QPR 2018 Financial Review – FFP Hits

QPR suffered their third consecutive season in the Championship following relegation from the Premier League. It was another disappointing season in the Championship after finishing 16^thas the club’s performances and finances continue to deteriorate after years of financial mismanagement.

This came to head in the form of a huge fine for the club from the EFL for Financial Fair Play (FFP) transgressions which has severely impacted their finances. QPR recorded a loss of £37.5m, and interestingly, for the records for the past 20 years we could obtain, shows the club have never posted a profit which shows their history for poor financial performance and management.

Let’s delve into the numbers.

Revenue Analysis

Revenue sank yet again, dropping from £47.6m to £31.5m (35%) as the club continued to languish in the Championship.

Matchday revenue fell only slightly, falling from £5.2m to £4.9m (6%) as the general dissatisfaction by fans reduced spending at matches and attendance as a whole.

Broadcasting revenue dropped significantly from £35.2m to £20.2m (43%) as a third year in a row in the Championship meant a further fall in parachute payments for QPR which could not be offset by a 2-place improvement in the league.

Commercial revenue was stable at £4.6m and it seems there is little hope of this figure increasing any time soon for a club in stand still, showing little to create a buzz for QPR fans or the football fans in general.

Looking ahead, QPR are likely to see revenue drop once more as parachute payments fall for again before they run out completely after next year. The club are likely to see stable matchday revenue and may see a drop in commercial revenue as current sponsorship deals run out and the club will find it difficult to attract new sponsors on lucrative terms.

Costs Analysis

QPR saw costs increase at the same time as revenue was falling, reducing profitability considerably. Costs rose from £56.0m to £73.7m, however if their huge fine of £20m (£42m in total – more on this later) is not taken into account, there is a small fall in costs.

Amortisation declined, decreasing from £11.3m to £9.1m (19%) as player investment was virtually non-existent again. QPR’s poor finances has held the club back in recent times and meant the club have been unable to invest into the club and has meant significant under investment after a period of excessive and poorly used investment.

Finances costs fell from £5.7m to a £5.0m finance income due to accounting rules around the FFP fine. In addition to this, the club paid no interest to their owners this year which hasn’t been the case in recent years.

Now to the big one, the FFP fine. The EFL have fined QPR £42m due to breaking FFP rules. This fine consists of:

A cash fine of £17m
Legal costs of £3m
The owners having to capitalise (essentially write-off) £22m of debt the club owe him. This debt was unlikely to be repaid any time soon anyway unless the club was sold for a large sum (which is unlikely in its current state)
A January 2019 transfer ban

This fine has had a significant effect on QPR and its finances, increasing their losses by £20m, however now that it has been finalised, QPR can move forward and plan for a healthier financial future.

Wages remained stable at £30.7m, falling by a measly £29k due to no major movement in or out of the club. Currently the club is restrained by FFP rules and the EFL from increasing their wages, the fine will however not be taken into account when setting the cap for this year for QPR.

Looking ahead, QPR are likely to see a full in costs, not least due to there being no fine to pay next year. Wages are likely to decline, and a further lack of investment will see amortisation fall also.

Transfer Analysis

QPR have had little transfer activity due to their current finances. The club saw Wheeler (£0.5m) and Smyth (£0.1m) join for a combine £0.6m. There were no fee-bearing transfers out of the club.

Despite this minimal net spend, there was some significant movement in terms of cash flowing in and out of QPR.

QPR saw a timely cash boost of £7.7m in terms of transfers from previous windows while they also had to spend £4.8m on previous transfers that they most likely regretted.

QPR will also earn a few more pounds as they are owed £1.2m in transfer fees still, of which £923k is due this year. In comparison, they only owe £64k themselves.

Debt Analysis

QPR’s current financial situation is a cause for concern due to the shaky foundation underneath it and their run-ins with the EFL and the FFP rules.

As with most Championship clubs, cash reserves are low. Their cash levels fell from £4.4m to £2.5m (43%) due to the increased loss incurred this. However, this was in part paid for by transfers fees (detailed above) and the owners plunging in a further £10m to steady the ship, they also had to repay £4m of bank loans.

Debt levels increased significantly, rising from £50m to £71m (42%) due to the new loan of £10m from their owners which took the debt owed by QPR to its owners to £56m.

The rest of the debt is the £15m (discounted figure) owed to the EFL for their FFP failures, with £4.7m due this year and the rest at a later date.

Hence, net debt levels rose from £45.6m to £68.5m (50%) as the club’s finances continue to cause worry. QPR will hope that the ending of the FFP saga will enable them to move forward. Of most importance is survival in the next two years as the acclimatise to life without parachute payments and begin to control their finances to a greater degree.

If this balance can be achieved, there is no reason why QPR fans can’t dream of a return to the Premier League in the next 5 years (on more stable footings than the last time).

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January 5, 2019January 5, 2019

Birmingham City 2018 Financial Review – Midland’s Mess

Birmingham have shown ambition in recent years, spending relatively heavily for the Championship. This investment has failed to produce any goods so far with two consecutives 19^thplaced finishes and a revolving managerial door after a very disappointing season.

The investments to date have been a gamble that hasn’t paid off and as such Birmingham are financially unstable. Following a loss this year of a huge £37.5m, Birmingham have a huge cumulative loss of £60m over 3 years and as such are in breach of Financial Fair Play rules for the Championship and are currently under a transfer ban as well as facing potentially fines and penalties for breaking Financial Fair Play rules.

Birmingham are in a financial mess and their directors begin the accounts with a lot of commentary on the financial situation the club finds itself in after poor financial controls. The directors admit that Birmingham are in financial trouble unless the owners continue to inject cash to help the club financially. As such their status as a going concern is under threat however should be okay for now.

Let’s delve into the numbers.

Revenue Analysis

Birmingham finished in the same position as last year and their revenue remained fairly stable due to this. Overall revenue rose from £17.6m to £18.8m (9%).

Matchday revenue rose from £4.5m to £4.9m (9%) as fans started the season optimistically despite a poor start due to the investment in the club and the adrenaline from their relegation battle the previous season.

Broadcasting revenue also rose, increasing from £7.0m to £7.6m (9%) as the distribution of prize money from the EFL rose meaning Birmingham received more income despite finishing 19^thagain. Birmingham also went slightly further in the domestic cups which supplemented this income.

Commercial revenue rose slightly, increasing from £6.1m to £6.3m (3%). This remained fairly stable as the commercial team failed to drum up any additional sponsorship interest. Birmingham however can take pride from having a relatively high commercial income for the Championship.

Looking to next year, Birmingham should see a jump in revenue after an upturn in form this season has led to a promotion chase by the club which will likely see the club at least manage a top half finish, a considerable improvement on last season which will boost broadcasting revenue. This may enable the club to benefit from increased takings on matchdays and also commercially.

Expense Analysis

After investing heavily as already mentioned, Birmingham saw their costs balloon, rising from £35.3m to £58.1m (65%). This rise significantly outstrips the 9% rise in revenue causing the massive loss of £37.5m.

Amortisation (the key indicator of investment in players) rose from £3.0m to £8.0m (167%). The fact that this amount more than doubled shows the relative size of their investment compared to previous more conservative years and the risks taken recently.

The club also had net finance expenses of £0.9m of which the majority related to transfer fees due in the future.

Wages grew significantly, rising from £22.2m to £38.0m (71%) due to the after mentioned player investments. This huge rise equates to an eye-watering extra £438k a week, a huge sum for a Championship side.

Related to this, directors saw their pay fall from £406k to £386k after a poor season.

Looking forward, Birmingham are likely to see a fall in costs after their Financial Fair Play problems meant they were under transfer restrictions and pressures to reduce costs. This is likely to mean amortisation and wages fall however this may be offset by any severance pay due to Harry Redknapp after his sacking.

Transfer Analysis

Talking of the player investment we finally come to Birmingham transfers. Birmingham spent £15.9m bringing in Jota (£5.9m), Roberts (£3.6m), Colin (£2.9m), Dean (£1.9m) and Gardner (£1.6m).

Out went Shotton (£2.9m) and Frei (£1.3m) for a combined £4.2m.

This led to a transfer net spend of £11.7m, a 31% increase on last year and 7^thhighest in the Championship last year despite finishing 19^th.

The players signed found it difficult adapting and the managerial upheaval early on in the season did not help. This season the earlier investment has started to pay dividends and it may have just been a period of adjustment was required.

Birmingham recorded an accounting profit on player sales of £2.0m due to the sale of Shotton which boosted reported earnings slightly.

From a cash perspective, Birmingham spent actual cash this year of £12.1m in transfers and recouped cash of £2.9m meaning a net cash outlay of £9.2m.

Worryingly for the club’s future financial health, Birmingham still owe £11.1m in transfer fees for this and previous windows, of which £7.3m is due in the next 12 months. On the flipside they are only owed £2.4m in transfer fees of which £1.9m is due in the next 12 months meaning further net cash will be required by the club.

Further to this issue, Birmingham may owe another £6.1m should certain contingent clauses in players contracts are met such as performance related fees and appearance fees.

Debt Analysis

As you can see, Birmingham are in a bit of financial bother and their issue conclude with their rising debt levels.

Cash wise, levels remain as standard. Cash rose from £3.3m to £3.6m. A huge loss of £37.5m was offset by a cash injection in the form of a loan from their owners of £39m which was used for this and to fund transfers and club improvements.

Debt hence rose from £33.4m to £73.1m (119%) on the back of this cash injection. The cash needed to keep the club running doesn’t look like slowing down due to the financial mess the club have created due to overindulgence and the club are currently in a position where they cannot survive without external funding. Luckily it seems this will be available for the foreseeable future and they should be okay subject to any Financial Fair Play punishments they may receive (for more on this have a read of our article on the potentially punishments they could face).

This has led to net debt more than doubling from £30.1m to £69.5m (131%) as a usually conservative club count the costs of ambition and poor financial management.

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November 16, 2018

Financial Fair Play – The Loopholes

This is the second instalment of our Financial Fair Play Series. In this article we will discuss the key issues for clubs complying with Financial Fair Play going forward and the loopholes that can be used to exploit Financial Fair Play rules.

The key message from UEFA for Financial Fair Play is ‘living within your means, spending should not exceed income by more than a minimal amount (€5m over 3 years). This puts budget constraints on clubs looking to grow, as these clubs can only increase spending if income is growing. Normally, income only grows if spending grows first (if spent wisely), making the whole situation like a dog trying to catch its tail. Think Manchester City, their revenue is has only in the last few seasons begun to catch up with their spending after their successes have led to increased income from sponsors, merchandise, prize money and gate receipts.

As the graph above shows, Manchester City had an initial sharp increase in spending which was lagged by income with the % rise catching up later. Without that initial large spending the subsequent rise in income would not have occurred and Manchester City would not have the large income figures they have today. In a Financial Fair Play world, such spending would not have been allowed and Manchester City would not have been able to compete with the big boys at that time, leading to one less big team then we have currently.

Southampton, a club who were at once aspiring to greater things in the Premier League have identified this as a problem. Cortese, the club chairman said “we will grow our commercial income but if we cannot close the gap commercially, which will probably be the case for all time, we have to use other aspects [such as youth development].”

Big clubs income usually grows quicker than small clubs meaning the gap will keep growing over time. Small clubs are then posed with the difficulty of making their income go further. The options are clear: spend on youth development, make shrewd signings or become commercially astute to increase income through shirt sales, sponsors and match-day sales.

The Loopholes

On to the most controversial aspect of Financial Fair Play, loopholes. Due to the tough constraints on clubs to comply with Financial Fair Play, many free-spending clubs have sought ways to by-pass the rules or at least make them easier to comply with.

There are many ways to comply without seeking loopholes. Some spending is exempt from Financial Fair Play such as spending on youth development, community development and women’s football, all of which can help boost income (discussed here). Good youth development can bring through talented youngsters who can improve the club’s performance on the pitch, helping to increase prize money, shirt sales and match receipts, or through selling them for large fees. Community development can help enhance the fan base, increasing match day receipts and shirt sales. Women’s football is becoming more and more popular, meaning a good women’s football team can bring in larger revenues than ever before.

Transfers are also key to complying with Financial Fair Play. Profit on player sales is calculated differently to the straightforward sale value – cost (for me details click here). Some players with low book value can hence be sold at significant fees to allow for spending to increase.

However these options are all long term, the benefits will not be seen immediately which in a modern football world where patience is no longer a virtue, is not good enough for footballers, managers and owners. Meeting Financial Fair Play rules in the short term when spending is high is a challenge, many clubs have used related parties to boost income. Related parties are any companies with strong links to the owners of the clubs, these companies can be used to bring in money to artificially pass Financial Fair Play.

UEFA allows related party transactions as long as they are at fair value, such that if they were not related, a similar price would be charged. So for instance, Etihad have a £350m, 10-year contract to sponsor Manchester City. To see whether this at fair value, UEFA would compare this funding to similar deals where clubs were not related to sponsoring company with a similar stature to Manchester City at the time of the agreement. Newcastle also have a similar arrangement with their stadium named the Sports Direct Stadium, a company owned by their owner Mike Ashley.

There are obvious difficulties in measuring fair value as there are not always similar transactions from other clubs to compare, and the club can always argue their case that it is fair representation. This makes related party transactions a significant difficulty for UEFA when applying Financial Fair Play rules. Ex-Chelsea Chairman Buck Buck is hopeful that such issues do not arise: “Uefa now has to wrestle with third party sponsorships. We are all hopeful Uefa will apply these rules in a fair and equitable manner.”

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November 16, 2018November 16, 2018

Financial Fair Play – The Rules

Since its announcement in September 2009, Financial Fair Play (FFP) has divided opinion. The ever polarising Platini remarked “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market. The teams who play in our tournaments have unanimously agreed to our principles…living within your means is the basis of accounting but it hasn’t been the basis of football for years now.”

So promoting sustainable spending was the aim, with excessive spending a thing of the past, this was the message Platini was sending. Fast forward to 2018 and PSG and Manchester City are being reinvestigated for past transgressions.

This series will explore what exactly Financial Fair Play aims to achieve, its rules and how they have been enacted and bypassed to date. We will first look into the rules to gain a better understanding into

UEFA’s thinking behind this regime.

The Break Even Requirement

Financial Fair Play rules are fairly broad, the main financial requirement is the break even requirement. This is a requirement to limit losses incurred by clubs, it is based on a clubs income and expenses, with the aim of encouraging sustainable spending such that clubs ‘break-even’ and don’t over extend themselves.

All clubs in UEFA competition must comply with the rules, which are based over a rolling three-year period (e.g for 2018 it will be based on the 15/16, 16/17 and 17/18 seasons).

The break-even requirement is that relevant expenses must not exceed relevant income by more than €5m over the rolling three-year period. This loss can be increased to €30m if the excess (€25m) is contributed by a related party.

Club must also avoid having overdue payments to other clubs for transfers, employees and Government.

As an example if the Break even results 15/16 was +10m, 16/17 was +5m and 17/18 was -20m the club would still be within the requirements as the net result would be -5m. The result could be anywhere up to 25m if and only if the extra above the -5m was covered by contributions from related parties.

Below is a breakdown of what is included in ‘relevant income’ and ‘relevant expenses’, which from now on we will just call income and expenses respectively:

Technical Points

The main technical area around this is profit on disposal of players, this is a bit more complex than just taking taking the difference between transfer fee paid and transfer received.

Players are (rightfully so) treated as assets for football clubs, they are therefore assumed to depreciate over the time they are at the football club. The profit is then the transfer fee received minus the depreciated value of the player.

For more details on the technical side of this, check out this post explaining player disposals Here.

This is an area that can be very useful in complying with Financial Fair Play. Players can sometimes be sold who have a depreciated value that can be sold for a large fee due to their value actually increasing, making a large ‘profit’ on that player and potentially saving the company from breaking (pardon the pun) the break-even requirements.

Another area that causes controversy for Financial Fair Play is related party transactions. An obvious deceitful way to pass Financial Fair Play is to use a company that the mega-rich club owner owns and plug money into the club through a ‘sponsorship’ which will increase income and meet break-even requirements.

In an effort to stop that, UEFA have stated that related party transactions must be at their fair value, such that if they were not related the payment would be the same. This is difficult to prove however as what exactly is fair? Often comparisons will be made with other similar deals, however this is not always available and fair value is open to debate so as of now is still a grey area for Financial Fair Play and UEFA.

The same scenario may play out with expenses, where the related party charges the club a lower fee than otherwise would be ‘fair’ for instance stadium maintenance costs or other services.

Expenditure on youth development, community development and women’s football are all taken off the expense figure to encourage spending in these areas. Youth development will aid sustainable growth for clubs and help bring through more youth players with more of a focus on homegrown talent. Community development will help keep clubs in touch with their local community and fans which is harder than ever with the growing money in the game. A focus on women’s football is essential to building the game to higher level and encouraging girls to take up the sport.

Clubs may also be proactive and choose to voluntarily sign up to Financial Fair Play and break-even requirements. You may wonder why clubs would risk the extra burden of these rules, clubs with aspirations to qualify for UEFA competition may want to be proactive in meeting the requirements to avoid a shock once qualified. Clubs may also want to self-impose financial discipline in order to achieve sustainability.

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August 13, 2018

The True Costs of Transfers

Premier League True Summer Transfer Cost

The True Costs of the Premier League 2018 Summer Transfer Window

The Premier League transfer window has officially shut with over £1.2bn spent by Premier League clubs ahead of the new season.

Clubs have to be wary of Financial Fair Play when purchasing players to avoid penalties and bans (for more on this click here) and also need to ensure they are running sustainably for their owners etc.

This brings us to this article, which will explain the true costs of transfers from the 2018 summer transfer window explained briefly below:

When clubs sign a player, from an accounting perspective this is not all charged in the year of the transfer as the payments are matched to how the player will be used. So, a player signing for £50m on a 5-year contract is deemed to cost the club £10m a year, known as the amortisation cost. This is the true costs of the transfer per season for the club.

Another key element is player sales. In this regard the profit the club gain is not simply the transfer fee received minus the transfer fee paid, it is the transfer fee received less the remaining value of the player sold. So, for a £50m player on a 5-year contract, he will be ‘worth’ £50m minus the amortisation charges to date, so after two years of charges, the player will be ‘worth’ £30m. Hence, should a player be sold 2 years later for £50m, a ‘profit’ of £20m will be recorded, rather than nothing like many people believe.

This article will analyse each Premier League club’s business and compare to their counterparts.

Due to the availability of data, this excludes the costs of loans and player wages. All transfer fees and contract lengths are via Transfmartk.co.uk. In order to simplify the amortisation costs, we have ignored contract renewals which make the calculation more complex without much added insight.

Let’s Not Talk About Spend, Let’s Talk About Net Spend

Premier League clubs had an active transfer window despite its shortening, spending over £1.2bn, receiving only £353m in return, leaving the club with an astronomical net spend of £909m.

This was due to higher spending by certain clubs, with Liverpool leading the way by a distant after investing heavily following their Champions League heartache with Naby Keita, Fabinho, Alisson and Shaqiri joining while only Danny Ward left, leaving the merseysiders with a net spend of £151m.

Fulham became the first promoted club to ever break the £100m barrier after a barnstorming transfer window with 7 players arriving for transfer fees and only 1 leaving. This led to the club having a net transfer spend of £101m with Seri the pick of the players signed.

Fellow West Londoners Chelsea had the third biggest net spend at £92m after breaking the world transfer record for a goalkeeper in the £72m paid for Kepa after losing Courtois to Real Madrid and they also signed Jorginho.

Manchester United and Manchester City had quiet windows with both making one big purchase a piece with Fred joining United (along with Dalot and Grant) and Mahrez joining City.

At the other end of the scale were Watford with a net transfer spend of minus £23m after not reinvesting all of their Richarlison windfall. Newcastle also were in the black after recording a net transfer spend of minus £13m as Mike Ashley used transfer cash received to purchase House of Fraser rather than reinvest in the Toon.

Additional Amortisation Costs

Premier League clubs face additional transfer costs of £275m this year alone after a huge transfer spend of over £1.2bn, with this cost spread of the players signed contracts which average at just over 4-year contracts.

Amortisation costs are, as explained above, based on transfer spend and contract lengths and as such the costs are higher for larger spends and also higher when contract lengths are shorter. A key example is Kepa, a £72m keeper who signed a 7-year contract, costing Chelsea just over £10m a year. While Mahrez, a £61m purchase on a 5-year contract cost Manchester City more at just over £12m a year despite the smaller transfer fee.

Liverpool unsurprisingly lead the way after their impressive transfer window where they spent £164m with Alisson signing a 6-year contract while Keita, Fabinho and Shaqiri signed 5-year deals. Liverpool will have additional costs of £31m after these deals.

Fulham had the second highest net spend after their £105m 7 player splurge with contracts lengths 4 years on average, bringing amortisation costs of £24m over that period.

Leicester despite their relatively small net spend have a large transfer costs due to their £103m spend with the Mahrez deal diluting their net spend after the club reinvested the Mahrez cash and then some, leading to an amortisation cost of £22m.

Chelsea and West Ham also had large amortisation costs above £20m after their productive transfer windows.

Tottenham were at the other end of scale after an inactive transfer window, becoming the first club since the transfer window came into effect in 2003 not to purchase or sell a player.

Crystal Palace were the only other club to have an additional amortisation cost below £5m.

Amortisation Costs Savings

Premier League clubs saved £41m on amortisation cost after after player sales of £353m with many players sold either brought cheaply or have been long serving players that no longer attract amortisation costs after staying longer than their original contract.

Amortisation costs savings are driven again by the transfer fee paid when the player was brought and their original contract length. So, for instance Daley Blind signed for Manchester United 4 years ago for £15.8m on a 4-year contract, costing Manchester United just under £4m a year for those 4 years. Now that the 4 years are up, Blind costs United nothing from an accounting perspective, so no amortisation costs are saved and hence no savings included in our calculations.

As such many Premier League clubs didn’t recorded any savings as the players sold had already seen their entire transfer fee amortised. This includes players signed as youths such as Danny Ward at Liverpool or long serving players such as Courtois at Chelsea.

In a couple of situations, players were signed and immediately sold. This was the case for Benik Afobe at Wolves and Mikel Merino for Newcastle. In both these cases the amortisation costs were excluded when calculating additional costs and savings.

Bournemouth were the biggest savers, saving just under £8m after the sales of the after mentioned Benik Afobe to Wolves (before Wolves later sold him to Stoke), Lewis Grabban and Max Gradel.

Everton (£7m), Newcastle (£6m) and Watford (£5.5m) were the only other clubs to save in excess of £5m on player sales after the sales of the likes of Klassen, Mitrovic and Richarlison.

Burnley, Cardiff, Crystal Palace and Tottenham sold no players hence the reason for their lack of amortisation costs savings.

Chelsea, Liverpool, Manchester United, Southampton and West Ham also had no amortisation costs savings despite player sales due to the players sold having been at the club for at least their original contract lengths such as Courtois, Danny Ward, Blind, Tadic and Kouyate.

Profit, Profit, Profit (Or Loss)

Premier League clubs due to this made profits on their sales of £247m after selling players for £353m, a 70% return on investment.

When players are sold, as seen above, this may not lead to amortisation costs savings if the players amortisation costs were low due to the price paid or they have been at the club a long time.

This doesn’t mean they receive nothing, as the amount earned is recorded as a profit on player sales. This is recorded as the transfer fee received minus their remaining value as explained in the introduction. However, to avoid you having to scroll up, here is an example from this season using Courtois.

Courtois cost Chelsea £8m 7 years ago on a 5-year contract, costing the club £1.6m a year initially. Each year he is worth less of his transfer fee, so after 1 year he is worth £6.4m and after 2 years £4.8m etc. After 5 years he is worth essentially zero, at this point when he is sold the transfer fee received is all profit, so Chelsea record a profit of £31.5m.

Clearly the biggest benefiters here were Leicester after their sale of Mahrez was essentially all profit and hence the club recorded a profit of £67.1m.

Chelsea also benefited as described above, whilst Watford were the only other club to record a profit of more than £30m after their sale of Richarlison.

Everton were one of only two clubs to make a loss after the costly purchases of Klassen and Funes Mori who they both made a loss on after buying them recently and then selling on the cheap. Leading to a loss of £3.8m.

Arsenal also made a loss on the flop transfer of Lucas Perez, diluted slightly by the sale of academy graduate Akpom.

Burnley, Cardiff, Crystal Palace and Tottenham made no transfer sales and hence recorded no profit or loss this year.

The Summary – The True Cost

To work out the true cost of this transfer window we use the following formula:

Additional amortisation costs – Amortisation costs saved -/+ Profit/Loss on player sales.

This gives an interesting picture for Premier League clubs with a net transfer costs of minus £13.9m! Meaning Premier League clubs as a whole have saved on transfers this year from a Financial Fair Play perspective.

This is heavily skewed due to the net savings made by Leicester, Watford and Newcastle in particular.

Leicester, due to the Mahrez deal have made a saving of approximately £50m after their new signings, while Watford and Newcastle have also saved in excess of £20m.

Both Manchester clubs are in the black after making one big purchase each and selling a couple fringe players.

Chelsea are also in the black after selling Courtois.

Fulham have the highest cost of £20m after their sensation transfer window in which they spent hugely for a Premier League newcomer, making a statement on their ambitions.

Liverpool were unsurprisingly up there with a net cost of £18m. Everton and Arsenal were the only other clubs with a net cost exceeding £15m.

To put this all into perspective there is a mismatch. The profits received are all given in the period of sale, while new transfers are spread over their contract. This means that Chelsea, despite making a profit on Courtois, and hence their net costs are negative, will indeed see amortisation costs rise in the long run as next year they will not have that Courtois profit.

The same is the case for amortisation costs saved, for some of the players sold, they may only have had one more year of amortisation costs and as such this saving will not be there next year and hence they will see amortisation costs rise the following year.

Amortisation costs have risen over the years and will continue to as long as clubs net spends are still as large as they are.

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January 21, 2018January 21, 2018

Financial Football News Round-Up Edition 10

Financial Football News Weekly Round-Up 10

Here is your weekly financial football news round-up to keep you up to date with all things financial football! This is your round-up for the week commencing 15th January 2018, featuring Newcastle, Manchester United, Huddersfield, UEFA, Chelsea and Brighton.

Brighton Financial Results Released – Analysed by FFN

Brighton released their financial accounts for the promotion winning 16/17 season. The accounts saw losses grow by 50% despite record revenue as the club ambitiously sought Premier League football and set to reap the rewards in next years accounts – full analysis here.

Financial Fair Play 2.0?

French newspaper Le Parisien are reporting that reforms on Financial Fair Play are looming due to Historically large clubs such as Real Madrid, Barcelona and Bayern dissatisfied with the current rules.

There are various changes being considered with a major one being to limit spending that isn’t matched by increased revenue to EUR 100m. This would be of particularly difficulty to the ‘new rich’ who won’t be a able to spend large sums without a rise in revenues first.

Sanctions to control debt are also under consideration that would specifically target debt heavy Manchester United.

A limit may also be imposed on limiting players at a club to stop the likes of Manchester City and Chelsea stockpiling youth players the loaning them in the hope of profiting in the future.

There is also took of redefining the meaning of ‘related parties’ in order to reduce the ways owners can pump money into the club without raising Financial Fair Play Issues. Manchester City and PSG both have large deals with Etihad and Abu Dhabi respectively, who are both related to their owners.

UEFA are due to vote on a reform on 24th May with a draft report rumoured to have already been created.

Newcastle Sale Stalemate

The long running saga involving the sale of Newcastle by Mike Ashley to Amanda Staveley continues to rumble, with talks currently hitting a roadblock and no sale in sight any time soon after a £250m offer was rejected. The current plight of the troubled Geordie side cannot of given prospective owners much confidence in taking over, with Mike Ashley not wanting to reflect this in his pricing.

This is also a difficult time for the manager Rafa Benitez, who is experiencing uncertainty in terms of transfer money available to spend in a bid to move the club clear of the relegation zone, something their owner will want to do but not a huge costs that will dent any sale proceeds he may gain.

Huddersfield Hydrated By Coco Fuzion 100

Huddersfield have announced another commercial partnership with drinks company Coco Fuzion becoming their official hydration partner. The company produces carbonated coconut water drinks that naturally hydrate consumers with the electrolytes it contains.

The brand fits well with the Huddersfield playing style who will need a great deal of hydrating due to the all action pressing style the club implements.

This is the latest in a number of commercial deal Huddersfield have signed, taking advantage of their new found Premier League status.

Oops I Did It Again! – Chelsea Back In Trouble Over Youth Players

Fifa are reported to be investigating Chelsea for the third time in eight years for possible breaches of signing under-age players. The club deny any wrongdoing.

Previously the club have been banned for two transfer windows when in 2009, they were sanctioned for the purchase of Gael Kakuta, the ban was successfully overturned on appeal however.

Fifa have been a lot tougher on such punishments recently with Real Madrid, Barcelona and Atletico all receiving bans in recent years and Chelsea will hope they have not fallen foul of the rules to avoid a similar fate.

Man United Striker SIS Partnership

Manchester United have signed a three-year partnership with Science In Sport (SIS), a sport nutrition company based in Lancashire. This represents another major coup for the company, with Manchester United become the 10th Premier League club to sign with the sport nutritionist.

As part of the deal SIS will provide Man Utd with a dedicated performance nutritionist, as well as installing a Fuel Station within the club’s training ground, giving players and staff direct exposure to SIS products at all times.

UEFA Release Huge Report On Football Landscape

UEFA last week released their annual report analysing the financial performance of all clubs in the 55 UEFA member associations in the 2016 financial year. The report details areas such as fan support, sponsorship, transfers and wages plus more. Stay tuned for analysis of this interesting report over the next week.

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November 13, 2017November 13, 2017

Financial Fair Play, Neymar and Accounting – How they can meet the rules

Transfers are a huge part of football clubs finances and compliance with Financial Fair Play (FFP). The way football transfers are accounted for aren’t a simple as taking profit/loss from a sale and adding/subtracting from the clubs profits. This article will take the world record Neymar transfer as an example and explain how this monumental deal can be within Financial Fair Play rules.

In the wonderful world of football accounting, players when purchased are capitalised such that their cost are spread over their ‘useful life’. A players useful life is essentially their contract length, so for a player on a 4 year contract, their transfer fee will be split over 4 seasons. The annual cost is known as the amortisation. For example, Neymar cost PSG £200m on a five-year contract so annual amortisation charge will be £40m, this will be included as an expense in the clubs financial statements. This costs does not include wages.

When the player is sold, the profit is not the transfer fee received less the transfer fee paid, it is instead the transfer fee received less the players remaining ‘value’. This value is the original transfer fee minus any amortisation to the date of sale. So, using the Neymar example again, in two years Neymar ‘value’ will be the £200m transfer fee minus two years of amortisation costs (£40m x2), £80m. This leaves Neymar with a value of £120m in two years.

So if Neymar is sold at this point for £150m, many would wrongly assume a loss of £50m when in fact, the club has made a ‘profit’ of £30m in their accounts. This amount will be added as income in their financial statements. They will also be saving costs on amortisation of £40m for each of the remaining 3 years and his wages.

This explains why the Neymar deal may be financially viable. PSG can sell players and record a ‘profit’ while also saving on their amortisation costs in the future. Lets look at their player sales.

Aurier

Aurier was signed for £9m on a four-year contract from Toulouse in July 2015. This leads to a yearly amortisation costs of only £2.25m a year. He was then sold to Tottenham for £22.5m in August 2017, just over two years worth of amortisation (we will stick to two years for mathematical simplicity). Two years of amortisation is then £4.5m (£2.25m x2) leaving him with a value of £4.5m. PSG therefore record a profit of £18m on this sale in their accounts, nearly half of Neymar’s amortisation costs, plus amortisation savings of £2.25m for each of the next two years and also saved wage costs.

Matuidi

Matuidi was signed for £7.2m on a three-year contract from Saint-Ettiene in July 2011. Since he stayed for six years, he obviously signed a few new contracts. This changes the treatment as his ‘value’ remains at the time of the new contract is then amortised over the new contract length. However due to this amount being negligible, for simplicity we will assume his contract has been fully amortised leaving him with a value of nil. PSG sold Matuidi for £18m, realising a profit on the full amount while also saving on his wages.

Jean-Kevin Augustin

A relatively unknown player, Augustin, 20, was an up and coming PSG youth player, signed as a boy in 2009 at the age of 12. He was signed by the ambitious German outfit RB Leipzig this summer for £14.4m. As he came through their youth system at negligible cost, he has a nil value and the full transfer fee is recognisable as a ‘profit’ in their accounts, another incentive to invest in youth.

Overall

Neymar and Financial Fair Play — Neymar & Financial Fair Play – The Numbers

From these 3 sales, PSG have recognised profits of £50.4m, more than covering the amortisation costs of Neymar, leaving room to help afford his lucrative wages. This does not include the saved wage costs of the players and Aurier’s amortisation costs.

This is obviously unsustainable to expect to sell 3 good players a season and not spend elsewhere also, however the quality of Neymar should help the club improve performance in the Champions League to increase prize money, while his star power will lead to increased commercial success through sponsorships, merchandising and TV earnings. Which has already been seen with the added interest in PSG this season and even at one point running out of Neymar shirts in their club store.

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November 13, 2017December 7, 2017

Financial Fair Play Series – Play By The Rules

Since its announcement in September 2009, Financial Fair Play has divided opinion. The ever polarising Platini remarked “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market. The teams who play in our tournaments have unanimously agreed to our principles…living within your means is the basis of accounting but it hasn’t been the basis of football for years now”. Financial Fair Play was aiming to change this.

Promoting sustainable spending was the aim, with excessive spending a thing of the past, this was the message Platini was sending. Fast forward to 2017 and PSG have spent around 200m on Neymar and effectively spent (when the loan becomes permanent) £160m on a break-out teenager with 1 year of first team football.

All clubs in UEFA competition must comply with the rules, which are based over a rolling three-year period (e.g for 2017 it will be based on the 14/15, 15/16 and 16/17 seasons).

The break-even requirement is that relevant expenses must not exceed relevant income by more than EUR 5m over the rolling three-year period. This loss can be increased to EUR 30m if the excess (EUR 25m) is contributed by a related party.

Club must also avoid having overdue payments to other clubs for transfers, employees and Government.

As an example if the Break even results 14/15 was +10m, 15/16 was +5m and 16/17 was -20m the club would still be within the requirements as the net result would be -5m. The result could be anywhere up to -45m if and only if the extra above the -5m was covered by contributions from related parties.

Below is a breakdown of what is included in ‘relevant income’ and ‘relevant expenses’, which from now on we will just call income and expenses respectively:

Financial Fair Play relevant income and expenses

The main technical area around this is profit on disposal of players, this is a bit more complex than just taking taking the difference between transfer fee paid and transfer received.

Players are (rightfully so) treated as assets for football clubs, they are therefore assumed to depreciate over the time they are at the football club (Not always true, look at Zlatlan!). The profit is then the transfer fee received minus the depreciated value of the player.

For more details on the technical side of this, check out this post explaining player disposals here.

This is an area that can be very useful in complying with Financial Fair Play. Players can sometimes be sold who have a low book value can be sold for a large fee due to their ability, making a large ‘profit’ on that player and potentially saving the company from breaking (pardon the pun) the break-even requirements.

The same scenario may play out with expenses, where the related party charges the club a lower fee than otherwise would be ‘fair’ for instance stadium maintenance costs or other services.

Clubs may also be proactive and choose to voluntarily sign up to Financial Fair Play and break-even requirements. You may wonder why clubs would risk the extra burden of these rules, clubs with aspirations to qualify for UEFA competition may want to be proactive in meeting the requirements to avoid a shock once qualifies. Clubs may also want to self-impose financial discipline in order to achieve sustainability.

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September 25, 2017April 16, 2018

Financial Fair Play Series – Pay The Penalty

We are back for the final instalment of our Financial Fair Play Series. In this edition we will discuss the sanctions that UEFA may impose on a club for failing Financial Fair Play and examples of when this has happened.

Let us first start with the possible sanctions for non-compliance with Financial Fair Play, where clubs fail in meeting the requirements we discussed in the first instalment of this series.

The lightest punishments available are warnings and reprimands, usually given in marginal cases or where there is a specific extenuating reason for non-compliance such as a one-off unexpected expense. Light punishments may also be given in the cases where there is an ‘improving trend’, where it looks likely that the club will soon meet the break even requirements.

Fines are the common penalty for non-compliance and have been issued in numerous cases, normally with part of the fine suspended and only issued if certain criteria is not met.

The rest of the sanctions are all very serious. Points deductions can have a big impact on revenue and are not handed out lightly, while withholding revenue can also cause significant damage for the club at hand in meeting their needs. Usually the amount of revenue withheld is not substantial enough to create huge cash flow issues, and in many circumstances, will be given back once certain criteria is met.

Transfers bans have been given out in a few situations and can range from just one transfer window to as many as deemed appropriate, usually capped at two. It is easy to get this mixed up with recent transfer bans for Barcelona and Atletico Madrid, however these bans were not linked to Financial Fair Play and instead to breaking transfers rules regarding players which will not be covered here.

For clubs in European competition, UEFA allows the club to register up to 25 players for use during the competition, this includes 8 home-grown players, of which 4 must be home-grown at the club. UEFA sometimes sanction a reduction of this number as a punishment for failing Financial Fair Play which can put these clubs at a serious disadvantage in the competition and significantly harm their chances of success.

The second most serious punishment is disqualification from UEFA competition. This is given out in extreme cases where the club was way below breaking even and expected to be for foreseeable future. The reason is that excess spending would give the club an unfair advantage against teams that are complying with Financial Fair Play so they should not be able to enjoy this advantage. These bans can include that the club is banned next time they qualify for the competition if they fail to do so in the season after their ban.

The worst possible punishment is retrospective stripping of UEFA competition titles, this is where other clubs can plea that the winning club gained an unfair advantage from their overspending which why the won the competition. This is a case (unlikely!) we could see this season after PSG stunning start to the season and the question marks over whether they will be able to comply with Financial Fair Play this season.

Now that we have an understanding of all the possible sanctions we will look at how these have been applied since 2013.

2013 – 2014

Probably the two most famous Financial Fair Play cases and most relevant today are related to super-rich clubs Manchester City and PSG. Both clubs had been brought by Mansour bin Zayed Al Nahyan of the UAE and Nasser Ghanim Al-Khelaïfi of Qatar respectively. Both clubs continued to flex their financial muscle going into the 2013 – 2014 season. Manchester City had a net spend of around £90m, with the significant arrivals of Fernandinho (£36m), Jovetic (£23.4m), Negredo (£22.5) and Navas (£18m) with Tevez departing for £8m. Meanwhile PSG had a net spend of around £100m with the arrivals of Cavani (£58m), Marquinhos (£28m), Cabaye (£22.5m, with Digne (£13.5m), Sakho (£17m) and Gameiro (£7m) the significant departures.

Despite this spending, Manchester City announced following the release of their annual accounts that they would fall within Financial Fair Play regulations. The main reasoning for this was a large spend on youth infrastructure which led to the building for their state of the art new training facilities, and an increase in turnover of over £40m with nearly £50m of their turnover due to peculiar image rights and property rights sales, from related parties of their Owner and New York City FC, Manchester City’s sister club. Chelsea manager at the time, Jose Mourinho openly questioned the legitimacy of Manchester City Financial Fair Play compliance calling it “dodgy financial fair play”. UEFA agreed with this assessment and rejected the legitimacy of these sales and decided that sanctions were necessary against Manchester City.

PSG had claimed compliance due in part to similar sponsorship deals to Manchester City from related parties. These claims were dismissed and PSG were also hit with the same sanctions as Manchester City.

Both clubs were handed:

EUR 60m fines, of which EUR 40m was suspended
UEFA squad size reduced form 25 to 21 players, this was later reduced on appeal
Transfer spending restrictions were imposed, with PSG missing out on Angel Di Maria to Manchester United as a consequence. PSG ‘only spent’ £45m on David Luiz that season. While Manchester City had a net spend of around £50m after purchasing Bony (£29m), Mangala (£27m), Fernando (£13.5m) and Caballero (£7m) while selling Javi Garcia (£15m) and Rodwell (£11m).
Two-year squad salary reduction plan was also imposed on the clubs.

The fine proceeds were split between all clubs in UEFA competition that met Financial Fair Play rules.

Both Manchester City and PSG have met all criteria imposed on them since the ban and since even had them softened.

Both Manchester City and PSG complained about their punishments, seeing their investment punished while other large clubs loaded up on debt to fund spending such as the Glazer-owned Manchester rivals United. Manchester City in fact were debt free which does seem rather sustainable.

PSG argued that Financial Fair Play stops new investment into football and protects already established large clubs who can spend more due to large revenue figures – “For me, Financial Fair Play is unfair. It stops new investors from coming into football. It protects the big clubs and obliges the smaller ones to remain small clubs. If investors are prevented from coming into football, they will invest in Formula One or elsewhere. It is not good for football. We are ready to work within the rules but I hope UEFA are going to change it next year because a lot of clubs have complained. I hope a solution can be found.”

2014 – 2015

Sanctions and settlement agreements were handed out to 14 clubs in 2014/2015 season, with Hull City the most notable, being the only English club sanctioned, however they received a minimal fine of EUR 600,000, with EUR 400,000 suspended and were told they must be break even by 2015/16 season to avoid further sanctions.

Roma were also subject to Financial Fair Play punishment and were handed a EUR 6m fine, with EUR 4m suspended if certain criteria is met. Their squad size was also reduced to 22 players for the following season.

Previously free spending Monaco were hit with a EUR 13m fine, with EUR 10m suspended and a squad reduction to 22 players.

Inter Milan were handed the largest fine of EUR 20m, with £14m suspended if certain criteria was met. Their squad size for UEFA competition was also reduced to 21 players for the following season. They were also hit with significant transfer spending restrictions, Inter had a negative net spend for 14/15 (-£7m) and 15/16 (-£6m), bringing in more transfer income than spending. They were also tasked with breaking even by 18/19 season.

Sporting Lisbon were also handed a fine of EUR 2m, of which all was suspended.

2015 – 2016

Hull and Sporting Lisbon both quickly exited their settlement agreement after meeting all criteria the following season.

Turkish clubs Fenerbahce, Besiktas and Galatasaray failed Financial Fair Play, Fenerbahce were issued with a EUR 7.5m fine, with EUR 5.5m suspended, while Besiktas were issues with a EUR 5.5m fine, with EUR 4m suspended, both clubs were sanctioned with a squad reduction to 22 players. Galatasaray ban was much more significant, having previously been in hot water UEFA banned them from a year of UEFA competition and imposed strict spending and wage restrictions that led to the selling of a vast number of players with income of £19m plus the wage bill savings.

Financial Fair has been a significant issue for Portuguese and Turkish clubs, who have struggled to control their spending due to large wage bills, this has led them to be less competitive in Europe with Turkish teams in particular struggling with 6 clubs so far failing Financial Fair Play. Both Galatasaray and Fenerbahce who are usually Champions League group stage participants, were unable to progress through qualifiers and their fans will not witness any European football this season.

Porto are the most recent team to be sanctioned by Financial Fair Play in June 2017 and have received a small fine of EUR 2.2m, with EUR 0.7m suspended and a squad reduction this season to 22 players. This did not stop them from qualifying in second place in their Champions League group this year though.

This is the end of this Financial Fair Play series, here at Financial Football News we will be following Financial Fair Play rulings and update you on any changes that occur this year with particular interest on the PSG story.

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September 24, 2017April 14, 2018

Financial Fair Play Series – Jumping Through Loops

Welcome to the second instalment of our Financial Fair Play Series where we will discuss the key issues for clubs in complying with Financial Fair Play going forward and the loopholes that can be used to exploit the Financial Fair Play rules.

The key message from UEFA for Financial Fair Play is ‘living within your means’, spending should not exceed income by more than a minimal amount (currently EUR 5m over a 3 year period). This puts budget constraints on clubs looking to grow, as these clubs can only increase spending if income is growing. Normally, income only grows if spending grows first (if spent wisely), making the whole situation similar to a dog trying to catch its tail. Think Manchester City, their revenue is only just starting to catch up with their spending now after their successes have led to increased income from sponsors, merchandise, prize money and gate receipts.

As the graph above shows, Manchester City had an initial sharp increase in spending which was lagged by income with the % rise catching up later.

Without that initial large spending, the subsequent rise in income would not have occurred and Manchester City would not have the large income figures they have today.

In a Financial Fair Play world, such spending would not have been allowed and Manchester City would not have been able to compete with the big boys at that time, leading to one less big team in the Premier League than we have currently.

Southampton, a club who are in the aspiring bracket of football clubs have identified this as a problem. Cortese, the club’s chairman said “we will grow our commercial income but if we cannot close the gap commercially, which will probably be the case for all time, we have to use other aspects [such as youth development].”

Big clubs income usually grows quicker than smaller clubs meaning the gap will grow bigger over time. Smaller clubs are then posed with the difficult question of how to make their income go further. The options are clear: spend on youth development, make shrewd signings or become commercially astute to increase income through shirt sales, sponsors and match-day sales.

Did Someone Say Loopholes?!

There are many ways to comply without seeking loopholes, some spending is exempt from Financial Fair Play such as spending on youth development, community development and women’s football, all of which can help boost income (discussed here).

Good youth development can bring through talented youngsters who can improve the club’s performance on the pitch, helping to increase prize money, shirt sales and match receipts, or through selling them for large fees.

Community development can help enhance the fan base, increasing match day receipts and shirt sales.

Women’s football is becoming more and more popular, meaning a good women’s football team can bring in larger revenues than ever before.

Financial Fair Play relevant income and expenses

Transfers are also key to complying with Financial Fair Play. Profit on player sales is calculated differently to the straightforward sale value less cost (for me details click here). Some players with low book value can hence be sold at significant fees to allow for spending to increase.

Related parties are any companies with strong links to the owners of the clubs, these companies can be used to bring in money to artificially pass Financial Fair Play.

There are obvious difficulties in measuring fair value as there are not always similar transactions from other clubs to compare, and the club can always argue their case that it is a fair representation. This makes related party transactions a significant difficulty for UEFA when applying Financial Fair Play rules. Ex-Chelsea Chairman Buck Buck is hopeful that such issues do not arise: “Uefa now has to wrestle with third party sponsorships. We are all hopeful Uefa will apply these rules in a fair and equitable manner.”

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