From the course: Finance Essentials for Small Business

The USFL

From the course: Finance Essentials for Small Business

The USFL

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- You've heard of the NFL? - Absolutely, the National Football League. - How 'about the USFL? - Ah, I haven't heard them mentioned in a while. The USFL was the United States Football League. A rival professional football league that operated for three seasons from 1983 through 1985. - That first season, 1983, saw the USFL owners, as a group, loose millions of dollars. These losses were caused by fan interest being less than expected and player salaries being more than expected. - In response to these losses in 1983, the USFL tried to fix their profitability problems with an approach that is often used by small business owners. - What approach is that? - They tried to grow their way into profitability. The rationale was if we grow faster, we'll become more profitable. Classic mistake. - A better approach is to first fix the profitability of your existing operations and then think about growing. - Ah, but alas. The USFL made the common outgrow our problems mistake and tried to grow out of their profitability problems. So in the second season, 1984, the league grew in two ways. - First, they expanded the number of teams. In the inaugural season there were 14 teams. In the second season the league expanded to 18 team. - Second, the teams grew their player payrolls. The initial plan was to hold to a strict salary cap of 1.8 million dollars per team. But some of the owners couldn't resist signing expensive big name players to try to raise the profile of the league. - Some of the well-known players who got their start in the USFL were Running Back Herschel Walker, who was paid 1.4 million dollars per year by the New Jersey Generals and Quarterback Steve Young, from our own Brigham Young University, who signed a 40 year one million dollar per year contract. Steve Young's 40 million dollar contract was, at the time, by far the largest contract in professional football history, even surpassing all of the big stars in the established NFL. - As expected, this rapid growth strategy in number of teams and in player salaries failed to turn the money losing league into a money maker. - After the 1985 season, the league ceased operations. In its brief three year history, the team owners had lost a total of at least 180 million dollars. - The lesson, if you got profitability problems or cash flow problems, faster growth is almost always not the solution.

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