, and a waiver of the requirement to execute a new franchise agreement — three separate regulatory hurdles, each with its own timeline and uncertainty. We structured the transaction with a fallback provision: if the league declined to approve a full change in principal ownership, our client and the outgoing principal owner would serve as co-principal owners, preserving the deal’s economics while satisfying the league’s governance requirements. This contingency gave our client the flexibility to close rather than walk away if full approval was delayed or conditioned.
The equity structure required careful design. Rather than a straightforward cash-for-equity investment, we structured the transaction to include a warrant package — representing a negotiated percentage of all outstanding membership interests — issued to our client as consideration for its agreement to serve as co-guarantor on the franchise’s existing debt obligations. The warrants were priced at the same per-unit price as the preferred equity investment, fully vested upon issuance, and carried no expiration date, giving our client meaningful additional upside tied directly to the risk it was assuming on the debt guaranty. We also negotiated a “drag-up” conversion feature allowing our client to convert a portion of the franchise’s existing common units into preferred units on a one-for-one basis, providing a mechanism to upgrade the economic seniority of the investor’s position relative to the existing common equity as the investment grew.
The franchise’s existing debt and insider obligations presented a significant structuring challenge. The franchise carried indebtedness to its outgoing co-owner that needed to be resolved at closing to effect a clean separation.We structured a solution in which the franchise borrowed an additional sum from a local bank — as part of a broader refinancing of existing debt at improved rates — and used those proceeds to satisfy the documented insider indebtedness at closing. The remaining balance of the insider obligation was converted into preferred units at the same price as the investor’s tranche, aligning the departing co-owner’s residual economic interests with those of the incoming investor rather than leaving him as a creditor. Our client was added as co-guarantor on the refinanced debt on a limited, pro rata basis, with co-security deposits placed at the lending institution.
Employment agreements for the franchise’s two key operational leaders — the general manager and a senior executive — were negotiated concurrently with the investment documents, with multi-year terms running through the end of a future league season and an option for the franchise to extend for one additional year. Locking in these agreements at closing was essential: the franchise’s operational value was heavily dependent on the continuity of its existing leadership, and our client needed assurance that the people who built the team’s market presence would remain in place through the transition. Both agreements included participation in an incentive program approved by the newly constituted board.
The governance restructuring established a Board of Advisors comprised of representatives from the franchise’s existing management and a majority of representatives designated by our client, along with a semi-monthly Executive Committee that included both investor and operational representation. The preferred units were structured with a 1x non-participating liquidation preference — including units issued upon exercise of warrants and upon conversion of common units through the drag-up feature — ensuring our client’s capital was first out in any liquidity event before common equity participated.
The transaction closed in two tranches as structured, with all required national professional sports league approvals and waivers obtained prior to the Tranche 1 closing. Our client assumed the position of principal owner of the franchise, with a preferred equity stake, a fully vested warrant package representing a negotiated percentage of outstanding membership interests, and governance rights providing effective control over the franchise’s strategic and financial direction. The franchise’s debt was refinanced at improved terms with a local lender, the insider obligation was resolved cleanly at closing, and employment agreements were in place for the franchise’s critical operational personnel. The Tranche 2 investment followed at the conclusion of the season, completing our client’s full preferred equity commitment on the terms negotiated at the outset.
This case study is provided for illustrative purposes and describes the nature of services rendered. Certain details have been generalized to preserve client confidentiality.