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Art Modell And The State Of Family Businesses

Sep 14, 2012 10:09 AM EST

By Jonathan Tjarks

When Art Modell entered the NFL in 1961, the league was a blip on the American sports radar. He paid $4 million, only $250,000 of which was his, to purchase the Cleveland Browns in 1961. In 2004, he sold the franchise, which had been moved to Baltimore and renamed the Ravens, for an estimated $600 million.

Modell was one of the seminal figures in NFL history, helping to negotiate the TV deals that made it the most popular sport in the US. However, his legacy within the league was undone by his own success. As the NFL’s popularity skyrocketed, it became increasingly untenable for a man with his limited means to own such a valuable asset.

The Browns were moved not because Cleveland couldn’t afford to support an NFL franchise but because Modell no longer could. While the move bought him eight years, he was ultimately forced to sell his majority stake to a Maryland businessman. The explosion in franchise values eventually made his family immeasurably wealthy, but not before it forced them out of the “family business”.

In that way, Modell was no different than the vast majority of the league’s original owners. The people who made their fortune in the NFL have been steadily driven out by people investing fortunes they already made into it. There’s only a small handful left -- the Rooneys, Maras, Fords, Davis and Hunts -- who were involved with the league before the Super Bowl era.

That’s how it is any business. When a mom-and-pop operation expands from one store to one thousand, it ceases to be a mom-and-pop operation in any meaningful sense of the world. At a certain point in the growth stage of any successful operation, the original stakeholders have to cash out.

If a company generates $100 million annually but the owner has a net worth of only $10 million, even the slightest cash flow fluctuation can wipe him out. The business becomes undercapitalized, which is precisely what happened to the Browns by the mid-1990’s. When Cleveland signed free agent WR Andre Rison, Modell had to take out loans from banks to give Rison the signing bonus he demanded.

As a business owner, there are three ways to raise more capital: increase short-term revenue, take on debt or bring in more investors. For an owner who wants to maintain complete control, option A is always most attractive. That was the underlying motive behind the NBA’s 2011 lockout: the league’s undercapitalized owners were trying to squeeze money out of their employees in order to keep themselves solvent.

Modell, however, couldn’t be saved by any short-term infusion of cash; the Browns needed a new stadium to compete in the modern NFL and he had no way to pay for it. Debt was off the table as well: a bank might have been willing to front the contract of a WR, but they weren’t paying for a new stadium. What Modell needed were people willing to invest in his franchise without demanding any control in return for such a massive investment.

When Mark Zuckerberg faced a similar dilemma with Facebook, he took the company public while retaining an absolute majority of the voting shares. As a result, he raised the money necessary to run his burgeoning business without losing any decision-making control. However, NFL companies are not allowed to go public, not after the overwhelming success of the publicly owned Green Bay Packers prompted the other owners to change the league’s bylaws to prevent imitators.

The only option left for Modell was to go public in everything but name only. He leveraged the league’s monopoly on pro football franchises in the United States to force the city of Baltimore, which had previously lost the Colts to Indianapolis, to assume the cost of building a new stadium. That decision, in turn, broke the hearts of the city of Cleveland, but it was the only way Modell thought that he could ensure his family would stay involved with the business he loved.

Regardless of his role in helping to grow the league, that’s what his legacy will always be. Whether he makes the Hall of Fame is ultimately insignificant, not when Cleveland fans can make the short trip to Canton to ruin any induction ceremony. The real question is whether the dilemma that sunk Modell will ultimately sink the next generation of NFL owners as well.

In the eight years since Steve Bisciotti assumed control of the Ravens, the franchise has gained approximately $400 million in value. Interest in the NFL shows no signs of slowing down either: in 2011, the league agreed to an extension of its TV deals worth $3 billion annually. And with the advent of DVR making live sports an even more attractive TV property, there is no real ceiling to how much money the NFL can make down the road.

If franchise values start to reach the multi-billion dollar mark, how many private investors can realistically own them? We may have already reached that point in baseball, when the Los Angeles Dodgers were sold for $2.1 billion earlier this year to the Guggenheim Partners. They cannily brought on Magic Johnson to be their PR spokesman, but the money comes from the pension funds and life insurance trusts, which represent the accumulated wealth of millions, that Guggenheim manages.

By all accounts, Art Modell was a good man in his private life. Nevertheless, his image will be forever tarnished by his role in an ownership system that allows a public trust to be operated for private gain. If he has a saving grace, it’s that the league he helped create will one day become too successful for anyone but the public at large to own.