How billionaires like Warren Buffett profit from minor-league baseball ownership

Warren Buffett, America's second-richest man after Bill Gates, is worth $44 billion. The vast majority of that wealth is from Berkshire Hathaway, Buffett's holding company based in Omaha, Nebraska, but a small portion comes courtesy of a Minor League Baseball team in the same state. Buffett owns a 25 percent stake in the Omaha Storm Chasers, the Kansas City Royals' AAA farm team that is currently leading the Pacific Coast League's American Northern division with a 36-25 record. The Storm Chasers rank No. 20 on our list of Minor League Baseball's most valuable teams, taking home an estimated $8 million in revenue last season.

And Buffett isn't the league's only billionaire owner, either. Robert E. Rich, Jr., who made his $2.1 billion with food conglomerate Rich Products, owns the Buffalo Bisons (No. 13); Herb Simon, chairman and director of Simon Property – the nation's largest publicly traded real estate investment trust – is a co-owner of the Reno Aces (No. 14).

Why would some of the nation's wealthiest men be interested in owning such small professional sports teams? Simple: it's smart business.

Of the 160 minor league teams with player development contracts with MLB team, not one pays a single player, coach, manager or trainer. While the majority of MLB teams' expenses go towards player costs, they are paid in full for minor league teams. The minor league squads don't even pay the full cost for bats and balls; it's split with the major league affiliate. It's a sweet deal made even sweeter by the cities and counties that are willing to finance minor league stadiums in order to help stimulate their local economies.

Part of the reason that the top-drawing minor league franchises are so successful is that they provide family entertainment at a reasonable price. The average MiLB ticket costs $7, which is almost four times less expensive than the $27 average cost of a MLB ticket. Plus, a family of four can attend a minor league game for $61, which includes food, drinks, parking and a program. Going out to dinner or seeing a movie could cost more than that, which makes minor league baseball games an appealing opportunity for families looking for something to do on a summer night.

Successful owners not only provide affordable entertainment, but they are also creative when it comes to drawing fans to the stadium. The Round Rock Express installed a "simulated rock wall" for fans to climb on, while the Frisco RoughRiders have an outfield pool for those warm summer nights. Many teams also offer between-inning entertainment, like mascot races and eating contests, and the non-baseball entertainment doesn't end there. Minor league teams that operate their own stadiums often invite fans out to concerts or movie nights when the team is out of town, making it easier for team ownership to sell ballpark advertising and luxury suites. The RoughRiders don't even charge attendance at their movie night, but they utilize the event to generate additional concessions and advertising revenue.

Pools and rock walls are a recent development, however, and they point towards the modernity of the top teams' stadiums. In fact, 14 of the teams on our list have constructed new stadiums since 2000, and the impact is undeniable. According to a 2010 study by Towson University's Department of Economics, new stadiums increase attendance by an average 1.2 million fans, or about 26 percent, for AAA teams. What's more, the study found that new stadiums have a lasting effect on attendance: "The [attendance] increases from new construction remain relatively unchanged for the next two years," and "ten years later attendance is still about 5-10 percent higher than the average."

Our numbers show that the strategy is paying off. The 20 most valuable teams are worth an average $22 million dollars, with average revenue of $11 million. Teams on our list also averaged an operating income (earnings before taxes, interest and depreciation) of $4 million last season. The average team value is up 5 percent from 2008, the last time we undertook the study, and average revenue has increased by more than 12 percent in the same time period. The growth is quite impressive given the state of the economy since our 2008 list, though the low cost of attendance may have made minor league games even more enticing during a recession.

While even the top MiLB teams are worth a fraction of the $605 million that the typical MLB team is worth, minor league teams have often delivered spectacular returns because of the minimal investment required to buy one. Someone that paid $22 million for a team earning $4 million is roughly getting an 18 percent pretax return on capital. Another example of the great return on investment is the owners' ability to sell teams for much more than the original purchase price. Craig Stein and Joe Finley bought the Ottawa Lynx in 2006 for an estimated $14 million. They relocated the team to Allentown, where it became the Lehigh Valley IronPigs, and it is now worth $26 million, tied for the second-most valuable team in minor league baseball.

To find the most valuable minor league franchises, we first limited our scope to teams with MLB affiliations, better known as farm teams. That omits MiLB-sanctioned foreign leagues, such as the Mexican League, and independent leagues. We then further cut down our population to MiLB's top 30 teams in attendance last season. The reason is that minor league franchises rely almost entirely on in-stadium revenue streams to make money. Tickets, luxury suites, parking, stadium sponsorships, stadium naming rights, merchandise and concessions are the core sources of revenue. If attendance suffers, so do all of those income sources. But if attendance is bustling, then ownership can be confident that the cash will be rolling in. One example: 11 teams on our list ranked in the top 25 of MiLB merchandise sales last season.

From there we utilized available stadium leases and spoke with professionals involved in or familiar with the business of the sport to construct our estimates of team revenues and expenses. When a team's financial details were unavailable, we made comparisons to teams in similar markets for which we had definitive data. Our final values were derived from multiples of revenue and attendance, using historical transactions as a guide.

Perhaps the smartest owners are those who try to maximize their minor league profits by owning multiple teams. Ryan-Sanders Baseball, led by Hall of Fame pitcher Nolan Ryan and business partner Don Sanders, owns two teams on our list: the Round Rock Express (No. 3) and Corpus Christi Hooks (No. 18). Mandalay Baseball Properties, a subsidiary of the Mandalay Entertainment Group, owns five minor league franchises. Two of them, the Frisco RoughRiders (No. 4) and Dayton Dragons (No. 8), made our list, and the Oklahoma City RedHawks didn't miss by much. Joe Finely, co-owner of the IronPigs, also has individual ownership stakes in the Lakewood Blue Claws and Trenton Thunder, two teams that ranked among the top 30 in attendance last season. The multi-team investment approach to minor league ownership best highlights just how valuable minor league teams can be to business-savvy owners.

The top five:

1. Sacramento River Cats ($32 million)
2t. Lehigh Valley IronPigs ($26 million)
2t. Round Rock Express ($26 million)
4t. Frisco RoughRiders ($24 million)
4t. Columbus Clippers ($24 million)
See the Albuquerque Isotopes and more teams

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