Auto racing is an unforgiving passion: If you don’t perform well on the track, you won’t survive over time. Resources are not limitless. It’s an essential lesson in pay for performance and free enterprise at its finest.
Race teams need to have secure marketing partners to fund their operations, and race purse winnings to stay afloat. If a team shutters its race shop, there is not much left to sell to somebody else, given the tailored fabrication equipment, rule-dependent car templates, and the reliance on human talent that heads for the exit. In racing, the best way to make a small fortune is to start with a large one.
Now, NASCAR wants to reinvent that dynamic by establishing what is being referred to as a franchising “charter system”. For an upfront license fee (projected to be several million dollars per full-time car), entitled teams would be guaranteed a spot in each race. As a result, teams unable to secure a charter would be discouraged from participating, given that only a few spots in the show would be earned purely based on qualifying day performance.
Chartered teams also would have a superior ability to sell sponsorship and secure funding. As a result, many see this as a boon for current owners by ensuring they have equity in their race organizations, thereby providing a “guaranteed residual”, or a pay-to-play fee, for anybody to enter the sport.
This development is perplexing, given that a succession planning void looms over the next generation of trailblazers willing to invest capital in NASCAR’s future. At some point, NASCAR will need to replenish the current super team owners at its top Sprint Cup level (i.e., Roger Penske, Jack Roush, Richard Childress, Rick Hendrick, Chip Ganassi, and Joe Gibbs), given these long-time principals have an average age of 70 years.
Historically, the auto racing business has been about performance. Better performing teams get more attractive sponsors. Sponsors bring money to pay big-time drivers. Big-time drivers win races and bring purse money to the team. And the virtuous cycle continues. Pay for performance, clean and simple. Strong performing teams survive, and weak ones fade to the sideline. No different than other small businesses.
Throughout my career, I’ve designed and reviewed executive employment agreements. Nowadays, shareholders are clamoring for executives to be paid for their performance on the street. That said, golden parachute payout protections still persist, ensuring that an executive can realize lucrative severance benefits regardless of performance.
Somehow, the new charter license fee strikes me as having the same unfavored aspect, providing a floor level of profit, in spite of whether the team’s performance justifies that value.
Purportedly, NASCAR is trying to get this deal done prior to the start of its season at Daytona International Speedway in mid-February. Draft contracts have been circulated among the teams, as NASCAR Chairman Brian France looks to put his stamp on yet another landmark initiative.
“We don’t have it finished and it’s still moving around a little bit,” France said during January’s preseason media tour. “The time line is sooner rather than later. This is a complicated plan and structure that will require some time to phase in.”
However, NASCAR is not just brokering a deal with team owners. Team owners are haggling among themselves, in that the layers of ownership are diverse: Tenure vs. youth, multi-car vs. single car organizations, full-time vs. part-time, and wealthy vs. meager resources. With the agreement expected to span five years, which matches the contractual time period NASCAR just signed with all of the speedways that host races, it is critical to get this right.
“Like most things, the devil’s in the details,” according to Rob Kauffman, chairman of the Race Team Alliance, and former principal of now defunct Michael Waltrip Racing, who is spearheading the discussion on behalf of the owners.
As such, it is not a surprise that NASCAR and the teams are reviewing what is rumored to be a 100 page contract. Teams have different interests. One thing is a certainty, in that attorneys are getting paid handsomely, as hundreds of billable hours are being racked up in trying to put this deal together.
However, the trickiest obstacle is one of valuation. What should a full-time NASCAR charter be worth? Should it vary by race team status? And here is the rub: race teams do not control the sport’s primary assets; NASCAR does. Unlike stick and ball franchises, race teams are not granted an exclusive license to operate a geographic territory. They do not collect the fan ticket sales at the track; they do not own the tracks’ rights fees. And these teams surely do not regulate the competitive schedule nor negotiate the national TV broadcast rights, as that is handled in Daytona headquarters by the sanctioning body.
So, while the LA Dodgers may have been sold for more than $2 billion, the Guggenheim Baseball Partnership lays claim to the ticket sales, concession fees, and, most importantly, the local TV rights sold to Time Warner Cable that will generate $7 billion in incremental revenue over 25 years. Now that is a source of value that justifies an MLB franchise fee.
Breaking this all down, what NASCAR is attempting to sell through the charter license is equivalent to phantom stock sometimes used by entrepreneurs to provide the illusion of ownership for employees in a start-up. However, phantom stock is just that. You get no voting rights, no control, and no expectation of dividends. In the end, the owners may find that the charter is only worth what NASCAR is willing to buy it back for. Only time will tell if new pioneers are willing to step up and buy an outgoing charter to facilitate the coming ownership succession.
By Ron Bottano. Let’s connect on Twitter @rbottano