Building resiliency: businesses plan for all types of scenarios--busy season, slow season, economic slowdowns, etc.--but what are the unique characteristics of the business of sports, where the key ingredient, talent, is somewhat unpredictable? Financial Executive and Financial Executives Research Foundation asked several involved in the business how they manage.

• Author: Graziano, Cheryl de Mesa
• Position: Industry Profile: SPORTS

With the current focus on excessive executive compensation, consider a business where more than 50 percent of revenues are paid out for compensation--and not for those in the C-suite, but to employees. Imagine a business where the owners aren't likely to receive annual returns on their investment, and may only realize a return upon selling the business--likely many years down the road. Would you invest in this kind of business?

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For many sports franchise owners in North America, the answer is a resounding "yes." A series of interviews with executives in the sports industry reveal that despite the glamour and glitz, the business of sports is tougher than one would think.

It's a business where the product you work hard to deliver is your team's performance--and yet you can't guarantee that all the players will even make it to the end of the season. You can spend tons of money on a star recruit, only to lose him to an injury. Short-term injuries are largely planned for, but debilitating season-ending or, worse, yet, career-loss injuries are high-risk variables.

It's a unique business where its asset value is the franchise itself. It's part of a universe of a limited number of franchises--all four major pro sports total 122 franchises, with 30 teams each in basketball, baseball and hockey and 32 in football--and the value is determined by the amount the last franchise sold for.

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And, talk about keeping customers. For sports teams, the customers are primarily fans, who love winners, and will often defect when the team is down. Yet, legends are made with a team like baseball's Boston Red Sox, whose fans patiently waited 86 years for a national baseball championship! Sponsors, too, will pay big for contracts with winning franchises. Indeed, the finance guys in this article know well the best time to talk about long-term contracts is when their team is on a winning streak.

Established in 1967 as the Dallas Chaparrals, the San Antonio Spurs of the National Basketball Association (NBA), have been enjoying a sweet run for about the past 15 years "We don't know what it's like to have a team that hasn't won," says Rick Pych, the executive vice president/finance, corporate development, who has been with the Spurs since 1993.

He says his team has been fortunate. Since David Robinson (who has since retired) started playing in 1989, the team has had only one losing season, and that's when Robinson suffered a back injury and missed most of the season. But, good fortune came again when the team missed the playoffs that year, got a lottery pick in 1997 and netted Tim Duncan. They have been back on a roll ever since.

Avoid the Unforced Error

Ask Pych about the most unpredictable aspect of his business, and without missing a beat, he says, "Tim Duncan (pictured, left) getting hurt and not being able to play again."

"We can't afford to make mistakes in player decisions in such a small market," Pych continues. "With us, planning is everything. We have a rolling five-year planning cycle that begins with our player roster." Any change in the team's overall health will dramatically change its financial success. "Short-term injuries you can deal with, but, when a player has a career-ending injury and you're not in a position to replace that person, there's really no provision to acquire another franchise player. You may have to start rebuilding your team at that point."

Rebuild is exactly what the now 40-year-old Pittsburgh Penguins did, as it's just completed a six-year rebuild. "We needed a major correction in the economics of our business," says President and CFO Ken Sawyer. When the National Hockey League (NHL) lockout occurred in 2004, lasting nine months, he says, "We planned for it, but nonetheless, we took our lumps, financially." It is apparently paying off, as it has allowed the team to revamp its roster.

"The more successful you are, the harder it is to sustain because better teams get...