The Same Deep Waters As You

The clock is ticking for clubs in the EFL in terms of their ability to financially survive with the effects of Covid-19, money is needed, and quickly too, but who should be putting their hands in pockets…if anyone?

How should an industry which has learned nothing from the ITV Digital crash in 2002 and the economic slump created by bankers, accountants and debt rating agencies in 2007 be viewed in terms of its governance and regulation?

EFL clubs between them had a total net loss (total revenues less total costs) of £286 million in 2018/19.

Calculating profits is tricky though as they often contain one off profits such as stadium and player sales that do not occur every year.

Unfortunately, many clubs in the bottom two divisions don’t publish full accounts and so it is only possible to calculate operating profits for clubs in the Championship, these totalled over £600 million in 18/19.

Regrettably both Derby County and Sheffield Wednesday have chosen to not publish their accounts, so their figures are for 2017/18.

EFL Championship clubs have in the main lost money because of an inability to control player related costs, especially wages.

Spending more money on wages than is generated as revenue means that the finances of clubs at this level were precarious prior to the pandemic.

Due to getting a fixed percentage of the Premier League TV deal in the form of solidarity and parachute payments, EFL clubs have had some significant rises in their revenue streams over the last decade which have gone straight through to higher wages.

In 2017, for example, at the start of a new Premier League TV cycle, Championship income increased by £148 million mainly due to this deal but wages increased by £153 million.

Some clubs in the Championship, and many further down the EFL pyramid do try to operate a tighter financial regime but this is difficult with so many others in an arms race on wages and transfer fees chasing promotion.

In a division where the highest wage bill is 12 times that of the lowest it is difficult to have sympathy for those clubs paying out wages of over £1 million a year (£19,230 a week).

Nevertheless, there is a real danger of insolvency, especially in Leagues One and Two, who only get 12% and 8% respectively of the broadcasting deals in the EFL.

Premier League

The head of the DCMS, Oliver Dowden, has said the Premier League should ‘step up to the plate’ and provide financial support to EFL clubs, who are potentially looking at a £200 million income shortfall in 20120/21.

EFL clubs however received about £348 million from the Premier League in 2019/20 in the form of parachute payments as well as solidarity payments of £4.5m for Championship teams, £670,000 in League One and £450,000 in League Two.

Giving further funds to the EFL therefore grates with some Premier League club owners, who point to the potential £680 million shortfall in revenue they will suffer if matches continue to be played behind closed doors for 2020/21.

Reliance on matchday income is less critical for Premier League clubs than it is for those in the lower leagues, with 13% of total revenue coming from this source for the top tier compared to over 40% for many clubs in League Two.

Additional to parachute/solidarity payments, Premier League clubs have paid those in the Championship over £100 million during the summer by recruiting the likes of Nathan Ake, Ollie Watkins and Callum Wilson.

The Premier League clubs also point to the fact that they have not, unlike many companies of a similar size, used the government furlough scheme (and when some did contemplate this approach performed an immediate U-Turn due to fan displeasure) and that some Championship clubs (Birmingham, Villa, Reading, Sheffield Wednesday and Derby) sold their stadia to club owner controlled companies for nearly £1/4 billion in 2018.

Government

It is the government who introduced the rules preventing football matches taking place before a paying audience, so should the government bear some of the financial cost that could cause the industry to lose some clubs over the next few months?

Over the course of the pandemic the football industry has been used as a target (Matt Hancock’s comments about player wages) and a source of positivity (the initial pilot schemes were championed as success in combatting the disease) by politicians.

No one is suggesting that the government pays all of the costs incurred by the industry, but for those clubs in the EFL who are suffering as a result of being unable to generate revenue, there is a sense of frustration that the government is focussing on the Premier League and ignoring the position of those further down the pyramid.

If the government can provide grants for the entertainment industry and the National League to allow it to play, should the same be the case for the EFL?

Some clubs in the EFL, such as Shrewsbury, Lincoln, Tranmere and Accrington Stanley not only operate on tight budgets but also are integrated into their local communities, offering respite and schemes for those most in need of help, and surely such efforts should be recognised?

The problem could be that the EFL does cover a range of clubs from those paying out wages varying from small tens of thousands a year to over a million, which makes it difficult for the government to be seen to be financially supporting all three divisions.

Having a scheme which is linked to individual club’s personal circumstances is a potential solution, but this would take time to implement and in the intervening period clubs could become insolvent.

English football is part of the fabric of our society and as such deserves preserving, the financial cost compared to other schemes is relatively low.

By supporting football, however, would the government be setting a precedent for other sports and outdoor related industries who would also be after financial investments?

EFL clubs in the main don’t pay much corporation tax as they nearly all lose money but do provide employment both directly and indirectly (transport, pubs, restaurants on match days etc) and so contribute towards HMRC’s employment tax receipts.

EFL Itself

Some people might take the view that the EFL, combined with clubs and owners, who are worth an estimated £32 billion between them, should take on the responsibility for funding the game during the pandemic.

The EFL is however only an organisational body, sometimes working for, sometimes at loggerheads with individual clubs in terms of agreeing and implementing rules.

A look at EFL finances does show that it has been a lucrative place of employment for some though.

Looking at wage figures at the EFL it does seem strange that someone’s salary shot up from 2016 onwards but critics will say that there was no improvement in the governance or financial success of the organisation.

Bury, Bolton and Macclesfield fans, and probably some from other clubs too will point to the continued self interest that appears to be the driving force of how the EFL operate.

Under Jonathan Taylor QC a governance review did take place earlier this year and the main proposal, that of the appointment of independent directors on the EFL board, was rejected.

Making a good case for financial support from other parts of the football world is now more difficult for the EFL when its own governance structure is called into question.

Gambling Companies

English football has proven to be very lucrative for gambling companies, with the likes of Bet365 generating over £64 billion in wagers that generated £3 billion of profits.

Viewers of football on TV will have noted that many shows are sponsored by betting companies, the EFL itself is sponsored by Sky Bet and over half of Championship clubs have front of shirt sponsors from the industry.

Even when a House of Lords Select Committee report recommended a front of shirt ban from betting companies recently the EFL acted as a cheerleader for the bookies by responding “The association between football and the gambling sector is long-standing and the League firmly believes a collaborative, evidence-based approach to preventing gambling harms that is also sympathetic to the economic needs of sport will be of much greater benefit than the blunt instrument of blanket bans.”

Reading between the lines the EFL clearly thinks that gambling companies are somewhere between Mother Theresa and the NHS in terms of the positive impact they have on society.

A 1% levy on gross bets placed could bring in substantial sums to the government and this could be used to finance EFL club finances and that of grass roots football too.

However, help is needed now, and it could take too long for legislation to be introduced in time to prevent clubs disappearing.

In addition, the betting industry could potentially go even further offshore than it is presently, and the government could end up out of pocket as a result.

Conclusion

The Premier League (probably) and EFL club owners (certainly in the bottom two divisions) can’t pay for the full shortfall with a full ban on fans attending games for its own games. The Premier League might be more supportive of a limited form of support for clubs in Leagues One and Two, perhaps the bottom of the Championship too, but this will not be a free lunch, and there will be some ‘concessions’ sought from the lower divisions.

The government is under pressure from a variety of industries to give them support, of which football is one. In the short term it could help as it has done in the National League in the last week, longer term it might look for some form of increased transparency and better governance from EFL clubs.

The betting industry has been a major beneficiary of football since the sport lockdown was lifted, but its lobbying power and ease at moving operations overseas means that it is not a short term solution to clubs that are already worrying whether they can pay the wages at the end of October and November.

Crystal Palace 2018/19: Dissidents

Summary

2018 £’m 2019 £’m Change
Revenue 150 155 +3.4%
Wages 117 119 +1.7%
Operating losses (39) (36) -7.3%
Player sale profits 2 46 +1,795%
Pre-tax profit/(loss) (38) 5
Squad cost 197 208 +5.3%
Borrowings 64 83 +29.4%

Introduction

Blog updates during a pandemic when we should be doing the day job appear to be the in thing for public sector employees so here’s my look at Crystal Palace’s 2018/19 finances.

Only one other club remained to publish their accounts in the Premier League following Palace, and it will come as no surprise that Mike Ashley’s Newcastle are the guilty party here and they hurriedly put theirs out within a couple of days of Palace.

Revenue streams

Revenue for a Premier League club comes from three key streams, broadcasting, matchday and commercial.

Income overall for Palace increased last season by 3.4% to £155 million, with the benefits of promotion in 2012/13 and the new three year broadcasting deal in 2016/17 being very evident.

Six years in the Premier League has resulted in Palace being comfortably mid-table in both league position and overall income totals.

Judging by the average attendances of 25,455 Selhurst Park was effectively sold out last season which resulted in a slight increase in matchday income.

Only 6.8% of Palace’s income comes from matchday, which reinforces why the owners are keen to increase stadium capacity as the alternatives of ticket price increases or more matches are difficult to deliver.

How long it will take Palace to expand the stadium, especially in a post Covid-19 lending world with banks likely to be risk averse, remains to be seen.

No one can deny that the Premier League TV deal is an incredible achievement and Palace were the beneficiaries as they earned a record £124 million last season due to higher overseas income offsetting finishing one place lower than in 2017/18.

Six clubs who already have a financial advantage (and you don’t have to guess too hard as to who they are) have pressurised the others to revise how to distribute broadcast income to ensure that they will earn even more of the pie, which is potentially bad news for clubs such as Palace.

Over the period Palace have been in the Premier League the club has been able to steadily increase its commercial income generated from sponsors and partners as they became more of an established PL team, this continued in 18/19 with an 8% increase.

Nestling between Leicester and Southampton in the commercial income table is a reasonable achievement for Palace, who are able to leverage on their London location to international sponsors.

Income overall for Palace is very much skewed towards broadcasting, but there are ten clubs in the Premier League who are dependent upon this source for 75% or more of income so they are not alone.

Costs

Staff costs are always the main issue when looking at a football club and Palace’s strategy here is a risky one but it has been successful.

A relatively small increase was incurred in wages for 2018/19 as many players were locked into long term deals and bonuses for final league position would have been slightly lower than the previous season.

Spending over £70 on wages for every £100 of income is deemed dangerous by UEFA and Palace have crossed this ‘red line’ for the last four seasons, but it has ensured they have remained in the Premier League by paying competitive wages.

Palace’s wage bill puts them in the top half of the Premier League at £55k a week, research suggests there is a positive correlation between league position and wages, although there is a chicken and egg element here as most player contracts are incentivised.

Included in the wage bill is directors’ pay which in the case of Palace tends to just relate to one person, presumably Steve Parish, who last season had remuneration of just under £3 million.

No one comes near Daniel Levy’s £7m from Spurs last season (which apparently contains a large bonus for delivering a stadium late and over budget) but a few eyebrows might be raised in Norbury at Palace being fourth in the table.

Eagles fans might point out where it says in the accounts that ‘funds in excess of the basic salary received by the highest paid director are to be reinvested into the Academy’ which seems odd as it would surely be more tax effective to simply pay the director less and commit more towards the academy.

Lovers of accounting nerdiness get excited when amortisation is brought into football finance discussions, but this is simply spreading the cost of a transfer over the contract period.

Each year since returning to the Premier League Palace’s amortisation cost has increased, which reflects both inflation in the transfer market and the increased number of players coming from other clubs.

Size does matter when it comes to amortisation costs, with the expected big clubs at the top of the spend here, with the exception of Spurs, who may find that their approach backfires in terms of continuing to deliver top four places in the Premier League.

Settling in mid table in this cost suggests that Palace are where you would expect them to be in terms of results on the pitch.

Profits

There are many types of profit that can be used to measure financial success, Palace use one called EBITDA which excludes both amortisation and depreciation (the cost of long term assets such as property spread over their expected lives) in their strategic report.

When a club has negative EBITDA it effectively means that the club is losing money before taking into consideration player or infrastructure spending which makes the losses made by three clubs concerning.

Unfortunately when player costs are taken into consideration profits for all clubs, including Palace, fall so far more clubs end up in the red.

Normally a business that has been in existence for many years would expect to make profits but football is an industry where normal rules don’t apply.

The majority of clubs in the Premier League don’t make profits on a day to day basis, with total losses of £395 million before taking into account player sales.

Player sale profits for many clubs are volatile and difficult to predict and can have a disproportionate amount of impact upon overall profit. When Liverpool announced a ‘world record’ profit of £131 million in 2018 they were very coy about the sale of Coutinho contributing £124 million of this sum.

Steve Parish, the Palace CEO, was refreshingly honest in stating that a ‘major consideration’ in the sale of Aaron Wan-Bissaka to Manchester United for £45 million was FFP compliance. The sale of AWB reversed the losses and took place on June 29th, just before the financial year end. Had it taken place a few days later, the club would have reported a significant loss.

Player sales generated £434 million of profit for Premier League clubs in 2018/19. It’s highly likely though that in a post Covid-19 economic environment the transfer market will shrink in terms of prices paid. This will mean that clubs will not be able to rely on player sales to dig them out of a financial hole as they have done in the past.

The AWB sale is unusual in one respect in that although the deal went through on 29 June, Palace did not receive any cash at the time of the sale. The cash flow statement for the year shows that player sales (which accountants call intangibles) only generated £1.8 million in the year to 30 June.

Further investigation confirms this as the figures in the debtors total shows that the club is owed nearly £47 million in football transfer fees at 30 June 2019, up from £2m the previous year. There’s nothing wrong with such an approach, but it does seem odd that Manchester United didn’t pay a deposit when signing AWB.

Taking all the above into account, along with interest costs on borrowings, leaves Palace with a profit of £5 million for the year and £3 million overall for the six seasons in the Premier League.

Just over half the clubs in the Premier League make a pre-tax profit, but Palace are the right side of the divide this season on the back of the AWB sale. Expect nearly all clubs to make a pre tax loss in 2019/20 due to Covid-19 costs and rebates to season ticket holders, broadcasters and sponsors.

Player Trading

Last season was the first time since promotion to the Premier League that Palace had a negative net spend. It effectively allowed the club to have some breathing space before starting again. The sale of AWB was the driver of this, and the small print in the accounts suggests that Manchester United may have to pay a further £5m in add-on clauses.

Palace did write down the value of one player by £2.3 million in the year. This is usually when a player signed either has a long term injury or fails to meet expectations and his expected sales value is lower than the sum in the accounts.

In 2019/20 Palace have a net spend of just over £7 million, taking the total to £167 million in the seven years in the Premier League. This has meant that the squad, which when promoted cost less that £3 million, now has a total cost of £208 million as there has been continual investment each year.

In general the longer a club has been a member of the Premier League the higher the squad cost and Palace’s position in the table reflects this.

Borrowings

Palace’s debt have been growing since promotion to the Premier League, partly to fund investment in the playing squad. Palace’s debts are £37 million due to an external lender and £45 million to the owners. Apparently the external debt was initially repaid since then but a further loan has been obtained due to Covid-19.

Related Parties

One thing that doesn’t help owner Steve Parish is some of his transactions with the club. On top of costing the club nearly £3 million with his pay packet, he has two companies that supply goods and services to Palace for a further £279,000. Calling one of these companies Smoke and Mirrors Group Limited probably doesn’t help the situation.

Conclusion

Palace’s good season in the Premier League was matched by a set of results that are solid but reliant upon one transaction to keep them from making losses. Expect the club’s financial results to be substantially worse in 2019/20 but they will not be alone in this.

Premier League Club Values 2020

Photo displaying partial image of two pie charts on a canvas-textured page
University of Liverpool Premier League Club Valuations 2020 University of Liverpool Centre for Sports Business Group

Executive summary

  • The value of Premier League clubs based on their 2018/19 accounts increased by 1.5% overall to £14.7 billion, with the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal, Chelsea and Spurs) making up £11 billion (75%) of this total (2018: £10.6 billion 73%).
  • Spurs overtook both Manchester clubs at the top of the table on the back of reaching the Champions League final, a fourth-place finish in the Premier League and a wage bill barely half that of Manchester United.
  • Wolves, acquired for £45 million by owners Fosun in 2016/17 is now worth more than ten times that amount.
  • Many clubs have fallen in value due to relatively flat revenues as broadcasting revenues are in the final year of a three-year cycle.
  • The median value of a Premier League club fell from £366 million to £291 million.
  • The figures do not take into account the impact of COVID-19, which, based on falls in share prices for those clubs who are quoted on stock exchanges, would reduce values presently by 25-35%

Introduction

This is the University of Liverpool’s annual Premier League club valuation report. There are a variety of models used in practice to determine company values, and in an actual takeover deal environment more than one would be used.

At a time of global pandemic football is an irrelevance in terms of its importance to the economy, health, and general wellbeing of nations. We took the decision to publish the results in the context that the findings are just discussion points for fans and not in any way to pretend that it is of any importance compared to the steps being taken to reduce the harm caused by the pandemic.

Some of the values reported do seem intuitively high or low. This is a reflection of shortcomings of any model-based system, but also does perhaps highlight the success or otherwise of some clubs in terms of their business strategies compared to sporting achievements.

Valuation Table

Methodology

The valuation method is broadly based on the Markham Multivariate Model created by Dr Tom Markham, who presently is a senior executive for Sports Interactive, creators of Football Manager.

The model takes into consideration the main financial drivers of football club value in the form revenue, profits, non-recurring costs, average profits on player sales over a three-year period (which ties into how the Premier League calculates profits for Financial Fair Play purposes), net assets, wage control and proportion of seats sold.

The figures are derived from the financial statements sent to Companies House.

The model assumes that the club retains its position in the Premier League. For those clubs that have subsequently been relegated to the Championship realistic values are 60-70% lower.

The formula used is

((R+A) x ((R+P-NR+D)/R) x C)/W where

R = Revenue

A = Net Assets (adjusted for ‘soft’ loans from owners)

P = Net profit

NR = Non-recurring items (legal settlements, redundancy, player & asset sale gains/losses etc)

D = Average player sale profit over last three years

C = Average attendance/ Stadium capacity

W = Wages/Revenue

There have been some adjustments to components in the formula from the previous season and these are reflected in the comparative numbers.

As with all models, they should be treated with caution and in conjunction with other models to get a broader indication of club valuation.

Club by Club Analysis

1: Spurs £2,567 million (2018 3rd: £1,837 million)

All clubs have to compromise sporting achievement versus financial sustainability. Spurs’ control on the latter in recent years has meant them having something to put in the trophy cabinet in the new stadium in the form of winning this particular award.

Spurs have a degree of control over wages and player transactions that sets them far apart from their peer group in the so called ‘Big Six’ clubs.

Spurs income increased by 21% to £461 million in 2018/19, on the back of commercial deals at the new stadium and reaching the Champions League final. They achieved this despite their main player expenses, wages, and amortisation (transfer fees divided by contract length) being about half of some of their peer group.

Paying just 39% of their income in the form of wages gives Spurs a significant boost and their ability to keep wages so relatively low is the envy of many other club executives.

Whether this achievement is sustainable in the future is questionable, and a relatively poor season on the pitch in 2019/20 to date may be indicative of their low-cost base catching up with them.

2: Manchester City £2,186 million (2018 1st: £2,364m)

Manchester City’s first place position in the 2017/18 valuation surprised some commentators but was borne out by American investors SilverLake buying a 10% stake in the City Football Group in late 2019 for $500 million.

City’ value decreased slightly in 2019 despite winning three domestic trophies. Income advanced by 7% but the wage bill increased at three times this rate, possibly as a result of bonuses being paid for achieving targets in terms of trophies won on the pitch.

Since Pep Guardiola was appointed as first team manager City’s wage bill has increased by over £100 million and this has meant that profits have been relatively static.

City’s value is underpinned by the investment of Sheik Mansour’s Abu Dhabi United fund, which has allowed the club to have relatively low debt levels.

3: Manchester United £2,080 million (2018 2nd: 1,935m)

Manchester United’s value increased in 2019 due to an increase in profit on the back of slightly better player sales, lower tax charges and better overall cost control.

Whilst intuitively one might expect Manchester United to lead the valuation table they have had significant commitments in the form of interest charges on loans, which reduce profits, and dividends to shareholders, which reduce net assets.

Manchester United’s income advantage has been on the back of commercial deals with a variety of partners, but this advartage has stalled in recent years as the lack of on pitch success has led to commercial income plateau.

Manchester United were in danger of being overtaken in terms of generating the most income in 2019/20, but this is now less likely following Covid-19 which is likely to restrict income growth at both Liverpool and Manchester City, United’s biggest threats here.

4: Liverpool £1,553 million (2018 6th: £1,356 million)

Liverpool’s value increased in 2018/19, and the figures do not reflect the club winning the Champions League, which took place on June 2nd 2019 but their accounts go up to 31st May.

Had it not been for Covid-19 a further sizeable increase in the value would have been anticipated for 2019/20 on the back of the Champions League bonuses, World Club Championship success and almost certainly being Premier League champions too.

Liverpool’s owners FSG have seen a significant return on the £300 million that it cost them to buy the club in 2010.

Wage costs at Liverpool have doubled since 2015 as the club’s strategy appears to be to aim to break even on a day to day operating basis. The wage to income metric has operated in a relatively tight 56-58% band over recent years apart from the season that Jurgen Klopp was recruited.

Liverpool’s profits have been generated from player sales. Whilst this is an erratic and volatile method the supply line of players from Anfield in recent years has been such that they have made over £300 million from this strategy since 2015. These profits have been reinvested in improving the quality of the squad.

5: Arsenal: £1,374 million (2018 5th: £1,471 million)

Arsenal’s value has fallen for the second consecutive year due to once again only qualifying for the Europa League instead of the Champions League.

Revenue fell despite reaching the final of the Europa League, highlighting that this competition is a relatively minor earner and that Thursday evening football, especially in the early stages of the competition, is not a big draw for fans, broadcasters, or sponsors.

Arsenal are in danger of becoming detached from the rest of the ‘Big Six’ in terms of generating revenue and are falling further and further behind their peers in terms of the one area that the club can potentially grow, that of commercial income.

Arsenal made a pre-tax loss for the first time in many years as player sales generated £12 million profit compared to £120 million the previous season.

In 2017/18 Arsenal had to rely on player sales to reverse operating losses of £18 million as Oxlade-Chamberlain, Sanchez, Giroud and Walcott helped generate a profit of £120 million on disposals.

Less money in from player sales meant a lower investment in terms of recruitment too. Another season in the Europa League in 2019/20, combined with a relatively early exit from the competition is likely to see a further fall in Arsenal’s value.

6: Chelsea £1,231 million (4th: £1,615 million)

Chelsea’s value fell significantly in 2018/19 due to the club registering pre tax losses that exceeded over £100 million.

Chelsea’s income was static during the year as lack of Champions League participation led to falls in matchday and broadcast income. This was broadly matched by an increase in commercial revenue.

Chelsea have a disadvantage compared to the other ‘Big Six’ clubs in that the capacity of Stamford Bridge is considerably lower than that of the rest of its peer group.

Wages increased by 11% and transfer fee amortisation 40% resulting in Chelsea having player costs of £102 for every £100 of income, which helps explain the significant operating losses.

Roman Abramovich bankrolled a big spend on players resulting in the club being the biggest spenders on players last season.

Abramovich’s motives are as opaque as ever. His decision to stop progress in relation to moving to a new stadium appeared to be a reaction to a falling out with the UK government over visa issues.

He then lent Chelsea a net £248 million in 2018/19 to underwrite the investment in playing staff which seems inconsistent with his approach in relation to the stadium.

7: Wolverhampton Wanderers £458million (2018: Championship)

Wolves’ appearance this high in the table in their first season in the Premier League is likely to be questioned, but this reflects their success both on and off the pitch.

Wolves invested £111 million in player additions in 2018/19, but this resulted in a 7th place finish and qualification for the Europa League.

Wolves had relatively good wage control, paying just £53 in wages for every £100 of income, the fourth best in the division. Expect this to increase in future years as further signings and new contracts for established players outstrips revenue. This will have a negative impact upon the valuation when wages rise.

Owners Fosun have made a spectacular return on the £45 million it cost them to buy the club in 2016.

8: Newcastle £387 million*

Newcastle disappointingly but unsurprisingly have not published their 2018/19 accounts, so the above valuation is based on 2018 figures adjusted for changes to the model formula. UK Chancellor Rishi Sunak made an announcement in late March 2020 that companies could take an additional three months if they wished in submitting their accounts.

Mike Ashley, a master at the dark arts of Companies Act compliance, was one of only two Premier League teams to take advantage of this change to the rules.

Newcastle are presently subject to an estimated £300 million sale, which takes into account the disruption of COVID and Newcastle’s wage bill presently likely to be considerably higher than the 2018 figure of £93 million. This will reduce profits and increase the wage/income ratio, both of which would cause the MMM value to fall.

Profits in 2018 were £21 million due to good cost control and modest transfer spending, an issue which has frustrated many of Ashley’s critics, who feel more money should be invested in the playing squad.

9: Burnley £350 million (2018 8th: £398 million)

Burnley’s regular appearance in the top half of the valuatoin table always provokes queries, but ultimatly reflects that they are in many ways the club that punches above their weight both on and off the pitch.

Burnley’s income decreased slightly in 2018/19 despite participation in the Europa League. A fall from 7th to 15th in the Premier League meant far lower prize money (this works out at about £2m per place in the final table) which offset the additional revenue from Europe.

Burnley’s success is built around a modest wage and transfer fee budget. They usually recruit domestic players who have proved themselves to be successful in the Championship.

Burnley have not required any cash injections from their owners for a decade and have the ability to deliver profits on an annual basis when they are in the Premier League and modest losses when in the Championship.

10: Leicester £304 million (9th: £378 million)

Leicester’s value decreased significantly in 2018/19 mainly due to costs rising far faster than revenue. Leicester have invested significantly in players since winning the Premier League in 2016, and this has caused both wage and transfer fee amortisation costs to accelerate.

Leicester had wage and amortisation costs of £120 for every £100 of income in 2018/19. Whilst this was offset to a degree by profits on player sales, it is indicative of the challenges for any club that is attempting to break into the ‘Big Six’.

The sale of Harry Maguire and a potential Champions League finish in 2019/20 should generate an increase in Leicester’s value.

11: Watford £279 million (2018: 18th £168 million)

An improved Premier League position, FA Cup final appearance and a reduction in the wage bill have contributed to Watford’s value increasing in 2018/19.

In addition the sale of Richarlison to Everton meant the club made £22 million in player profit sales.

Like many of the ‘Other 14’ clubs Watford are reliant upon Premier League broadcast income for most of their revenues. This was a major concern earlier in 2019/20 after a poor start to the season, but with improved form under Nigel Pearson they now have a fighting chance of staying in the top division.

Watford, like most clubs in the Premier League, are still making losses on a day to day basis, but player sale profits covered those losses in 2018/19.

12: Fulham £276 million (2018 Championship)

Fulham’s value looks high and benefits from the club being promoted to play in the Premier League in 2018/19. What is becoming increasingly common is that clubs make a profit in their first season in the topflight but that is quickly reversed. Fulham however made a £21 million operating loss in 2018/19, partly due to an increase in wages but also due to spending £120 million on new signings.

Fulham’s results suggest that regardless of division, parachute payments or promotion, owning a football club is an expensive business, with losses averaging £500,000 a week over the last seven years.

13: Southampton £269 million (2018: 10th £369 million)

Southampton made an operating loss of £58 million in 2018/19, so their relatively high position in the valuation table may seem at odds with their day to day trading activities.

The club’s main ability is to develop players and sell them at a profit. Since promotion to the Premier League Southampton have generated over a quarter of a billion pounds of profit on player sales.

Whether the club can continue to make such gains in the post-COVID 19 transfer market is uncertain, as the consensus of views is that fees will be significantly depressed as sellers may be prepared to accept fire sale prices and buyers have limited funds to spend.

14: Everton £257 million (11th: £363 million)

Everton were valued at £175 million when Farhad Moshiri acquired the club in 2016. Their relatively modest present valuation is due to a significant investment in players which have been hit and miss in terms of improving results.

A repeat of the 8th place finish the previous season meant no additional prize money for Everton, wages increased partly due to their accounting period being extended to 13 months and the amortisation charge continues to grow rapidly as Richarlison was added to the squad.

The combined impact of this investment in players resulted in an operating loss of more than £100 million. This is sustainable in the short term under Premier League Profitability and Sustainability rules. Everton have had this season to resort to some unusual transactions, such as selling an option on naming rights for their yet to be approved stadium, to stay within the limits.

Everton are limited by the size and age of Goodison Park, where matchday revenues of £14 million make up just 8% of the total. A move to the new stadium at Bramley Moor Dock is essential if the club wishes to start to challenge the ‘Big Six’ financially.

15: West Ham £248 million (12th: £321 million)

West Ham is another club who most fans would expect to be valued higher than the £248 million produced by the model. CEO Karren Brady values the club at £800 million.

West Ham certainly have the potential to be higher in the valuation table, but their financial performance has held them back. Playing at the London Stadium should in theory result in substantial matchday income, but this has risen only modestly since the move from the Boleyn Ground. This is partially due to season ticket prices being relatively cheap compared to some of the other Premier League clubs in London.

West Ham’s owners have a strained relationship with fans, but there has been significant investment in players in recent seasons, but this has not been converted into improved performances on the pitch.

16: Cardiff £223 million (2018: Championship)

Cardiff effectively took an ‘air shot’ in respect of their season in the Premier League. Revenue increased as a result of promotion, but the wage bill was by some distance the lowest in the Premier League.

Research constantly there is a positive correlation between final league positions and wage levels. It is therefore no surprise that the two clubs with the lowest wage bills in the Premier League were relegated and two of the three highest wage expenses were incurred by the winners and runners up.

Cardiff made a profit before tax of less than £3 million, but this was after taking into consideration the full cost of the transfer of Emiliano Sala, the young man tragically killed shortly after signing for the club in January 2019. Cardiff also wrote down other transfer fees by nearly £12 million to further depress profits.

Cardiff’s main achievement was promotion from the Championship the previous season under Neil Warnock despite negative net spends on players in that division for four seasons.

Realistically their value will have fallen by about two-thirds at least following relegation.

17: Crystal Palace £200 million*

Crystal Palace’s valuation is based on their 2018 accounts, as like Newcastle, they have taken advantage of the relaxation of rules in relation to publishing their accounts.

Conspiracy theorists and rivals will no doubt use this to criticise Palace but there is no evidence of any undue financial stress.

Palace’s strategy since promotion to the Premier League is one of paying wages that many would consider relatively high for a small club, as well as a £240 million investment in players.

Whether the club can reduce the wage bill is open to question. Wilfried Zaha is one of the most coveted players in the Premier League and is paid accordingly to keep suitors away.

Palace had a sizeable loss in 2017/18 which kept the club value low and the club’s profits have fallen every year since promotion which has a further negative impact upon the valuation.

18: Brighton £187 million (2018 15th: £234 million)

Brighton avoided relegation in 2018/19 but it came at a financial cost. The £9 million operating profits of the club’s first season in the Premier League became a £25 million loss as player costs increased by 39% but revenue only 3%, despite an FA Cup semi-final appearance.

Brighton owner Tony Bloom has continued to invest in the club despite it reaching the Premier League.

Brighton have invested significantly in players in recent years in both the Championship and the Premier League. Player sales however have been relatively modest, and this has meant that operating losses have effectively been borne by the club owner.

19: Huddersfield £178 million (2018: 13th: £242 million)

Huddersfield were sold at the end of 2018/19 for an estimated £60 million. This coincided with the club being relegated from the Premier League, and ties in with the view that clubs in the Championship suffer a 60-70% fall in value in the second tier of English football.

Huddersfield’s income declined and wages were static. Income due to finishing lower in the Premier League and wages because many player contracts were bonus driven in relation to avoiding relegation.

However, transfer fee amortisation increased as Huddersfield spent a further £46 million on signings in 2018/19.

20: Bournemouth £99 million (2018 20th: £158 million)

Bournemouth’s value decreased due to the pincer movement of lower revenues and higher costs, especially those relating to players.

With a stadium capacity of only 11,000 the club is heavily reliant upon broadcasting income for most of its total, and the club, which was in the third tier of English football as recently as 2012/13, has been transformed by membership of the Premier League.

Bournemouth are not alone in their dependency on broadcast income with eleven Premier League clubs generating at least three-quarters of revenue from this source.

Bournemouth’s finances are further evidence of the myth that the Premier League is paved with gold for club owners. In 2012/13 the club was in League One, since then its income has increased by £126 million, but player costs have increased by £134 million.

Conclusions

The Big Six clubs continue to be very valuable and their dominance of revenue streams is likely to ensure that the gap between themselves and the remaining clubs in the Premier League is maintained.

Cost control is proving to be very difficult for all clubs in the division, especially in terms of wages and this may restrict future growth in the value of clubs especially with broadcast revenue growth slowing. Wages as a proportion of revenue grew in 2018/19 as the Premier League entered the final year of the three season deal with Sky and BT. Broadcast revenues were set to rise slightly in 2019/20 but it is unlikely to match wage growth.

Underlying profitability (pre tax and interest, excluding one off transactions and player sales) shows that Premier League clubs had a collective loss of £384 million, assuming that Newcastle and Crystal Palace’s results are the same as the previous season.

The pandemic, which of course relegates football to the sideshow in life that we have always secretly known it to be, will have had a significant impact upon the figures for the present and future seasons. Revenue streams will be reduced as matches being played in front of fans may not return until 2021. Transfer fees will decrease significantly as so few clubs will have cash to spend. In the short-term wages may fall slightly, where they will go as long-term contracts expire will be determined by long term revenue trends.

West Ham 2018/19: Flares’n’Slippers

In January 2020 David Sullivan, West Ham’s controlling shareholder said “Overall, I believe the club’s in a far better state than 10 years ago” so we thought we’d put that to the test with a look at the club’s finances during that period.

Decade of success or standing still? The West Ham that Sullivan and Gold acquired from the former Icelandic Bank owners was certainly in crisis, but have their efforts improved the happiness of fans who now attend the rented London Stadium?

Rebelling fans know West Ham have just announced their accounts for the year ended 30 June 2019, and like events on the pitch last season, disappoint more than excite.

Income

A Football club generates income from three main sources, matchday, commercial and broadcasting.

The matchday income for West Ham in 2018/19 was £27.1 million, which is just £200,000 more than the club’s final season at the Boleyn, and £7 million more than most of the preceding seasons.

Having this amount of matchday income puts West Ham 7th in the Premier League, but a long way behind the ‘Big Six’ that fans thought the club would be challenging when they said farewell to their spiritual and cultural home in 2016.

Every club generates matchday income by (number of matches x average price per ticket x average attendance) and here despite big attendances West Ham are ahead of the provincial clubs but behind the elite.

Relatively low prices at the London Stadium, which has a traditional old school working class fanbase, coupled with fewer matches than those clubs playing in UEFA competitions, meant that West Ham generated only 28 pence per seat for every £1 that Chelsea made last season.

Being tenants at the London Stadium also means that West Ham can effectively only make cash from the stadium for 19 days a season (plus any home cup matches) whereas Spurs can sweat their asset in the form of the new stadium with NFL matches, conferences, catering and concerts.

Every club has a season ticket price policy and West Ham, to their credit, seem to have some available at £299 (£320 for 2019/20) but for some matchdays the cheapest adult tickets are £55 each, which doesn’t include the binoculars needed to see the pitch from these vantage points.

Being able to exploit the modern facilities of the new stadium for commercial gain was another justification for the move in 2016, and this appears to have some merit.

A look at the commercial income totals shows that West Ham have doubled this revenue source over the last decade, with a noticeable jump since moving to the new stadium in 2016/17.

Commercial income follows that of matchday in that West Ham are again ‘best of the rest’ (Everton’s should be treated with caution following their deals with Putin pal Alisher Usmanov) but still far behind the elite.

Keeping up with the Big Six of the Premier League is unrealistic for West Ham unless they can offer sponsors UEFA competition exposure or the attraction of players that have huge social media followings.

A look at Broadcasting income shows a similar story, with West Ham recoding record figures that look good compared to the club’s history, but pale into insignificance when matched against the peer group they want to challenge.

The increase in broadcast income was mainly due to West Ham finishing 10th last season compared to 13th in 2017/18, as each additional place is worth just under £2 million.

The importance of qualifying for European competition is evident from the above table which shows the benefits to the elite clubs for reaching the latter stages of the Champions and Europa League, which can be worth up to an extra £100 million in prize money plus additional gate receipts and sponsor add-ons.

Having European qualification would change things for West Ham but realistically they would have to be regular participants there before competing in the same pond as the ‘Big Six’.

Even if the club did make it to the Europa League, they are now competing for places with Everton, Wolves and Leicester domestically, all of whom have owners who are keen to pour more money into their clubs to secure higher places in the table.

Broadcasting income growth has fallen domestically for the three years starting 2019/20 but the rise in the international rights has offset that, realistically there is limited future growth in traditional TV rights.

Overall West Ham are stuck against the glass ceiling in terms of being the 7th biggest revenue generators in the Premier League but still only earning half of that of Arsenal, the next club in the earnings league.

Costs

Like it or lump it, player related expenses are the highest element of a club’s cost base and generate endless discussion from fans and the media.

Every club needs to pay competitive wages to attract talent, resulting in what Sir Alan Sugar calls the ‘prune juice’ effect of additional money coming into the top of the game quickly exiting at the bottom in the form of player wages and transfer costs.

Year on year in 2018/19 wages increased by over 27% to an average weekly sum of £63,000 for first team regulars.

No one will be surprised that West Ham have the 8th biggest wage bill as they have the 7th biggest income stream, what will disillusion fans is the failure to make more progress on the pitch given that the unpopular owners have invested money on the pitch, albeit poorly.

The concern with the wage bill is that West Ham spent £71 on this for every £100 of income, UEFA recommend keeping this to no more than £70 so realistically the club have limited wiggle room in recruiting new players unless some existing ones leave.

Having a new signing does not mean that the whole fee is charged as an expense immediately due to the accounting dark art that is amortisation.

Amortisation is the effective rental cost of a player in relation to the transfer fee paid for his registration.

Numbers for individual transfer fees are difficult to obtain, but amortisation totals give a good long term indicator of the investment in players by the club.

Amortisation is the transfer spread over the contract life so when West Ham signed Haller for £40 million on a five-year contract, this will result in an annual amortisation charge of £8 million a year.

Squad amortisation for 2018/19 was a record £57 million, up 40% on the previous season, again suggesting investment was made, but the decisions made by the recruitment team were unsuccessful.

Overall West Ham’s amortisation cost for the last decade was £270 million, and has increased noticeably in recent years, but this has not turned into better football being seen by fans.

Under a succession of managers West Ham’s recruitment policy looks poor when compared to the amortisation costs of the likes of Spurs or Leicester, with Liverpool’s being only moderately higher too.

Looking at the rapid increase in amortisation costs indicates that West Ham have spent large sums recruiting players from other clubs and paying them handsomely, but the quality of the recruitment must be called into question.

Life in the boardroom at West Ham isn’t easy in the sense that many fans blame Gold, Sullivan and Brady for the lack of progress on the pitch, but this is offset by a 27% pay rise for West Ham’s CEO.

Ed Woodward at Manchester United, another unpopular executive, is the highest paid club CEO but there are now a considerable number earning million pound plus sums each year.

Some West Ham fans may be surprised that the club did make over £12 million profit last season from selling players, nearly all of this is likely to be in respect of Kouyate joining Crystal Palace and Reece Burke going to Hull.

Profits

So overall West Ham went from a profit before tax of £18 million to a loss of £28 million in 2019.

By looking at the above table it’s evident that West Ham’s player policy is the main reason for the reversal of profits is player related.

Owners David Gold and Sullivan have not endeared themselves to fans by charging a further £1.9 million on their £45 million loan to the club though, taking the total interest charges to over £18 million, not a game changer to the club, but high when compared to some other owners, including Mike Ashley at Newcastle, who for all his faults has lent £111 million interest free. .

West Ham managed to fund the loss last season by borrowing money secured on future broadcast rights, whilst this is a common event in the Premier League it will cause problems if the club is relegated.

Losing Premier League status would be challenging for West Ham, but the auditors seem happy with the club’s going concern status and many players have significant relegation wage clauses in their contracts.

Player trading

West Ham signed players for £108 million in the year to 31 May 2019 as Anderson, Diop, Yarmolenko, Fabianski and Co were recruited. Sales were a modest £14 million. Since then the club spent a net £36 million in the summer 2019 window and Bowen, Randolph and Soucek in January 2020.

Over the course of the last decade West Ham spent a total of £444 million on players and recouped about a third of it in sales. What is noticeable is that the club has made many of the player signings on credit, which could be a concern if the club is relegated.

Funding

West Ham have borrowed money from a variety of sources. Gold and Sullivan have lent £45 million and presently charge interest at 4.25%. In addition, there was a £42 million loan from Rights and Media Limited, which was half paid off shortly before the year end and so reduced the liability at the balance sheet date. The loan was then effectively renewed shortly after the year end. David Sullivan candidly admits that 75% of the club’s income is effectively generated between 31 May and 31 July.

The criticisms levelled at the owners are that other club owners have lent money to the club and not charged interest, including the US investors at West Ham, who own 10% of the company. Whilst the interest charged ultimately is relatively insignificant (1.8%) of revenue if the club is not delivering on the pitch then it sticks in the throat of those who have given up what has been a huge part of their lives for an anodyne extension to a shopping centre.

Summary

So, where does this leave West Ham? There is no doubt that the Gold, Sullivan and Brady are unpopular with a large proportion of fans. They hugely overpromised and underdelivered in relation to the benefits of the stadium move. The very big financial gap between West Ham and the ‘Big Six’ is as big as ever. What was so great and identifiable historically about West Ham has been lost in the shape of being representative of East End working class culture has been replaced with a very bland, very corporate and very anonymous ‘matchday experience’ that is for many a price too high. If the club was closer in the Premier League table as it is in the income and wage table then perhaps a lot would be forgiven, but until then it’s going to be a hostile environment and a sense of loss by the fans.

Premier League Ownership Investment: Love, profit, vanity or insanity?

Premier League Funding

Football clubs can broadly arrange their finances in one of three ways, bank lending, owner loans or shares.

In terms of the Premier League all three methods have been used. The following analysis is from the most recent documents filed by clubs at Companies House.

Liverpool

League leaders Liverpool are owned by the American Fenway Sports Group (FSG), who also own baseball team Boston Red Sox.

FSG acquired Liverpool in October 2010 for an estimated £300 million. The club paid off existing loans due to the previous owners of £105 million.

Since then FSG have lent the club almost £100 million as well as borrowing £56 million from banks to help fund stadium expansion at Anfield.

Liverpool have a borrowing facility of £150 million from the bank but sales of the likes of Suarez, Sterling and Coutinho have allowed Liverpool to stay significantly below that sum.

If the club goes ahead with further expansion to take Anfield up to 60,000 capacity then they may need to borrow more.

The loans are at very low interest rates (1.24% from FSG and 2.24% from the banks).

Manchester City

Manchester City were acquired by Sheik Mansour’s Abu Dhabi United Group in 2008. The owners initially lent money to the club at an interest rate of 10% but these loans were quickly converted into shares, upon which no interest is payable.

Abu Dhabi United accelerated City’s growth by underwriting large losses as the club invested heavily in players, manager and infrastructure. These losses peaked at £197 million in 2011.

Manchester City are part of City Football Group, which owns clubs in the USA, Australia, China, Japan, India and Uruguay. The success of the multi club model was evidenced recently when American tech company SilverLake bought 10% of City Football Group for £389 million.

Spurs

Spurs historically have been cautious in terms of issuing shares and borrowing, but the decision to build a new stadium at White Hart Lane necessitated change. Spurs have mainly taken the bank borrowing route with a £537 million loan facility arranged with a consortium of Bank of America, HSBC and Goldman Sachs. In addition majority shareholder ENIC, controlled by Joe Lewis in the Bahamas, have provided a further £50 million.

The interest rate on the loan is modest so Spurs will be paying about £15 million a year, which will be more than covered by the additional matchday, hospitality and commercial income generated by the 62,000 multi-function stadium, which has already been used for hosting NFL fixtures.

Chelsea

The Chelsea company structure resembles that of a matryoshka doll, which is befitting given that Roman Abramovich is from Russia.

Chelsea Football Club Limited is owned by Chelsea FC plc, which in turn is owned by Fordstam Limited, which is funded by Camberley International Investments Limited, (CII) controlled by Mr Abramovich.

In 2018/19 Abramovich lent £247 million to the club, which seems at odds with the stories that he had lost interest in Chelsea following the refusal of the British government to renew his investor visa. He had historically rented an executive box at Stamford Bridge for £1 million a year but has not been seen at the stadium now since 2017.

In total Abramovich has lent the club £1.38 billion interest free since acquiring it in 2003. The club’s stadium expansion/move has been put on hold indefinitely though, which does mean that Chelsea are some way behind its peer group in the ‘Big Six’ in terms of capacity, which in term impacts upon its ability to generate revenues.

Manchester United

Manchester United were acquired by Malcolm Glazer in 2005 via a Leveraged Buy Out (LBO), at a time when the club had zero debt and cash in the bank. An LBO arises when an investor borrows a substantial sum to buy a company and uses the cash generated by the business to pay the loans.

Initially banks were wary of lending to a business they were not convinced was risk free and this was reflected in very high interest rates and some of the loans being Payment In Kind (PIK) where the borrower pays neither capital nor interest, and the interest cost is added to the value of the loan.

Manchester United are another example of a complex ownership structure, involving a myriad of companies registered in both the UK and Cayman Islands. The club had a share listing in New York in 2012, part of which was used to pay off £200 million of loans. United have approximately £500 million of loans outstanding but these have been renegotiated at much lower interest rates.

The Glazer family have not invested sums into the club themselves. Manchester United is the only Premier League club that regularly pays a dividend to shareholders, and this returns about £22 million to them each year.

Arsenal

Arsenal’s owner Stan Kroenke controls the club via US company KSE UK Inc. Kroenke has come under criticism from Arsenal fans for his perceived reluctance to invest money in the playing squad, instead concentrating on reducing the club’s debt levels.

Arsenal moved from Highbury to The Emirates stadium in 2006, with loans peaking shortly thereafter at £415 million. Since then the debt has halved as the club has made regular repayments to lenders.

Kroenke bought out the other shareholders of Arsenal for £600 million to take the club private in 2018. His critics have used this to accuse him of having money to fund share purchases but being reluctant to spend on players to help win trophies.

Research indicates that on field success in terms of trophies is closely correlated to wage levels and here Arsenal have fallen behind their peer group. Kroenke’s critics have accused him of being content to sacrifice on pitch performance for a better looking balance sheet.

Under Arsene Wenger the club finished either 3rd or 4th in the Premier League for ten seasons from 2005-6 onwards, sufficient to qualify for the Champions League but in the eyes of fans not investing enough in players to challenge for major trophies.

Everton

Everton recently announced record losses of £112 million as new owner Farhad Moshiri has underwritten an attempt to break into the regular group of clubs who compete for Champions League places.

The losses are a result of paying higher transfer fees and wages than in previous years. Moshiri was previously a shareholder at Arsenal, but sold his shares and used the proceeds to buy 49.9% of Everton for an estimated £175 million in 2016.

Since then Moshiri has increased his shareholding to give him greater control, but more importantly for the club has lent £350 million interest free via an Isle of Man company. In addition Moshiri’s business partner Alisher Usmanov has paid £48 million for innovative naming rights schemes for the training ground and a potential future stadium at Bramley-Moore Dock.

West Ham

West Ham have been owned by David Sullivan and David Gold since 2010. The club’s previous owners, an Icelandic bank consortium, had financial trouble following the global economic crash.

Under Gold and Sullivan West Ham have moved to the London Stadium after selling the Boleyn Ground. They lent the club money upon which interest of £18 million was charged over the years. The loan balance of £45 million is still outstanding. This has angered some West Ham fans who feel that the interest charges would have been better spent on the playing squad. The owners argue that the interest rates they have charged, of between 4-6%, are lower than would have been charged by a bank and so the club has saved money.

Brighton

Brighton owner and lifelong fan Tony Bloom acquired the club when it was in League One and playing at a local athletic track. He then underwrote the move to a new stadium at Falmer as well as new training facilities in a combination of shares and interest free loans. Despite promotion to the Premier League in 2017 Bloom has continued to bankroll the club, with a total commitment of £362 million by the end of 2019.

Podcast 23 January

Kieran talks Kevin through his number crunch of the average weekly wages at each Premier League club since 1993. They also examine the difference between the prize money in the Women’s FA Cup compared to the men’s version, the size of the new kit deal between Nike and Liverpool, the significance of the Sunderland owner putting the club up for sale, and why some Championship clubs are charging more than those in the Premier League for away tickets. https://play.acast.com/s/priceoffootball/6d457b09-cb48-4da7-a09f-7c74396f45fb

Football Transfers and Creative Accounting: Protect me from what I want

It’s the disease of the age, It’s the disease that we crave.

When Derby County published their response to the EFL charges for financial misconduct on Friday 17th January 2020, it included reference to ‘the newly notified charge of intangible fixed asset amortisation’.

The nonsense below is all about the said subject, but extended to how clubs can increase or decrease costs in the accounts in relation to how they account for players.

The Basics

When a club signs a player, they will often pay compensation to the previous club for his registration certificate lodged at the football authorities, this is what is commonly called a transfer fee and is either negotiated between the two clubs or embedded in the player’s contract.

The buying club then spreads the cost of the transfer fee over the period of the contract signed by the player, so when Harry Maguire signed for Manchester United in summer 2019 for £80 million on a six year deal this works out as an annual amortisation cost of £13.3 million (£80m/6).

The total amortisation fees for the whole squad are treated as an expense in the accounts, and importantly, ARE included in Financial Fair Play/Profitability & Sustainability (P&S) calculations.

Amortisation costs for many clubs in higher divisions are usually the second biggest expense after that of player wages, as shown by the figures below for Everton.

The creatives

Under P&S rules clubs are assessed over a three year period, so sometimes it may be beneficial for them to accelerate or decelerate costs in a particular year, so ensure they stay within the limits during a particular three year assessment period.

Here are possible methods that could be used, all of which have been approved by the clubs’ respective auditors.

  1. Player impairment

All fans have seen players who they quickly write off as rubbish and a waste of money. This applies in the accounts too.

In 2015/16 Aston Villa were relegated from the Premier League, which allows a P&S loss of £105 million over three years, which then tapers down to £39 million over three years in the EFL Championship.

It is therefore in Villa’s interests to put as many costs into their 2015/16 accounts to be absorbed by their Premier League P&S limit.

Villa achieved this by charging an extra £79.6 million as a cost in the expense for impairment of the stadium and players (called ‘intangible assets’ in the accounts).

This works as follows. If you sign a player for £30 million on a five year contract the amortisation cost is £6m a year, a tough cost to have to deal with in the Championship. However, if the club was relegated at the end of the first season there is nothing to stop it from assessing the player’s value and conclude that he is worth, say, £10 million.

This would mean that his book value at the end of year one would fall from £24 million (£30m less one year’s amortisation of £6m) to £10m, which would result in a £14 million impairment charge.

However in subsequent years the amortisation charge would be just £2.5 million a year (£10m book value spread over the remaining four years of the contract), which is useful for P&S purposes in the Championship.

When Villa did this the £35 million impairment charge in 2016 would (if remaining contract lengths were on average 3 years) have reduced costs by nearly £12 million a year in the Championship.

Sometimes the reason for an impairment is clear and the decrease in value is understandable (due to long term injury, the fee initially paid was too high or the player is Mario Balotelli). Impairment does however give clubs licence to accelerate player costs into an earlier year.

  1. Contract extensions

Amortisation is the registration fee spread over the contract period, so if you extend the contract you reduce the annual cost.

Example: Sign a player for £20m on 1 January 2019 on a four year contract. At the end of 2019 give him a two year contract extension.

Amortisation charge in 2019 = £5m (£20m/4)

Amortisation charge 2020 onwards £3m ((20-5m)/(3+2))

This reduces FFP losses by £2m a year.

Therefore by extending a contract a club can reduce costs in a single year.

  1. Player sale profits

These are calculated by comparing the transfer fee receivable to the book value of the player. Even when a player is sold at what fans may think is a loss for accounting purposes it can work out at a profit.

Example: A player is signed for £40 million on a five year contract on 1 January 2018. He’s not been a success so is sold for £26 million on 1 January 2020. At that date his accounting book value is £24 million (£40m – 2 years amortisation at £8m a year) so book a profit of £2m on the deal.

It’s always important to check the sale date though, as these can be confusing. In the Derby County accounts for the year ended 30 June 2017 the club included the profit on the sale of Tom Ince to Huddersfield Town, which contributed towards FFP for that year. That’s all well and good but the sale of Ince did not take place until July 2017, which is in the 2017/18 accounts in theory.

By having a player sale just before or after the year end a club can increase or decrease profits in the year that suits it best.

  1. Residual Values

The issue that appears to be irking the EFL most of all is Derby’s use of residual values for players. All other Premier League and Championship clubs amortise player contracts on a straight line basis to a zero value at the end of the contract. This is because players can leave on a Bosman deal at the contract end so the ‘selling’ club received no fee.

Derby changed their accounting policy in 2017 for player registration fees to include the ‘ consideration of active market residual values’. Prior to that Derby ignored residual values similar to other clubs.

This might seem an insignificant comment, but this allows a club to reduce amortisation fees (and therefore costs for FFP). A player signed on a £30m four year deal costs £7.5 million annually in amortisation.

If the club gives him (say) a £12 million residual value at the end of the contract (which ignores he can leave on a Bosman) then the amortisation cost falls to ((£30-12m)/4) = £4.5 million a year.

A look at Derby’s accounts shows that for 2017/18 the club had transfer fees and registration intangible assets that were £52.5m at the start of the year and £62.2m at the end. This gives an average of £57.3m. The amortisation fee for the year was £6.6 million. This means that Derby were effectively spreading transfer fees over 8.7 years, which seems very long for contract length, and is far longer than the average for the division of about 3.7 years.

Derby’s defence is that the EFL had already signed off on the issue and that they should have been aware of it. I can confirm the latter having written to the EFL in June 2018 on the very subject which generated this response from…supporter services.

Given that the EFL have been aware of the issue since June 2018, it does seem odd that the charges have been made at Derby in January 2020.

Podcast 16 January

In this show Kevin and Kieran look at how Chelsea won the Europa League, finished in the top four domestically but still needed to borrow £247 million from Roman Abramovich as they racked up huge losses.

Plus a look at what happens when UEFA ride into town, the situation at Southend where wages have gone unpaid, why Spanish and Italian games are being played in Riyadh and much more.