In December, the Los Angeles Dodgers agreed to sign Shohei Ohtani, the all-star baseball player nicknamed “Shotime”, to a historic $700 million, 10-year contract, the largest salary any professional sports team has paid in U.S. sports history.
However, the deal has an interesting wrinkle: instead of paying Ohtani $70 million per year from 2024-2033, the Dodgers will only pay $2 million annually over the next ten years. The remaining $680 million will be deferred and paid out over a 10-year span from 2034-2043.
At Raistone, we specialize in helping companies manage their cashflow so they can run a competitive and successful business. Needless to say, Ohtani’s contract caught our eye.
Why Are the Dodgers Deferring Ohtani’s Payments?
Major League Baseball also understands the power of deferred payments and how it can affect the competitive balance of the league. According to The Wall Street Journal, MLB rules assess the present value of Ohtani’s deal at $460 million, and will apply a $46 million hit against the Dodgers luxury payroll tax each season of the 10-year deal. That’s a considerable decrease from a $70 million cap hit the Dodgers would see if the payments weren’t deferred.
In a highly competitive league, the Dodgers’ deal with Ohtani is a strong competitive advantage for their organization, but it’s one well within the rules. It’s also a magnified example of how implementing deferred payments can help an organization financially and operationally. The deferred payment structure of the contract will give the Dodgers increased flexibility to fill their roster with great supporting talent around Ohtani, fielding a competitive, championship-caliber team while also being able to afford the highest-paid player in the history of baseball.
What Is a Deferred Contract?
Like the Dodgers, large companies understand the competitive value of deferring payments on a large scale, which is why many elect to extend payment terms and keep more money on their balance sheet, through a process known as Supply Chain Finance (SCF). Extensions to payment terms allow companies to unlock the present value of their cash and to reinvest that value into their business.
Under these programs, buyers can extend payment terms to both improve days payable outstanding (DPO) and reduce days sales outstanding (DSO). SCF programs also help companies support their supply chain by offering them Accounts Receivable Finance (ARF), allowing sellers to get paid earlier on invoices due to them without incurring debt.
The result is a win-win, as larger companies utilizing SCF extend payment terms, and their supply chain can get paid in just a few days at a small discount. And because ARF programs are largely based on the credit profile of the buyer, companies in the supply chain access capital at a lower cost than traditional methods, like bank loans.
Though SCF programs do not allow SMBs to defer payments for 10 years like the Dodgers and did with Ohtani, the benefits of even a few weeks’ improvement in DPO can be massive. Companies that work with Raistone have used their extra liquidity to work with more clients, accept larger orders, buy more product, hire new personnel, reduce risk, and much more.
The Benefits of Deferred Compensation
The Dodgers-Ohtani deal is smart business where both parties come out winners with this deferred compensation model. Other teams and players around the league will certainly take note.
Given the historic size of the $700 million contract, its unique structure made headlines. But for those of us at Raistone, the benefits were no surprise — we’re already helping businesses efficiently manage billions of dollars in cashflow, and we understand that forward thinking companies will continue to utilize these tools to get a leg up on their competition.
About the author
Kellen Bates serves as a Vice President on the Accounts Receivable Finance (ARF) Sales team at Raistone. He manages ARF programs across a wide portfolio of clients and is responsible for onboarding new clients and growing existing relationships. Prior to joining Raistone, he served as a Procurement Agent at Boeing where he managed relationships between raw materials suppliers and Boeing. While there, Kellen learned the importance of capital access for smaller suppliers working with large organizations utilizing extended payment terms. He holds a Bachelor of Science in Finance from Montana State University and is a CFA® charterholder.
FAQs
Frequently Asked Questions about Shohei Ohtani’s Deferred $700 Million Contract
What is the total value of Shohei Ohtani’s deferred contract?
Shohei Ohtani signed a 10-year, $700 million contract with the Los Angeles Dodgers. The deal includes $680 million in deferred payments which will be spread out from 2022 to 2043.
How much will Ohtani receive annually from the deferred money?
Ohtani will receive an average of $68 million per year in deferred payments over the 20-year period, starting from 2024.
Why did Ohtani agree to defer such a large portion of his contract?
Ohtani, in a statement, mentioned that deferring income provides payroll flexibility for the Dodgers and allows them to allocate resources strategically over time.
What are the financial implications of deferring such a significant amount?
Deferring $680 million in payments over 20 years allows the Dodgers to maximize payroll flexibility and manage their financial commitments effectively under the current tax system.
What impact does Ohtani’s contract have on the Dodgers’ long-term financial planning?
By structuring the $700 million deal with a significant portion deferred, the Dodgers can strategically manage their payroll and investments over the 10-year contract period and beyond.
What does the deferred contract mean for the Los Angeles Angels and New York Mets?
The structure of Ohtani’s deal with the Dodgers could influence how other teams, such as the Los Angeles Angels and New York Mets, approach contract negotiations with star players in the future.
How does the deferred compensation in Ohtani’s contract compare to other athlete contracts?
Ohtani’s agreement to defer a substantial portion of his contract stands out as a unique approach in professional sports, affecting the landscape of athlete compensation in major league sports, going forward.
