Second Opinion: Tough Financial Road for Fighters

April 14, 2009

The following is a guest editorial from Nick Meyer of BetUS Sportsbook.

With the success of The Ultimate Fighter TV show and the larger-than-life personas of the fighters, it seems as if everyone wants to at least train in MMA if not make it to the big show. It is little wonder as the glory and respect garnered by popular UFC fighters puts them right up there with movie starts now that the sport has blown up.

Many young people who have been discouraged about their chances of making it far in major pro sports such as the NBA and the NFL because of the incredible caliber and number of athletes populating these positions, have now turned their attention to training for an MMA career.

While there are success stories of underdogs who have made it far in the UFC, the reality of the business is that the only fighters who can make a comfortable living off of the sport in this day and age are the big-name guys, big-time personalities, and the most exciting fighters.

One look at the UFC 96 pay scale for fighters shows just how hard it is to make a living in the sport for the lesser-known’s. While Quinton “Rampage” Jackson made $325,000 for his fight with Keith Jardine, which wasn’t even a title fight, Jason Day, a pretty solid fighter according to most, only made $5,000.

Day was 17-7 going in with wins over some good fighters like Alan Belcher and Jonathan Goulet and he even has an interesting nickname, “Dooms,” but he doesn’t put fans in the seats so he was relegated to a tiny salary for the night.

The fight was Day’s first in three months, which equates to a $20,000 yearly salary going by fight salaries only. He would have gotten a $5,000 fight bonus but going up against a guy like Kendall Grove is tough.

Fighters are lured by cash incentives given to the guys that win Submission of the Night and Knockout of the Night, among others.

But that raises another problem for the up-and-comers: there’s always tremendous pressure to put on a show in addition to the pressure of actually winning the fight. If guys of Day’s caliber don’t put on a high-octane, back-and-forth undercard fight that entertains the crowd, they will be booed mercilessly. And if they win in a not-so-exciting fashion, which might be their best bet in a lot of cases, they aren’t likely to get a good slot on the next fight card, either. All these things are going through a fighters head before he enters a ring or octagon with an opponent that is trying to knock you out.

What many people don’t consider when they think about the life of MMA fighter is everything outside of the ring. Take into account the costs for training and equipment as well as the immense physical and mental toll it takes to be a fighter at the highest level. There is also the strong possibility or inevitability of being knocked out of action for long stretches due to injuries and it’s easy to see why the life of a UFC fighter coming up through the system is often anything but glamorous.

Still, fighters often jump at the chance to fight in the UFC because the exposure and clout they gain from the organization can help them further their careers down the line.

Many UFC fighters such as Shane Carwin continue to hold down second jobs. Carwin remains a full-time engineer while also juggling a busy family life and the type of training it takes to be a high-level UFC fighter.

It takes that kind of commitment, some luck, and good management skills to become a profitable UFC fighter these days. With the short expected career span for a guys in this dangerous line of work, you can’t fault them for wanting to squeeze every last dollar out of their fighting careers before it’s time to move on to a different lifestyle. That is, if you can make it that far.

MMA in Korea

May 18, 2008 reader Jason Kindree is writer and instructor working for an educational company in Seoul, South Korea. Kindree recently spoke with Kim Dong Hyun, who will make his UFC debut next weekend, and Im Jae Seok and offers the following glimpse into the South Korean MMA scene.

Korean MMA Fighters on the Rise

The MMA scene is relatively young in South Korea as it is elsewhere, but the popularity has been explosive as well. More clubs are opening up that teach pupils all the foundational skills – striking, grappling, and submissions. Team Tackle is one such gym located in the affluent Kangnam area of Seoul, where fighters such as Yoon Dong Sik train (Koreans put there family name first).

Yoon currently has a four fight win streak and a deceptive record because of early losses, including a competitive decision to Rampage Jackson. He won his last match at DREAM’s middleweight grand prix in April. Team Tackle’s head instructor is none other than Choi Mu Bae, the former PRIDE standout who won by submission in more than half his contests.

Other fighters have received notice such as Im Jae Seok who fought in Elite XC and Strikeforce and Song Un Sik, an undefeated lightweight from Daegu who is very young and has mainly fought in Japan thus far. Denis Kang was one of the first Korean fighters to become well known by dominating many contests in Spirit MC (Korea’s major MMA organization) and later in PRIDE and K1 Heroes, which are both now defunct. Kang, as many fans are aware, is half Korean, but that hasn’t stopped the fans from embracing him and showing their support whether he’s won or lost.

Right now the talk of the town though is Kim Dong Hyun. He used to train in Seoul, but he moved to Pusan to train at a club called M.A.D. When he’s not in South Korea he regularly trains in Japan with Yushin Okami. Kim, who has a similar build to Okami, (tall and rangy) recently signed with the UFC, and he’ll be fighting in UFC 84 against Jason Tan in the welterweight division.

His contract is for four fights, and he views this as an opportunity to make a statement not only for himself but for his country. His record is 9-1-1, with his first 3 fights in Spirit MC and then the last seven in Japan’s DEEP organization. While fighters are often hesitant to discuss specific numbers when it comes to money, they all admit that the pay is very low in Spirit MC. One could say it’s a farm league that develops fighters who move up the ranks and onto greener pastures. Most Korean fighters earn a living by fighting in Japan, through endorsements, or by opening up a gym and training other fighters, which is what Choi Mu Bae and Im Jae Seok have done.

This weekend on primetime national TV, Kim spoke with sportscasters as they watched highlights and offered analysis of his fights. The same South Korean TV network that broadcasts the UFC (Superaction) has also been heavily advertising UFC 84 and Kim’s match. He looked relaxed and excited as he discussed his career and future prospects.

His road to the UFC started when he was 18 with Judo. Shortly after he saw shooto fighting, and he was immediately drawn to MMA. Kim is an accomplished grappler as well, with ten years of training behind him. He stressed that money and honor had to remain secondary in a fighter’s mind, and that the love of the sport should always be the primary motivator.

Kim is looking forward to measuring himself and testing his skills against the best fighters. He said that before the UFC purchased PRIDE, there was some debate as to which organization had the better fighters. Now everyone agrees that the UFC is the top organization so he is very happy to be there.

When I asked him about his style and fighters who he wants to emulate, Kim mentioned Anderson Silva, his training partner Okami, and the fighter who he felt had the “perfect style” was Georges St. Pierre. He wants to be well-rounded, and like any self-respecting fighter his goal is the title. We’ll see how the increased media and fan attention affects him before the big show in Vegas on Saturday.

Other Korean professionals are undoubtedly watching with keen interest, as they know that success for Kim could translate into more opportunity for them, both at home and internationally. Whether he considers it or not, there’s more at stake than just personal honor and national pride.

Second Opinion: Englebrecht on IFL & ProElite 10-Ks

April 26, 2008

Roy Englebrecht is the owner of Roy Englebrecht Promotions, California’s third largest boxing promotions company. Oscar De La Hoya purchased the company in December of 2001 and Golden Boy Promotions was formed, with Roy serving as COO for the first three years. At the end of 2004 Roy Englebrecht Promotions was again reestablished, with Oscar De La Hoya now as a minority partner. Roy offered the following Second Opinion on the IFL and ProElite’s recent 10-K filings.

I have been reading the stories about the awful 10-K annual reports for IFL and ProElite, and I just have to comment.

I want you to know I pray for humility every day, and I don’t want to sound like I am tooting my own horn, but what are these guys doing in the fight business in the first place if they don’t know how to be profitable!

According to Jay Larkin of the IFL, and I thought Jay’s leadership and creativity at Showtime boxing was as good as anyone in the sport, but he says 20 MMA groups are all struggling. Well, I’ll promote eight to 10 pro mma clubs shows in 2008, and I won’t lose money on any of them!

In 2007, my fight business did $1.1 million in gross revenue, and I read that the IFL only did $5.7 million in gross revenue and ProElite did only $5.3 million in gross revenue… mean that my company, which is all of two people, me and my matchmaker Arnold Berber, did over a million in revenue and we turned a profit, and the IFL and ProElite with their vast staffs and network partners did just awful!! With their staffs and resources they should have made $35 million, not lost $35 million!!

While I respect Dana White for the way he has grown the UFC, and though I don’t agree with some of his statements in the past, I give him my top kudos for his statement in the Forbes UFC article, where he was quoted in regards to some comments about competitors like ProElite on CBS and HDNet Fights, that “CBS doesn’t know the fight business, and Mark Cuban doesn’t know anything about the fight business, either.”

He hit the nail on the head…..these so called “fight promotions companies” don’t know the fight business. Their executives can negotiate nice fighter agreements, and secure great site fees with venues and casinos, but they have never “promoted a show” never rented a venue, created the marketing, had to sell all the tickets, hire an event staff, made sure towels, water and ice were in the dressing rooms, and had to stay within a show budget. These companies aren’t fight promoters, they are syndicators.

My MMA Fist Series will promote four hotel ballroom shows and fill them with 1,250 young fans. We’ll do two SummerFist Fair shows in Fresno and Orange County, free to fair goers, and I will do one SummerFist show at a minor league baseball stadium, and every one will turn a profit!

I have lived by a credo that I came up with 20 years ago….I give my fans great entertainment, at the right price, in a clean environment, and say thank you and mean it! Because I am anal about doing all four points all the time, my fans come back!

I’m afraid some of those “struggling mma groups” are missing one or two of the points that I preach!

Second Opinion: Zuffa Finances Come Into Focus

November 1, 2007

Tom Berryman has experience in corporate finance and offers the following second opinion on Behind the Curtain: Zuffa’s Finances Come Into Focus:
There has been some debate about the health of Zuffa according to a recent series of S&P reports. One thing is clear, Zuffa’s revenues are growing. The decrease in 2007 operating margins is misleading because the EBITDA margin went from 40% in 2006 to 20% in 2007 due to a readily identified one-off impact (that is, the increased international marketing effort). While they claim the margin will be pressured by increasing fighter wages, I find it hard to believe that this will not be a function of increasing revenues. Consequently, the sustainable margin will lie somewhere in the middle (I have assumed a 25% margin for my analysis, which I feel is conservative given the 40% margin in the year without the one-off expense).

Additionally, the credit downgrade only signifies that S&P views the company as risky. This term should not be over-analyzed. Yes, the UFC is a new business with unproven cash flows. No, this assessment of risk does not indicate that it is “high-risk.”

Some other points of clarification:

  • EBITDA margin is paramount – this, although an accounting measure, is the closest measure of cash from operations generally available and barring any unusual accounting policies indicates the “operating margin” of the business.
  • Interest on $325m might seem high, however, we are talking about a financeable corporation, and we need a figure to determine if this is the case here. Assuming a pretty high rate of interest (and here is where I am completely out of my area – the work I do is entirely UK or Europe based and generally specialized to one industry area. To be honest I don’t have a feel for what this rate might be) of 14%, roughly the rate on a risky piece of subordinated debt, the interest payable every year on a balance of $325m is around $45 million. I think this is surely at the top end of what the expense might be. Assuming historically moderate growth in revenues of 50% over the next 5 years and a sustainable operating margin of 25% (probably conservative business forecasts for such a fast-growing sport), the amount payable on the debt is exceeded by operating cash flows by at least 30% (a fair premium for the high cost of debt assumed)
  • Debt/revenue and debt/equity ratios are not that meaningful. Debt/EBITDA can be revealing, and this appears to be in the range 4.0x – 6.5x – this is not unusual.
    The reason the company might have negative equity is due to the large distribution that may have been paid from retained earnings. However with no detail on the mechanism of the distribution nor the state of the accounts prior, this is a structuring issue only, one which I’m sure Zuffa has hired sufficient accountants to solve.
  • There is an empirical argument here: very few people screw the bank. A lender who specializes in making sure their money is safe has lent to Zuffa—therefore it’s probably a good deal!
  • Regarding the notion that the Fertittas and Dana White have “cashed out:” This is no less than they deserve for piling in investment at a time when the company was about to collapse. Do not forget that it has been significant quantities of their money at risk for the last six years and they deserve to be rewarded for that. Obviously we don’t know the details, but a few simple assumptions about how the business will perform indicate that this structure might not only be not risky, but potentially financially prudent.

Second Opinion: Zuffa's Finances Come Into Focus

October 17, 2007

This site is blessed with a large professional readership interested in the business of MMA. I welcome your thoughts, for publication or not, attributable or not, on the stories that appear here or on the business of MMA generally. I hope to make Second Opinions a regular feature on the site. – AS

An attorney at a large Atlanta law firm with experience in the areas of bankruptcy and accounting malpractice offers the following provocative second opinion on Behind the Curtain: Zuffa’s Finances Come Into Focus:

I am not a finance expert, so please correct me if I have a flaw in my reasoning, but isn’t the gist of S&P’s report that, even though Zuffa’s revenues are growing, its margins are decreasing and it now has a highly-leveraged structure, making it a very risky business to lend money (i.e. it is likely to go bankrupt)? I usually don’t think of a potential credit downgrade as a signal that a business is “healthy,” even if it simultaneously reports revenue growth. Usually, S&P doesn’t rate the debt of healthy companies as high-risk.

EBITDA can be a very misleading thing to look at, especially given that interest on the $325 million term note is likely quite substantial. I wouldn’t equate an EBITDA margin with profit margin for a company that has such a high a debt-revenue or debt-equity ratio. On paper, the company probably now has negative equity. Cash flow that would have been profits in the past are probably now being used to pay interest on the note.

It looks to me like the Fertitas and Dana White “cashed out” and purposely switched to a very risky capital structure. Can’t say I blame them; they get to keep all the upside potential of the company while passing off the downside to their lender. This sort of thing often proceeds a bankruptcy. It signals to me that Zuffa’s owners may not be all that confident in the long-term profitability of the company. Honestly, I am surprised that a lender would make this deal, and I suspect that Zuffa is paying for it with an exorbitant interest rate. Anyway, it may be true that Zuffa will continue to be profitable long into the future, but this credit outlook downgrade and the new highly-leveraged structure certainly makes me wonder.