RIČARDS VAMBUTS IMPLEMENTING FINANCIAL FAIR PLAY RULES AT LATVIAN-ESTONIAN BASKETBALL LEAGUE Final Master Thesis Study programme: Sport Business Management State code 6211LX001 Supervisor: Assoc. prof. dr. Renata Legenzova Defended: Assoc. prof., dr. Rita Bendaravičienė Dean of the Faculty of Economics and Management Kaunas, 2021 Table of contents SUMMARY ........................................................................................................................................ 3 INTRODUCTION ............................................................................................................................... 4 I. LITERATURE REVIEW ON FINANCIAL FAIRPLAY AND FINANCIAL STABILITY ......... 6 1.1 The concept of financial stability in sports and its influencing factors ......................................... 6 1.2 Measures of financial stability ....................................................................................................... 8 1.3 Financial fair-play rules and their influence on financial stability in sports ............................... 11 1.4 Overview of financial fair-play rules in practices - cases of Euroleague and NBA .................... 15 II. ANALYSIS OF TEAMS' FINANCIAL STABILITY IN LATVIAN-ESTONIAN LEAGUE AND COMPARATIVE ANALYSIS OF FAIR-PLAY RULES ACROSS THE LEAGUES .......... 23 2.1 Overview of Latvian-Estonian basketball league ........................................................................ 23 2.2 Research methodology ................................................................................................................. 24 2.3 Results of the analysis of Latvian-Estonian basketball league team's financials ........................ 27 2.4 Results of the financial fair-play regulation practices across the comparative leagues............... 38 2.5 Lessons learned and problems identified ..................................................................................... 41 III. RECOMMENDATIONS FOR LATVIAN-ESTONIAN BASKETBALL LEAGUE ON IMPLEMENTENTION OF FINANCIAL FAIR-PLAY RULES ..................................................... 43 3.1 Proposed financial fair-play rules ................................................................................................ 43 3.2 Implementation guidelines ........................................................................................................... 44 3.3 Discussion .................................................................................................................................... 49 Conclusions ....................................................................................................................................... 50 List of references ............................................................................................................................... 52 Annexes ............................................................................................................................................. 58 2 Ričards Vambuts. IMPLEMENTING FINANCIAL FAIR PLAY RULES AT LATVIAN- ESTONIAN BASKETBALL LEAGUE: Final Master Thesis in Sport Business Management / Assoc. prof. dr. Renata Legenzova / Vytautas Magnus University, Faculty of Economics and Management, Graduate studies. – Kaunas, 2021. – 57 pages. SUMMARY Research problem addressed in this paper is what should be financial fair play rules of the Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. Current situation in Latvian professional basketball teams isn't the best due to the recent tax reform in the country. The aim of the paper is to discover what financial fair play rules should be implemented in Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. The main parts of the paper were about the concept of the financial stability and fair play rules and analyzing Latvian basketball teams and comparative basketball leagues around the world. Main results were that there are no financial stability and fair play rules in the Latvian-Estonian basketball league and the situation with Latvian basketball team finances isn't positive. Main recommendations for the league are to introduce minimum budget that would help teams in the long run and to check financial statements of the teams every year in order to see financial situation of the teams. Key words: basketball, financial stability, financial stability measures, financial fair-play, sports leagues 3 INTRODUCTION Relevance and topicality. The situation with Latvian professional basketball teams currently is difficult, even though basketball has risen in popularity in recent years with Latvian players playing in European and USA leagues, and with national teams playing well on the international stage. Furthermore, since the 2018 – 2019 season a unified Latvian – Estonian professional basketball team league has been created. In 2018 Latvia underwent a tax reform that had a significant impact on the sports industry, including basketball. While team's performance does not always depend on its financial ability, in the long run, a team will be more successful if it is financially stable. The issue of team finance must involve not only the teams, but also the league, which, through financial regulations and rules, can contribute to the long-term financial stability of the teams. Analysis of the available literature resources revealed that many different authors have touched upon the topic of sports sustainability. Barajas (2017), Budzinski (2014) and others have looked at the specifics of the financial fair-play, which were also used in this work to understand the nature of the financial fair-play and sustainability. Research problem addressed in this paper is what should be financial fair play rules of the Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. The object of the paper is financial fair play rules in basketball as a mean to ensure teams' financial stability. The aim of the paper is to discover what financial fair play rules should be implemented in Latvian-Estonian basketball league in order to ensure financial stability of the teams competing in the league. To reach the aim of the paper the following objectives were set: 1. To discuss the concept and importance of financial stability in sports and identify its measures; 2. To overview implications of implementation of fair play rules in practice based on cases of NBA and Euroleague; 3. To analyse and discuss current situation with financial stability of in Latvian- Estonian basketball league; 4. To analyse cases of comparable basketball leagues in terms of financial stability and financial fair play rules' implementation; 4 5. To propose financial fair play rules for Latvian-Estonian basketball league and present their implementation guidelines. The paper is structured in 3 main parts. The first part is about concept of financial stability in sports, its influencing factors and measures, as well as financial stability and financial fair play rules implementation in two pioneering basketball leagues – NBA and Euroleague. The second part is devoted to analysis of similar basketball leagues and their financial rules and Latvian professional basketball financial stability analysis. In the third part conclusions are made from analysis and recommendations to Latvian- Estonian basketball league are given. Research methods. The analysis and compilation of scientific articles and literature is conducted in order to know more about financial fair play rules in the biggest sports leagues. To get better understating of financial fair play and stability rules in selected basketball leagues, their representatives were contacted via e-mail. Data analysis on financials of Latvian professional basketball teams was conducted in order to evaluate Latvian basketball teams' financial position. Also interviews with team representatives were used to understand situation from team's perspective. Information sources. In this paper scientific articles were used, as well as financial reports of Latvian basketball teams, interviews with team representatives and internet articles. 5 I. LITERATURE REVIEW ON FINANCIAL FAIRPLAY AND FINANCIAL STABILITY 1.1 The concept of financial stability in sports and its influencing factors In order to better study basketball leagues and teams, it is first necessary to understand how financial stability manifests itself in sport and what the sport economy is like in general. If we look from the perspective of ordinary business, financial stability is the ability to withstand a temporary problem, such as a decrease in sales, lack of capital or loss of a key employee or customer (Ashe-Edmunds, 2020). In other resources, it is mentioned that being financially stable means not having to worry about paying for expenses or taking care of your obligations. It doesn’t mean that you have to be rich, but it does mean that you’re able to handle finances without taking on more debt (Entrepreneurshipinabox.com, 2020). If we are talking from professional sports team perspective, the biggest difference is in the goal, compared to a standard business mode – the goal of it is to make a profit, but the business objective of professional football clubs typically is do gain prestige and success rather than making profit (Vopel, 2011). From a theoretical point of view, financially stable sports team is able to pay salaries to players and