Selling your stadium to yourself: It’s not cricket

Introduction

Sale and leaseback is the latest buzz phrase in the world of football finance, as Derby County, Aston Villa and Sheffield Wednesday have used this mechanism to avoid points deductions in the EFL Championship.

How does it work, is it legitimate and what the benefits to the clubs involved (and their owners) in terms of FFP ‘compliance’ will be covered in this article?

What is sale and leaseback?

Accountants have used sale and leaseback for a long time to help companies raise money and it is usually a transaction arranged with a bank or other lender effectively mortgaging an existing property owned by a business.

Under present accounting rules when a company sells a property it can book a profit, calculated as the difference between the sale proceeds and the book (not market) value of the asset.

New owners of the stadium (which in the case of both Derby and Villa (and probably Wednesday too) is a new company set up by club owner) pays an agreed amount for the stadium then agrees a rental agreement with the ‘tenant’ (i.e. the football club).

How the price in relation to the sale of the stadium is agreed has provoked some raised eyebrows from other Championship club chairmen as there is a suspicion this has been inflated to maximise the profit on the disposal.

Applying the rules

As the ultimate ownership of the stadium is unchanged then what is effectively happening is that Mel Morris (in the case of Derby), Wes Eadons and Nassef Sawiris (at Villa) and Dejphon Chansiri (at Wednesday) have simply shifted large amounts of money from one of their bank accounts to another, but their respective clubs have had a FFP boost as a result.

Referring to the Derby accounts for the three years ending 30 June 2018 shows the club had an accumulated loss before tax of £23.7 million, seemingly well within the Profitability and Sustainability limit of £39 million.

Viewing the accounts of parent company SevCo5112 Ltd revealed that the loss of £1.1 million in 2018 was partly due to the sale of Pride Park at a price of £81.1 million, which generated a profit of £39.9 million as a result.

Every Derby fan will claim that the transaction was within the rules and based on the pre-tax figures in the accounts the three-year loss was ‘just’ £23.7 million.

Yet these losses can be reduced further by clubs spending money on ‘good’ activities, such as infrastructure, academy, women’s football and community schemes as these are excluded from FFP calculations.

If these costs are included then Derby would have had a P&S loss of £11.1 million, well within the allowable limit.

Should the profit on the sale of the stadium have been disallowed (as per the original FFP rules) then the loss would have been £39.1 million higher at £50.2 million and a probable eight-point deduction in 2018/19 meaning Middlesbrough, rather than Derby, would have made the playoffs.

Aston Villa had a much lower ‘sale’ price of Villa Park, which initially seems odd given that the stadium site is much larger, but this allowed the club to state that it complied with FFP for 2018/19, although based on our calculations there would probably have been only a three point deduction and Villa would still have made the playoff.

Compliance is very much the watchword in relation to P&S rules and the use of such creative accounting is surely more to do with the appallingly lax set of rules created by the EFL rather than clubs cheating, as has been accused by fans of other clubs.

Over at Hillsborough the stadium was ‘sold’ for £60 million and a £38.1 million profit booked although this is further confused by Land Registry still showing in July 2019 that it still belonged to the club even though the accounts in which the sale is shown are for 2017/18.

Have they done anything wrong?

Middlesbrough owner Steve Gibson has been the most vocal critic of the sale and leaseback transactions and has threatened legal action but whilst the actions of the Derby et al aren’t cricket we don’t think they have broken any rules.

Potential legal action by Gibson is therefore unlikely to succeed, although it will make for another tense meeting of club chairmen when they have their next EFL meet up.

Less clear is whether Gibson’s suspicion that the sale price of the stadia ‘sold’ has been at an inflated price.

Each club who has made such a sale has presumably used a firm of surveyors to determine the value although critics will point out that given the club chairmen are effectively paying the surveyors’ fees there will be a conflict of interest.

Those of you who watch daytime TV will have seen the likes of Dion Dublin take about a yield on properties which are bought to let, and this principle could be applied in relation to the three clubs involved.

Every company that has a rental agreement should in theory show the rents due in future years in the footnotes to the accounts.

Buried away in the Derby footnotes on page 33 is a note showing that Derby’s rent for the following year was increasing by about £1.05 million and the club appears to be committed to paying a total extra rent of £23 million in future years, far less than the £80 million sale proceeds.

Entering those numbers into our big calculator gives the new owner of Pride Park a 1.3% yield, which is unlikely to be given a thumbs up from Dion Dublin and co.

Looking at the accounts for Sheffield Wednesday gives equal confusion as the club does not appear to have any rental cost for Hillsborough in future years despite selling the ground for £60 million and so the new owner could have a zero yield.

Leasing football grounds, it must be stressed, is perfectly legitimate (Manchester City have such an arrangement with the local council for the Etihad, West Ham similar with the London stadium).

Conclusion

Each Championship club that has taken such an approach in the last couple of years has benefitted in terms of their ability to compete on the pitch as a result of these transactions and this has caused resentment from other club owners who have not used such mechanisms.

No one seemed to notice the change to the P&S Rules initially in 2016 and this is where the crux of the problem lies, as someone should take responsibility and explain whether the change was simply a cock up or a deliberate dilution of P&S.

Don’t expect anyone at the EFL to hold their hands up though, given the record of the organisation claiming to be ‘only a competition organiser’ whenever the flak starts flying.

Under the old EFL FFP rules profits on sales of tangible fixed assets, such as stadia, were specifically excluded from the calculations, which would have had a huge impact upon the ability of the clubs involved to trade. Derby, for example, spent over £15 million in 2017/18 on new players and a further £18.5 million in 2018/19, albeit with sales of players bringing in £16 million over that period too. Sheffield Wednesday were able to spend £168 on wages in 2017/18 for every £100 of income and Villa kept the superb Jack Grealish at Villa Park on the back of a lucrative new contract and were rewarded with promotion to the Premier League.

The new P&S rules make no reference to profits on asset sales and therefore they are legitimately included in the calculations. Why the change was allowed to go through has never been explained, although we have heard on the grapevine that the EFL simply cut and pasted the Premier League P&S rules (which have always allowed asset sales) without looking at the small print for any changes, unlike the accountants and lawyers at Derby.

The overall lesson learnt, as some are finding out with the present FaceApp photo ageing application, is that if you don’t read the small print someone else will, and they can make you look fairly stupid as a result, as the EFL is probably privately conceding at present.

Our view from day one of FFP is that it’s an artificial construct that has earned large sums for accountants and lawyers (the EFL’s legal costs for the QPR ruling are estimated to be £3 million and presumably QPR’s silks didn’t do it for free either) and looking at Bolton, Bury, Notts County, Oldham, Macclesfield etc hasn’t achieved much in the way of financial restraint.

Sheffield Wednesday 2017/18: When the sun goes down

If I stay I can eat my weight in tuna every year? It’s tempting.

Championship football may be the most unpredictable and exciting in the country, but it comes at a price, and Sheffield Wednesday’s very delayed 2017/18 accounts are no exception.

Huge losses are run up in the division as chairmen leave common sense behind and twist on 18 in the hope of achieving promotion to ‘the promised land’ of 8pm kickoff on a Monday night at home to Watford.

Accountants can now be as valuable as strikers if they can come up with schemes that Baldrick from Blackadder would call ‘cunning’ and help clubs avoid the laughably called Profitability and Sustainability (P&S) points deductions of up to 12 points.

No club apart from Birmingham City has suffered a points deduction to date though but have Sheffield Wednesday pushed the rules to the limit in their accounts covering 14 months to 31 July 2018?

Income

Sheffield Wednesday should ideally show three types of income in their accounts, matchday, broadcast and commercial, but for reasons best known to owner Dejphon Chansiri they combine the first two, so some assumptions have been made.

Income from matchday sales decreased by 4% on the back of Wednesday having a forgettable season and finishing 15th compared to 4th in 2016/17 and average attendances dropped by 1,400 per home match.

Relative to other clubs in the division Wednesday have reasonably good attendances and had the fourth highest matchday income in 2017/18, although they did have 14 months instead of 12 when they were generating this sum, much of it out of season.

Income from broadcasting is mainly generated by solidarity payments from the Premier League (about £4.3 million) and the EFL deal with Sky (about £2.3 million plus appearance fees of £100-140,000 per home match).

If a club has been relegated from the Premier League in the last 2-3 years though it also receives parachute payments of £14-41 million.

Not receiving parachute payments puts the remaining Championship clubs at a significant disadvantage, although the Premier League argues such a system helps reduce the possibility of relegated clubs going out of business.

There are a few Championship owners who think they are short-changed with the present EFL TV deal but realistically they will struggle to generate significantly more than the existing arrangement, which is split 80% to the Championship, 12% to League One and 8% to League Two clubs.

Even if the Sky deal, which lasts five years, was scrapped, it’s unlikely that a new broadcaster would be willing to pay much more, as armchair fans tend to focus on the elite Premier League teams and the remainder of that division are simply fortunate that collective sale of rights takes place.

Revenue from commercial deals and sponsors was up 17% for Wednesday in 2017/18 to £7.1 million, although most of this was due to the additional two months of trading.

For clubs in the Championship it is a cut throat market trying to persuade sponsors to sign deals, but Wednesday have an advantage to a degree in that their shirts bear the owner’s name and there are other deals with Elev8 drink and sportswear and a local taxi company that appears to have no taxis, both of which are owned by the club owner which generated about £1.2 million.

Even taking into account the above issues Wednesday are at best mid table in terms of commercial income, reflecting the club being in the doldrums for so long in terms of national and global profile.

Relative to the period prior to Chansiri’s involvement with Wednesday, the club is now earning about £10 million a year more, but this is chicken feed compared to those in the Premier League or receiving parachute payments.

Costs

Every fan knows that the biggest costs for a football club relates to players and the Owls’ accounts illustrate this clearly.

Sheffield Wednesday’s wage bill increased by over a half to £42 million in 2017/18 as the owner backed the manager in the transfer market and also the full year cost of new contracts for the likes of Forestieri.

Wages in the Championship average £15,000 a week, and Wednesday are in the top half of this table at £20,300.

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Increased rewards for promotion to the Premier League have resulted in Championship clubs paying higher and higher amounts in trying to get there.

The average wage paid by Wednesday has increased by 418% over the last decade, but most noticeably is how wages have nearly tripled in the last three years under Chansiri.

High player remuneration in the last three years has meant that Wednesday were paying £168 in wages for every £100 of income meaning the club is automatically making sizeable losses before any of the day to day running costs are incurred.

Getting wages under control was in theory one of the aims of Financial Fair Play, now called Profitability and Sustainability (P&S) rules but this would appear to have failed in the Championship as wages are now the highest ever compared to income.

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Only in football would spending more money on wages than generated through revenue be applauded by many, but from a fans’ perspective so long as the club is promoted the end is justified by the means.

Amortisation is the other main expense in relation to players where the transfer fee is spread over the life of the contract such as Wednesday signing Jordan Rhodes for £8 million on a three-year contract this works out as £2.67 million amortisation a year.

The amortisation fee in the profit and loss account takes into account all the squad players signed for fees and reflects the longer term investment in transfers.

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Sheffield Wednesday have spent substantial sums in the transfer market since Chansiri by their previous standards and this is reflected in the amortisation charge increasing by a factor of ten.

Profits/(Losses)

Profits are revenues less costs and the consequences of Wednesday’s recent splurge on player spending has meant that day to day losses increased rapidly and have averaged £420,000 a week under Chansiri.

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Even though Wednesday’s losses last season were the largest in their history, they were still exceeded by seven other clubs in the Championship in 2017/18.

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The only way that clubs can usually reduce these losses is via player sales or owners underwriting them. Wednesday have had relatively little success in terms of player sales in recent years though.

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This unwillingness or inability to sell players for large fees isn’t unique to Wednesday, but some other clubs have been able to generate huge sums which are used to ensure P&S compliance.

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Wednesday therefore took extreme measures to reduce the losses in selling Hillsborough. The agreed fee appears to be £60 million, as the stadium had a value in the accounts of £22m and so booked the difference of £38m as profit.

This transaction has been contentious in a number of ways. Under the old version of FFP profits on asset sales used to be disallowed and so there was no incentive for clubs to make disposals.

However, when the rules were brought into line with the Premier League in 2016, Shaun Harvey, the Mr Bean of football regulators, and co ignored a change which allowed asset sales to be included.

Derby County’s accountants were the first to spot this anomaly and ‘sold’ Pride Park for £80 million in their 2017/18 accounts to another company owned by chairman Mel Morris-Obe, helping to reduce a trading loss of £47 million. Aston Villa have done similar with Villa Park in the present season, which allowed them to keep Jack Grealish and be promoted on the back of his sublime skills, whilst transferring the stadium from the left to the right hands of the new owners after running up operating losses of £95 million in the first two years following relegation.

Wednesday have done the same, but the way they’ve gone about the sale of the ground has won them no favours. The ‘sale’ of the stadium is to a related party of Chansiri, was revealed in the footnotes to the accounts, but he clearly thinks that the fans have no right to know about such significant transactions.

There’s no indication as to the date of the sale or to which of Chansiri’s other companies the sale has been made. In the debtors note to the accounts there is a disclosure that indicates the sale proceeds are being spread over eight years.

If this is the case then presumably Wednesday should be able to charge interest on the outstanding payments. The price of £60 million has been queried in some circles, but presumably it has been assessed by an independent surveyor (appointed and paid for by Chansiri) and ticked off by the independent auditors (also appointed and paid for by Chansiri).

With the sale of the stadium it looks as if Wednesday would have made a P&S loss of just over £19 million in the three year assessment period. If the old FFP rules had still applied then the loss would have been £57 million and a likely 12 point penalty would have applied.

Player Trading

Under the previous regime Wednesday were cautious in the transfer market but Chansiri has allowed managers to recruit in order to try to achieve promotion.

A net spend of £10.7 million in 2017/18 was certainly competitive for last season but not excessive by Championship standards.

Owner Funding

Club owners can invest money in three ways, loans (which may or may not be interest bearing, share issues or related party transactions such as the stadium sale.

Since arriving at Hillsborough Chansiri has lent the club £65 million, and in September 2018 put in another £21 million via a new share issue.

Conclusion

Football should be about goal, chances, signings, red cards and abusing Mike Dean. If there are to be financial rules and regulations they should be robust and transparent.

The EFL’s P&S rules have proven to be weak and allowed rich owners to use expensive and creative accountants to devise schemes that achieve ‘compliance’ but having nothing to do with either Profitability or Sustainability.

In doing so the game is reduced to a rich man’s plaything and theres a lot of evidence that rich men think that rules don’t apply to them, as they can be ignored, bought or circumnavigated.

It’s no surprise that the three clubs who have applied the stadium sale and leaseback loophole are .owned by very wealthy people who consider themselves to be above the principles that FFP was supposed to be about, of preventing clubs ‘buying’ promotion or success by injecting as much money as was required to achieve their objectives. 

Villa were promoted to the Premier League on the back of such  behaviour, Derby made the playoff finals, suggesting that the concepts of sporting integrity that many hold dear are sneered at by the billionaires, multi-millionaires, weasel accountants and lawyers in their slick haircuts and sharp suits who wriggle their way through the small print and champion loopholes rather than football skill and prowess. 

Wednesday have ended up with a soft transfer embargo due to Chansiri’s stubbornness in refusing to send in the accounts to the EFL by the due deadline. This has resulted in the club being unable to deal in the transfer market as easily as the manager would like. 

The fans are left in the dark, they are lucky in a way to have an owner who is willing to empty his pockets (or rather those of his successful family) into Wednesday but at the same time his lack of football knowledge means he’s open to be taken advantage of by those who see the game purely as a commission making vehicle and a lot of money ( admittedly his) is wasted in the process. 

If such benevolence results in promotion then no one cares, but if not then there’s little to cheer about if you’re an Owl, as you’re the person who invests emotionally every week in the club, when you renew your season ticket and when you travel 400 miles on a Tuesday night for an abysmal away performance out of loyalty and love for your club. 

Ultimately it’s his club to do with as he sees fit, but having a soft transfer embargo as a result of some of his actions offsets the generosity he’s shown to players and managers over the last few years. It’s a shame because as an away fan a trip to Wednesday is a great day out. 

So long as the money keeps coming in then fans can be happy as they have someone willing to fund transfers and wages. Speak to fans of Liverpool under Hicks and Gillett,  Blackpool under the Oystons, Villa under Tony Xia,  Birmingham under Carson Yeung, Bolton under Ken Anderson and Bury under the last two owners (as well as many others who I’ve not mentioned) and the issues of club governance and owner motives do give cause for concern. 

 

Leeds 2018: Heartland

In the failing failing failing, Heartland make the places mine

Overview

Standing on the brink of promotion to the Premier League, playing exciting football and with a cult hero as a manager, Leeds United are cool to like again.

The club’s recently published accounts show that this success hasn’t come free but by the standards of the Championship Leeds have been a model of restraint compared to other owners who have gambled with the existence of their clubs.

Elland Road regulars have plenty of experience of improper owners and at present they seem to be operating with a competitive budget without going overboard.

Very few clubs get promoted making a profit and whilst Leeds are unlikely to do so themselves at least the level of losses incurred will be modest compared to other clubs who have gone up recently.

Revenue

EFL rules encourage clubs to split their revenue into at least three categories, matchday, broadcast and commercial.

Every club is trying to maximise all revenue sources at present due to rapidly rising wages, but Leeds were one of the very few who have been in the Championship for a few years to increase all type.

Various other revenue streams are also shown by some clubs (Leeds separate out catering and merchandise for example) but for the purposes of consistency they are all added to the ‘commercial’ heading.

Average attendances at Elland Road were 31,521 in 2017/18, up nearly 4,000 from the previous season, which contributed to a 10.6% increase in matchday income.

Nearly all the additional matchday income came from higher attendances as average revenue per fan has been broadly static for the last five seasons, with 2012/13 being higher partly due to good cup runs that season.

Sunderland, Sheffield Wednesday and Bolton haven’t published their results for 2017/18 yet (all three have reasons to hide the numbers) but for a team that finished 13th in the Championship last to have the second highest matchday income in the division is a sign of the club’s potential.

Income from broadcasting is a thorny subject for Leeds fans as whilst they are regularly chosen for live matches on TV this causes maximum disruption for fans planning their weekends and minimal extra income for the club.

Sky pay £100,000-£140,000 for home Championship matches (and £10,000 for away matches) but compared to parachute payments for those clubs relegated from the Premier League this is miniscule.

Non-parachute payment receiving clubs such as Leeds start each season in the Championship at a huge disadvantage, with research showing that those clubs recently relegated have a seven-point head start due to their extra PL funding.

On the other hand, some sides recently such as Sunderland and Wolves have dropped straight out of the Championship into League One despite receiving parachute payments, mainly due to having disaffected players on huge contracts refusing to move on due to the money they are earning.

The revenue generated from commercial deals and sponsors is where Leeds had the most impressive growth in 2017/18, with an increase of 33% compared to the previous season.

First in the commercial income table by a street is an impressive performance by Leeds as the club leveraged on the goodwill towards the new owner and made the most of being a big single club city.

Income from commercial sources in the Championship included catering (up by £1 million) merchandising (up £1 million) and general sponsorship (up £3 million) but overall Leeds success here helped give additional funds to be reinvested into the playing squad.

The fact that Leeds had more commercial income than half the clubs in the Premier League shows that the potential here is significant if the club is promoted.

Total income over £40 million is very impressive for a club not in receipt of parachute payments and should ensure Leeds are competitive at the top of the division regardless of whether they go up.

Costs

Overall costs for Leeds increased significantly in 2018 and it will come as no surprise to fans that this was driven mainly by a rise in player costs.

Staff costs rose by over £10 million in 2017/18 although this would include redundancy payoffs for Thomas Christiansen and Paul Heckingbottom (along with their coaching staff).

Nevertheless, despite this increase Leeds were only about mid-table in the Championship wage table last season, as the clubs with parachute payments were able to afford higher sums to players and management.

In terms of wage control Leeds, despite the increase in costs, only paid out £77 in wages for every £100 of revenue, compared to a Championship average of £108.

For any club in the Championship it is a constant battle between gambling on player investment to increase the chances of promotion which if unsuccessful could put the whole future of the club in the balance.

Financial Fair Play (FFP) in theory was introduced to try to prevent this but doesn’t seem to have worked in the Championship to date, with last minute rescues of the likes of Villa and Bolton being the only reason these clubs haven’t gone into administration or worse.

Birmingham being fined 9 points is hardly surprising given that the club spent more than twice their revenue on wages, what is surprising is that other clubs have not been subject to a similar fate.

In terms of transfer fees, these are spread over the life of the contracts signed by players in what are referred to as amortisation costs.

Ezgjan Alioski was signed by Leeds for £2.2m from Lugano in August 2017 on a four-year deal, so that would normally work out at £550,000 (£2.2/4) a year in amortisation costs.

Leeds total amortisation cost, which is the figure that represents all transfers, increased by 50% in 2017/18 as the club invested in Forshaw, Jansson, Saiz, Roberts, Alioski and others for million pound plus transfer fees.

Spreading transfer fees via amortisation reduces the volatility of the cost of transfer fees in a single season and reflects a club’s long-term spending on players.

Amortisation and wages together as a proportion of revenue was 97%, which meant that Leeds had little left to pay for the other day to day running costs of the club, such as rent (£2.2 million) depreciation (£1.6 million) and so on, with ‘other costs’ in total coming to over £17 million.

Profits and losses

Subtracting costs from revenue gives a profit or loss figure for the year and Leeds had an operating loss from day to day transactions of just under £20 million for 2017/18.

Big losses are incurred in the Championship by nearly every club as owners commit to pay the wages and transfer fees on signings that they hope will result in promotion.

In the Championship losses were £505 million last season (and that is without Sunderland, Sheffield United and Bolton) which shows the extreme pressures of trying to compete in the division.

Championship clubs all made operating losses last season and the only way for these to be financed is via player sales or owners investing money via loans or shares.

Yearly profits from player sales have been beneficial for Leeds recently, and Liam Bridcutt’s and Chris Woods’ departures, along with some sell on clauses on previous disposals, were the main drivers of the £18 million profit on player sales last season that absorbed most of the operating losses.

Championship clubs managed to recoup over £210 million of the losses via player sale profits but this still leaves a big gap to be plugged by owners.

Letting players go does generate cash but also has a detrimental impact on the quality of the remaining squad but is a financial necessity at times, fortunately for Leeds good cheap recruitment and an impressive academy scheme have improved the quality of football this season.

Excluding costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Struggling to generate cash from operations is common in the Championship but is does mean that clubs must increasingly hope that owners will make up the deficit.

EFL rules allow clubs to lose for FFP purposes (officially called Profitability and Sustainability in the Championship) £39 million over three seasons, but some costs (infrastructure, academy, women’s football and community schemes) are excluded from the calculations.

An estimated P&S profit of £1.6 million over the last three seasons suggest Leeds, even if they are not successful this season, are well within the limits and would not need a fire sale of players during the summer of 2019.

The actual details of P&S calculations for EFL Championship clubs are unknown, prompting much speculation and anger amongst fans who are unsure whether or not their club is subject to ‘soft’ sanctions, which are not publicised, but Leeds are almost certainly not being punished for these given the relatively prudent way the club is run.

Player Trading

Leeds spent £28 million on new signings in 2017/18 on many signings as the two new managers tried to mould squads. The sale of Chris Wood offset a large proportion of these player purchases.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent but again Leeds here have been relatively modest by the standards of the division.

Leeds have been building up the squad in recent seasons, which had a total cost of £37 million at then end of 2017/18. The appointment of Bielsa as coach in the summer of 2018 resulted in a further estimated net spend, mainly on Patrick Bamford, of about £4 million.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. The tie up with SF49’ers brought in share investment of £11 million and there was net borrowing of about £2.5 million in 2017/18.

Summary

Leeds had a hit and miss season in 2017/18 on the field, but the club’s strong revenue growth meant that it was in a strong position from an FFP perspective at the start of the current campaign.

It’s on a knife edge at present whether the club will go up automatically, but a playoff position is guaranteed. Promotion to the Premier League would see revenues rise by at least £100 million and the club is in a strong position given the size of the city and its history to sign some lucrative deals.

Leeds are certainly one of the best three teams in the division this season, but their biggest problem might arise is if they have a chance and fail to make automatic promotion on the last day of the season if the playoff positions are already finalised, as their potential opponents could rest the squad for the final fixture.

Promotion this season will be great for fans, but even if they fail to do so the club is in a strong position financially both in the short and medium term from the figures it has published.

Date Summary

Newcastle United 2017/18: Apply Some Pressure

Introduction

Mike Ashley, Newcastle United’s unloved owner, has finally submitted the accounts for the year ended 30 June 2018 for public scrutiny as The Toon became the final Premier League one to produce results for 2017/18.

In the club’s first season back in the Premier League after winning the Championship Newcastle reversed the big losses and managed to reduce wages from 2016/17, the latter of which is a first for a promoted club.

Kind words are in short supply in Tyneside for Ashley, who bought the club in May 2007 and has overseen two relegations since then.

Easy to criticise, and hard to love, but is Ashley as bad as some make out, given that he has lent the club over £140 million interest free, and invested a similar sum in buying shares in the club too?

A deeper look at the numbers is required to give a broader assessment of Ashley’s stewardship of the club, is he the Freddie Kreuger of football owners or is there some method to the apparent madness of his period at the club?

Revenue

Starting at the top of the profit and loss account, Newcastle’s total revenue doubled to £179 million but is over £200 million lower than that of Spurs, it was only £16 million less when Ashley took over.

Having money is one thing, and Newcastle have now generated revenue of over £1 billion under Ashley’s ownership, whether that money has been spent wisely is another matter.

Looking at total revenue for 2017/18, Newcastle had the 8th highest in the Premier League, although there is an element of chicken and egg as prize money is linked to the final position in the table.

Easily the biggest revenue stream last season was broadcasting, which generated over £126 million for Newcastle, partly due to promotion, partly due to prize money (each additional place in the Premier League is worth an extra £1.9 million) and partly due to the club being popular with broadcasters (each club is paid for ten matches in the basic fee and every additional match shown live is worth an extra £1 million, and Newcastle were shown live 18 times in 17/18).

Year by year volatility for broadcast revenue is also due to combination of which division the club is in and the renewal date for broadcasting deals (the present one kicked in in 2016/17) with Newcastle earning £652 million in total during the Ashley era.

Income from broadcasting in the Championship for non-parachute payment clubs is a basic of about £6.5 million a year, plus £100-£140,000 for every home match shown live on Sky, which shows the importance of being back in the top flight.

Some Premier League clubs generate additional broadcast income by being in UEFA competitions which are worth up to £80 million for winning the Champions League, but other than that the distribution of broadcast income is relatively democratic.

A huge gap therefore exists between those clubs who are in the Champions/Europa League and those that do not, although if Newcastle does qualify for the latter Thursday night trips to the Balkans and Malta are for the dedicated and/or insane only.

Commercial income for 2017/18 nearly doubled to £28 million, but critics of Mike Ashley identify this area as his biggest failing at the club as this has hardly increased since he first walked into the club.

Over at Spurs, commercial income has exceeded the £100 million a season mark on the back of a year at Wembley and Champions League participation.

Commercial income is the one area that clubs can independently grow and in doing so increase the budget for the manager.

Knockers of Ashley will point out he uses St James Park as an advertising vehicle for his Sports Direct cheap and cheerful sports emporium, and he should be generating more commercial income than any other club in the division.

Just £385,000 was earned by Newcastle from Sports Direct last season for this advertising but the club also spent nearly £1.5 million itself buying goods back from SD .

Until the club is sold to a new owner it will be difficult to tell if Ashley has missed a trick in terms of commercial sales but looking at the table overall (and Everton’s is inflated by some unusual naming rights for the training ground) Newcastle are broadly where you would expect them to be for a non ‘Big Six’ club.

Getting fans to turn up at St James’ Park for every match is relatively easy given the loyalty of the locals but getting more money out of them is more of an issue.

Gallowgate end regulars haven’t had to pay more for season tickets following a long term price freeze by Mike Ashley some years ago which explains why the revenue per fan barely changed last season, although individual matchday tickets, which are as difficult to find as a virgin in the Bigg Market on a Saturday night, did go up in price.

Lack of UEFA competition participation and the high prices that can be charged when facing glamourous European opponents is the main reason why Newcastle are so far behind the ‘Big Six’ in terms of matchday revenue, along with having fewer football tourists visiting the North East.

Costs

In the history of the Premier League, no club has ever had a reduction in the wage cost following promotion from the Championship…until Newcastle United in 2017/18.

Newcastle’s wage total fell by sixth last season, although it could be argued that the figures from 2016/17 were distorted by large promotion bonuses and the club accelerating some wages from future years into the Championship accounts via some eyebrow raising accounting that increased wages by £22 million in 2016/17 and decreased the total by £10 million the following season.

Getting wages under control has been one of Mike Ashley’s main ambitions since acquiring the club and with the club paying out just £52 in wages for every £100 of revenue this was easily achieved in 2017/18.

The danger level for wages according to UEFA for a top division club is 70% of revenue and if Newcastle had been at this level then wages would have been £125 million, placing The Toon between Leicester and Everton in the wage table.

Having a bottom half of the table wage bill means that last season’s tenth place finish was impressive, but fans feel that investing more in the squad would give Benitez an opportunity to compete for a European slot.

Unless there is a change in ownership though it is unlikely that this strategy will change as Premier League existence, rather than competing for trophies, appears to the limit of Ashley’s ambition.

Newcastle’s other main expense in relation to players is transfer fee amortisation, which is a non-cash expense, but all clubs show it in the accounts.

Dividing a transfer fee by the contract length is how amortisation is calculated, so when Newcastle signed Jacob Murphy for £10 million on a four-year deal in July 2017 this works out as an annual amortisation cost of £2.5 million (£10m/4).

Every Newcastle fan will point out that historically Mike Ashley has been reluctant to spend money on players and this certainly held true in the early years of his reign but the club’s mid-table position in the amortisation table suggests that in the last 2-3 years he has relaxed the policy to a degree.

Reducing costs to a minimum is a hallmark of how Mike Ashley runs all his businesses and it is impressive that the ‘other costs’ of Newcastle, which covers all the overheads such as marketing, HR, maintenance, insurance and so on are still lower than those of the first season in which he had control of the club over a decade ago.

Profits

Costs subtracted from income gives profit and Newcastle announced an £18 million profit in a press release compared to a £91 million loss for the previous season.

Understanding profit is a tricky issue though, as there are many variants so care must be taken and it is unwise to rely on just a single profit figure, especially one produced by a marketing department which may want to promote a particular message to either fans or potential buyers of the club.

Newcastle’s turnaround compared to the previous year, however expressed, is spectacular and reflects the additional income from being in the Premier League and cost control in terms of player wages in a division that is less profitable than many perceive.

The early years of Ashley’s reign were loss making and the only way these losses can be funded is through player sales or the owner injecting money.

Total operating losses under Ashley since 2008 come to £140 million but player sales profits more than cover this at £184 million, so this shows the approach taken by the owner.

If you strip out the one-off transactions and amortisation (as it is a non-cash expense) we get to a profit measure called EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). This is the figure most focussed on by city analysts and valuers, at it is a sustainable cash proxy for profit. This was a record £61 million in 2017/18 which meant that the club was generating over £1 million a week in cash from its day to day activities.

Player trading

Mike Ashley’s reluctance to spend money in the transfer market is legendary. In the period since he bought the club, he has spent £382 million on players and generated player sales income of £272 million.

This gives a net spend of just £110 million over the period, although this is distorted by £94 million of this arising in 2015/16 during Steve McLaren’s disastrous spell at the club.

Compared to the rest of the division Newcastle’s recruitment in 2017/18 was low and this was part of the reason why fans were so hostile towards the owner, fearing his reluctance to spend was increasing the chances of relegation.

Debts

Mike Ashley lent the club a further £10 million during the 2017/18, but was repaid this later in the season, meaning his total interest free loans stayed at £144 million. The club also had an overdraft at 30 June 2017, presumably used to pay the promotion bonuses, but this was wiped out when the Premier League broadcast income for 2017/18 started to flow to the club and by the end of the season Newcastle had £34 million in the bank.

Since the year end Ashley has been repaid a further £33 million taking his loan down to £111 million, which apparently won’t be repaid until the club is sold.

In addition to the loans Ashley has invested a further £134 million in shares in the club, taking his total investment to £278 million. Rumour is he is trying to sell if for £300-350 million.

Conclusion

Newcastle did take a gamble in not investing in players in 2017/18 and the risk of relegation was significant until the last third of the season when results improved.

Mike Ashley’s financial strategy appears to have been one of careful cost control to impress potential buyers. This is borne out when plugging in Newcastle’s financial figures into the Markham Multivariate Model used to value Premier League clubs, which churned out an eyebrow raising figure of £442 million, mainly due to excellent wage control, significant prize money on the back of Benitez’s management and a sold-out St. James’ Park for every match. This feels too high a figure but does show the potential of the club to an owner willing to take more risks than the present one. Adjusting for the wages provision reduces the value by about £40 million.

The club’s unusual accounting in relation to wages suggests that, a bit like some of Ashley’s recently acquired retail stores, it has been subject to some window dressing to make things look better than they are.

Data Summary

Derby County 2017/18: Say You’ll Be There

What I really really want? Promotion!

Making sense of Derby County’s 2018 accounts is a challenging task as the club’s structure has been changed nearly as often as the line-up of the Sugababes.

Enigmatic is the politest word that could be used to describe way that a myriad of different companies that are now running different elements of Derby which was further complicated by a new holding company Gelaw NewCo 203, taking over on 28 June 2018.

Is this 4-4-2 or 4-1-3-2?

Legally such a structure is perfectly valid and is common in other industries, whereas previously all of the club’s activities went through Derby County Football Club Limited the new set up arose after Mel Morris CBE took control of the club.

Income

Matchday, broadcast and commercial income are the three standard income categories used to comply with EFL League recommendations.

Obviously, clubs recently relegated from the Premier League have parachute payments too to increase their income and research indicates this is worth about seven extra points in the first season back in the Championship.

Runs in the cup that are televised and live appearances on Sky can increase the broadcast income slightly, with payments of £100-£140,000 for home Championship matches (and £10,000 for away matches).

Relative to other non-parachute payment receiving club Derby do fairly well as they have generated decent TV audiences, but the extra sums received are miniscule compared to those clubs recently relegated.

Income for clubs in the Championship from matchday is (number of matches x average price per ticket x average attendance) so with a ground that is practically sold out every home match there’s not a lot of scope to increase revenues unless prices go up.

Sponsorship and commercial income are an area where there is growth potential but there are 23 other clubs in the Championship also competing in this area but Derby have done well by divisional standards.

Some cynical fans might take the view that the big increase in commercial and hospitality income that commenced in 2017 may have come from companies related to Mel Morris CBE but there’s no evidence to support this theory although seeing with the fourth highest commercial income in that division and also earn more than quite a few Premier League clubs too does cause eyebrows to raise.

For a club the size of Derby to have the second highest non-parachute payment income in the division is an achievement, and surprising that they’ve outperformed the likes of Villa and Wolves in this regard too.

A breakdown of Derby’s overall income shows a fairly even split between the sources. Some clubs in the Premier League have nearly 90% of their income from broadcasting.

Costs

Very many fans get angry when the subject of players’ earnings are discussed, and Derby’s wage bill seems to have taken a big jump in 2017/18.

Overall wages for parent SevCo 5112 were nearly £47 million, an effective increase of 18% (SevCo’s actual wages for 2016/17 were £33.1 million but only covered a period of 10 months instead of 12) which meant that wages were £157 for every £100 of income, part of the increase could be attributed to commercial staff numbers increasing by 39 but the majority relates to players.

Unless players receive a competitive wage, they’re likely to go elsewhere and as owners and fans want promotion so clubs such as Derby with no parachute payments have to pay accordingly.

Relative to clubs in receipt of parachute payment Derby were not far behind other clubs last season (apart from Villa) but were high payers compared to other clubs, especially if the promotion bonuses paid to Fulham, Wolves and Cardiff are stripped out.

In terms of transfer fees, these are spread over the life of the contracts signed by players in what are referred to as amortisation costs.

Tom Lawrence cost Derby an estimated £5 million when he signed from Leicester in August 2017 on a five-year deal, so that would normally work out at £1 million (£5m/5) a year in amortisation costs.

Experienced Rams’ fans may know that their club is unique in the way it treats amortisation though which has the effect of reducing the expense in the accounts in what is best known as ‘Melenomics’ and no other clubs in England use such an approach.

Spreading the cost of transfers the ‘Derby Way’ resulted in the club being sandwiched between Brentford and Bristol City in the Championship amortisation table for last season which seems very low given that Derby’s wage bill is the same as both clubs combined.

Putting wages and amortisation together gives a total cost of £53.3 million which vastly exceeds revenues of £29.1 million, Derby had an expense of £183 in this area for every £100 of revenue but this was still far from the highest in the Championship last season.

Identifying the other costs incurred by the club is tricky as they are grouped together as ‘other costs and these increased by , depreciation increased by £1 million, rents paid doubled to £325,000 but ‘other costs’ overall increased alarmingly to nearly £19 million with no explanation in the accounts.

Costs therefore totalled £76 million which led to the sale of Pride Park to another part of Mel Morris CBE’s business empire which generated a profit of £40 million in order to ensure the club did not breach Profitability and Sustainability (FFP) limits and risk sanctions such as the points deduction suffered by Birmingham City.

Exceptional transactions such as the sale of the stadium appear to blow a hole in the principles of FFP but if allowed by the EFL as the club seems to imply then fans needn’t worry too much.

Getting away with such behaviour (and it looks as if Sheffield Wednesday may have done similar with Hillsborough) gives further support to the view that the only winners from FFP are the creative accountants and slippery lawyers who devise such transactions.

Profit

In the press release on the Derby website it said the club had made a profit of £14.8 million, but this applies to Derby County Football Club Limited and conveniently ignores the costs incurred by the commercial department, academy and stadium running costs which form the other subsidiaries of SevCo 5112.

Reading the SevCo 5112 accounts is more depressing as there was an operating loss, which represents revenue less day to day running costs, of £46.8 million.

Losses before disposals for the Championship total over half a billion pounds for 2017/18 and that is excluding results from Sunderland, Sheffield Wednesday and Bolton as many clubs gamble on being one of the three teams that win the golden ticket to the Premier League.

Incurring losses of this magnitude means that clubs are reliant on asset sales (usually players) and owner investment to cover the losses.

Stripping out costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Making cash losses of over £700,000 a week last season explains why Derby needed to sell Pride Park although selling it back to Mel Morris CBE is equivalent of transferring money you already have from the left hand to the right hand.

EFL rules allow clubs to lose £39 million over three seasons, but some costs (infrastructure, academy, women’s football and community schemes) are excluded from the FFP calculations.

Losses for Profitability & Sustainability purposes were, based on our calculations, £53 million over the three years prior to receiving compensation for Gary Rowett and the sale of Pride Park, which, based on the publication of the Birmingham City ruling, equivalent to an eleven point deduction.

Chopping ten or eleven points off Derby’s total for this season would have sent the club spiralling out of contention for a playoff scheme, so whoever came up with the idea of the sale and leaseback of Pride Park should perhaps win the player of the season award.

Bringing the stadium sale into consideration doesn’t just ensure that Derby have complied with the P&S rules, it also means that if the club is not promoted this season it should be able to compete in the summer transfer market as the cumulative P&S total shows a substantial profit.

EFL critics will be up in arms if this type of transaction is allowed, but it is the club owners who vote for the rules, they are not imposed by the league itself independently.

One consequence of the sale and leaseback deal is that it looks as if Derby will be paying rent of about £1.1 million a year for the use of the stadium.

Player Trading

Derby spent £15 million on new signings in 2017/18 on Lawrence, Wisdom, Huddlestone and Jerome and had sales of £4.3 million mainly in relation to Cyrus Christie. The sales of Will Hughes and Tom Ince which took place in the summer of 2017 were included in the accounts for the year ended 30 June 2017.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

Mel Morris CBE’s commitment to getting the club promoted is evident from the above graph as prior to that Derby were not serious players in the Championship transfer market.

The total cost of Derby’s squad at 30 June 2018 was £62 million which puts the club at the top end of the division which again puts it at odds with the relatively low amortisation charge.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Mel Morris CBE had put over £95 million into Derby in 2016 and 2017, his approach for 2017/18 came in the form of the stadium purchase for £81 million.

Summary

Derby went for broke in 2017/18 in trying to achieve promotion to the Premier League. To achieve this the club had to indulge in some eyebrow raising accounting transactions which appear to be at odds with the spirit, if not the letter, of P&S rules.

Promotion this season will be great for fans, but the legacy of the stadium sale income should ensure that even if the club doesn’t go up then Frank Lampard still has some leeway in recruiting players this summer and there is no need for a fire sale.

Incurring losses of this magnitude means that clubs are reliant on asset sales (usually players) and owner investment to cover the losses and Derby took an unusual approach here.

Relying on owners to keep putting money into clubs, especially when so many are abused by some financially illiterate fans for ‘lacking ambition’ does increase the risk of clubs going into administration or worse if the owner decides they have had enough grief.

Letting players go does generate cash but also has a detrimental impact on the quality of the remaining squad but is a financial necessity at times as was seen in 2016/17 when Derby sold Ince, Hughes and Hendrick to generate over £16 million profit.

If the EFL is going to allow owners to sell stadia to themselves to comply with P&S, then it would make sense the rules to be scrapped. At present the nature of the rules simply results in very expensive accountants and lawyers to devise schemes and fans would rather money be spent on the game instead of school fees and Ranger Rovers for bean counters.

Crystal Palace 2017/18: I Just Can’t Be Happy Today

Six Year in the Premier League? Neat, Neat, Neat.

Surviving in the Premier League is even tougher than getting there and an eleventh place position is testament to Roy Hodgson in guiding the club to another season at the top table.

Usually Palace start the season poorly and improve in the second half of the season and 2017/18 was no exception after the De Boer experiment was quickly jettisoned.

Sustainability from a financial perspective wasn’t achieved however as the club, despite record revenues, lost £750,000 a week from day to day operations and was reliant upon the club owners to finance the gap.

An increased capacity Selhurst Park is part of the club’s strategy to improve the finances in the long term and this should improve the financial performance in the Premier League.

Income

Nowadays all clubs split income into at least three categories to comply with EPL recommendations, matchday, broadcasting and commercial.

Nearly all ‘Other 14’ clubs are very dependent upon broadcast income for the lion’s share of their earnings and Palace are no exception.

A new TV deal in 2016/17 was the driver of the big increase that season, but Palace’s 11th place finish earned them an extra £6 million in prize money in 2017/18 to £121 million, slightly offset by being chosen for live broadcasts two fewer times than the previous season.

Having a reliance on broadcast income is fine so long as the rules don’t change, and it’s sad to see the greed of the ‘Big Six’ force through a new method for distributing money from TV so that the rich get richer from Premier League International Rights.

Relating broadcast income to live appearances and final league position has a lot of merit but the existing formula has worked successfully for years and allowed clubs such as Palace to retain their best players, making the Premier League more competitive and unpredictable.

Europa and Champions League participation by the regulars ensures they have more broadcast income from UEFA than the remainder of the Premier League, so it is nothing but naked greed from foreign owners that has driven the new distribution model from 2019/20.

Income from matchday for Palace has been relatively static due to ground capacity constraints and the club has been reliant on cup runs to boost totals as price freezes and sold out matches mean this figure can’t be increased in the short term.

Diving into the footnotes of the accounts there was an ominous comment from chairman Steve Parish “with strong demand and a low relative cost to other Premier League London football ticket pricing will be further reviewed for the 2019/20 season” and Palace season ticket holders already know the consequences of this.

Palace’s matchday income is okay by Premier League levels but the board see scope for growth, especially in terms of hospitality consumers who are put off by the prices elsewhere in London and a revamped Selhurst could give the club an extra £5-10 million per season.

Eagles’ fans may not like the garish logo on the club shirts of new sponsor ManBetX but this has been a major contributor to the 20% increase in commercial income.

Getting new sponsors and commercial partners for a club isn’t easy unless you are one of the global brands with tourist fans, so Palace have done well here to keep growing this income stream.

Selling the club to sponsors is made slightly easier by being in London and the continued existence in the Premier League has increased the appeal of the club too.

Some clubs such as Manchester City, Everton and Stoke have the benefit of connected parties being willing to pay generously for commercial deals but Palace have had to do it the hard way.

Total income increased by 5% to £150 million which is more than ten times the money generated when Palace were in the Championship and total Premier League income since then is £590 million.

Even monied clubs such as Stoke, Swansea, Hull and Sunderland have been relegated in the last two seasons and struggled to make much of an impact in the Championship, which highlights just how important it is for Palace to avoid getting into a relegation fight as there are no guarantees of coming straight back up.

Very few clubs bounce back straight away in the Championship as has been seen in the present season where the three teams challenging for promotion in Sheffield United, Leeds and Norwich finishing last season 10th, 13th and 14th respectively.

Costs

Every fan knows that the main costs for a PL football club are focussed on player related expenses relating to player wages and transfers.

Player costs have accelerated in 2017/18 for nearly all clubs despite broadcasting income being flat overall as Sky/BT are in the second year of a fixed three year contact.

Amortisation is the cost of all the transfer fees paid by the club spread over the contract life, so when Palace signed Mamadou Sakho for £26 million from Liverpool on a five-year deal this works out as an amortisation charge of £5.2 million a year (£26m/5).

Rapid increases in amortisation are common in the Premier League if a club is promoted and stays in the division due to legacy players from the Championship being replaced by more expensive signings in the top flight over a number of years.

In signing Sakho, Riedewald, Sorloth and Jach Palace instantly increased the overall squad cost to nearly £200 million and the amortisation expense rose in line with this especially as the previous season saw Schlupp, van Aanholt and Milivojevic all arrive in January 2017 with only had a half year of amortisation on their transfers.

Spending more on transfer fee amortisation than London rivals Spurs and West Ham might surprise some Palace fans, but the club has been very active in the transfer market especially given the rapid turnover of managers at the club who want different players and styles.

Having spent money on transfers it’s no surprise that Palace’s wage bill grew last season, albeit by a relatively modest 5% to £117 million but that still put the club 9th in the wage table.

With such high wages and amortisation charges it is of little surprise that these costs absorb all of Palace’s income, representing £109 of costs for every £100 of revenue, meaning that the excess and all other overheads have to be paid for by either player sales or the owners underwriting the costs.

If Palace maintain their Premier League status for a few more seasons this is fine provided the owners continue to bankroll the club, but if not the club is at risk of major cutbacks as has been seen at Swansea in recent months.

The average wage at Palace is £56,000 a week but by all accounts some players are on about twice that sum which is usually accepted if the player is delivering (such as Zaha) but causes resentment when he is not (such as Benteke).

Having a wages to income spend at a constant in theory is a sign of good cost control but Palace do have a problem here in that UEFA recommend clubs should aim to spend no more than £70 in wages for every £100 of income and Palace have been above that benchmark in the last three seasons.

Profit

Agreeing what is meant by profit is always tricky as there are many variants, but the simplest definition is that it represents income less costs although deciding what is included in income and costs can muddy the waters.

Subtracting total costs from income gives what is called net profit and here Palace have a negative figure in the form of a net loss of £35.9 million.

This was perhaps bigger than expected although the rescue plan in recruiting a new manager and players after the De Boer experiment failed was expensive to repair.

Reports in the media recently have focussed on net profits especially with Spurs and Liverpool announcing ‘world record’ sums but the Premier League as a whole made a £286 million net profit in 2017/18 with those two clubs being responsible for three-quarters of the total.

A lot of the net profit can come from one off transactions, such as high tax charges (Manchester United’s was £63 million) or profits on player sales (Liverpool’s was £124 million, mainly through Coutinho going to Barcelona).

Profit from operations is perhaps a better measure as it ignores the distortions caused by tax and finance costs (some clubs pay interest on loans, others have interest free deals with owners) and concentrates on the money made just from regular business activities.

Operating profits for Palace are however little different to net profit as the club had a tax rebate that effectively offset the £35,000 a week in interest that was charged.

Nerds may be familiar with a profit measure called EBIT (Earnings before interest and tax) which strips out one off transactions, such as player sales gains and other irregular expenses and income.

Crystal Palace benefitted from these substantially in 2016/17 due to the sale of Bolasie to Everton which helped generate a £35m profit on player sales plus £4 million from the repulsive Tony Pulis in a court case where the club successfully recovered a bonus that he had claimed but to which he was not entitled.

A lot of clubs in the Premier League are dependent upon player sales to make ends meet, despite the benefits of broadcast income, as can be seen by EBIT losses being £184 million overall compared to net profits being a positive of £286 million.

Liverpool, for example, saw their profits fall from the world record £131 million quoted in the press to just £7m once the Coutinho profit (which won’t arise every year) was removed but Palace’s numbers barely changed as player profit sales were just £2 million.

Leaving out the amortisation cost (which is an accounting expense rather than a cash one) and depreciation (the same) gives something called EBITDA (Earnings Before Interest Tax, Depreciation and Amortisation) and the good news for Palace is that this is a positive figure.

Earnings analysts like EBITDA because it is the nearest thing to a cash profit figure that can be easily calculated as it removes all the accounting nonsense which can be manipulated by unscrupulous businesses (Palace have NOT done this though as far as we can tell).

Player Trading

Delving into the footnotes of the accounts shows that Palace £54 million on new players in the year to 30 June 2018 but sales were much lower at just under £4 million.

Large investments in players, as has been already seen, led to the rise in the amortisation charge in the profit and loss account.

In each year in the Premier League Palace have spent more on player than they’ve generated in sales, which shows the board has backed the managers even if some fans think they should have spent more.

The total net spend by Palace since promotion in 2013 has been £184 million.

The Premier League pays inflated prices for many players, but the total net spend last season was over £1,240 million, with the usual suspects at the top of the spending table.

Liabilities for player signings can arise if clubs make signings on credit and agree to pay over a number of years via instalments and here there is cause for concern as Palace owed £49 million to other clubs at 30 June 2018.

Funding

Every club can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors and Palace have borrowed in recent years as new owners have put money into the club to underwrite its losses.

Palace benefitted from £38 million of interest free loans in 2017/18 and the owners have stuck in a further £24 million since June 2018 and this is before the stadium expansion project is implemented which will involve cash going out before it generates revenues.

It’s likely that similar investment will have to be made unless Palace cash in on the crown jewels in their squad this summer as underperforming players on big contracts may be reluctant to take the pay cut their talents perhaps deserve.

Summary

Every year Palace defy a poor season start and end up mid table and 2018/19 looks likely to repeat the formula, which is crucial as the club is vulnerable should relegation occur due to its disproportionately high player costs.

Relying on two or three star players to earn enough points to keep Premier League membership and paying them handsomely has worked to date and it would be foolhardy to change what has worked to date.

Sorting out the infrastructure cannot come fast enough if Steve Parish’s aim of establishing Palace as a top ten team in the Premier League as the relative lack of matchday revenue will hold the club back in what is becoming an increasingly important income source with broadcast deals unlikely to repeat their quantum leaps of the recent past.

Key Financial Highlights for year ended 30 June 2018

Turnover £150 million (up 5%)

Wages £117 million (up 5%)

Pre-player sale losses £38.9 million (up 50%)

Player sale profits £2.4 million (down from £34.7 million)

Player signings £54 million (down from £104 million)

Burnley 2017/18: I Thought You Were Dead

Seventh position in the Premier League and qualifying for the Europa League was an achievement for Burnley in 2017/18 and the club’s financial results were almost as impressive.

Earnings, wages and player trading profits all hit record levels yet some fans seem bored by life in the Premier League.

Income

All clubs split income into three categories to comply with EPL recommendations, matchday, broadcasting and commercial.

Nowadays most ‘Other 14’ clubs earn a small fraction of their total income from matchday sales and Burnley is no exception as frozen ticket prices and slightly less domestic cup progress meant that this fell by £200k compared to the previous year.

Due to having a relatively small ground capacity and few prawn sandwich eating fans there’s little scope for this income source to grow in the future so Burnley, with a population of 80,000, have to expect to be in the bottom six of matchday earners in this division.

Year on year Burnley’s matchday income fell by 4% last season but has been relatively static during the Premier League seasons.

Contributing just 4% of total revenues means that whilst the club doesn’t take fans for granted its focus will be ensuring Premier League membership and taking a pragmatic approach under Sean Dyche to earning points.

Having to compete with glamourous clubs within a fifty mile radius means that Burnley has to price tickets keenly and has the second lowest matchday income per fan in the Premier League.

Earnings from broadcasting increased by £16.5 million mainly due to higher prize money from the Premier League.

How the Premier League distributes broadcast money from both domestic and international TV deals is a thorny subject and the cause of much argument between club owners.

A half of the broadcast income domestically and all international deals are split evenly between all twenty EPL clubs, whereas a quarter is based on the number of live TV appearances and a further quarter is prize money linked to the final league position.

Seventh position meant that Burnley earned £24.7 million in prize money, which starts off at £1.9million for the team finishing bottom and increases by the same amount for each additional place in the table.

A million pounds is paid to clubs for each live appearance on BT/Sky and clubs are paid for a minimum of ten matches although for Burnley were only chosen for seven despite their strong position in the table.

Premier League broadcast payments are the lifeblood for a club such as Burnley, so it is no surprise to see that it was responsible for over 87% of total income.

Expect broadcast income to be slightly lower this season (2018/19) as Europa League income from the qualifying rounds is unlikely to offset the decrease in Premier League prize money.

Trying to sign up new sponsors and commercial partners is tricky in the present economic environment.

Having a potential global audience watching Burnley works fine when the club is playing Manchester United or Liverpool but doesn’t attract viewers when it’s a small club such as Crystal Palace.

A lot of clubs in the Premier League have gambling companies as their shirt sponsors and Burnley are no exception, with Laba360 replacing Dafabet as the Clarets signed a record deal that helped boost commercial income by 14% in 2017/18.

Manchester United are in a league of their own when it comes to commercial income (neighbours City are fortunate to have owners who have influence over some sponsor deals) but Burnley are in a fairly large group of 8-9 clubs whose income is broadly similar from this source.

Selling the charms of Turf Moor isn’t easy for the commercial team as the location isn’t in London or another large metropolis and sponsors will often try to barter down a price by threatening to take their money to another club of similar stature in the PL.

Total income for the Clarets was up nearly 15% and very dependent upon continued Premier League status which appears to have been achieved until at least 2019/20.

Even monied clubs such as Stoke, Swansea, Hull and Sunderland have been relegated in the last two seasons and struggled to make much of an impact in the Championship, which highlights just how important it is for Burnley to avoid getting into a relegation fight as there are no guarantees of coming straight back up.

Relative to its peer group Burnley’s total income is towards the top end of those clubs who would be expected to be in the bottom half of the Premier League at the start of the season.

Costs

Costs for a PL football club are focussed on player related expenses, namely amortisation and wages.

Amortisation is the cost of all the transfer fees paid by the club spread over the contract life, so when Burnley signed Chris Wood for £15 million from Leeds on a four-year deal this works out as an amortisation charge of £3.75 million a year (£15m/4).

Life in the Premier League is expensive and Burnley’s amortisation charge increased by over £5 million as Wood, Cork, Wells, Walters etc. came at a total cost of £43 million, offset by not having to amortise Keane and Gray when they departed at the start of 17/18.

Looking at amortisation it can be an indicator of potential relegation as West Brom and Stoke, both established PL clubs, were at the bottom of the table, with Brighton and Huddersfield unsurprisingly below them as they’d both just been promoted to the top flight for the first time.

Everyone has an opinion on football player wages but Burnley seem to have a fairly tight policy where all players are paid within a narrow range and this has an impact upon the nature of who they recruit and let go.

Driven by prize money bonuses for finishing 7th, Burnley’s total wage bill increased by 33% to over £81 million, over five times the level when the club was in the Championship and receiving parachute payments.

Burnley’s wage bill however was still the third lowest in the division despite the large increase in the year and based on our (somewhat crude) calculations work out at about £39,000 a week.

In letting Michael Keane go to Everton for three times that wage level Burnley seem to have a strategy that is appealing to players who want to further their career and see the club as a stepping stone to a ‘bigger’ club should they perform well at Turf Moor.

Getting the balance right between player costs (amortisation and wages) and sporting success on the pitch is challenging but Burnley have done supremely well in 2017/18 in paying out £79 in player costs for every £100 earned, leaving plenty to pay the other day to day overheads of running the club.

Profit

Defining profit is always tricky as there are many variants, but most simply put profit is income less costs although that contains lots of layers and distractions.

A lot of clubs cherry pick one of the many different profit figures available and Burnley have partially done this on their website by announcing a record net profit of £36.6 million.

Various alternative figures could have been used though and we will look at these in some detail.

Everyday profits arising from income less all the running costs of the club except loan interest are often referred to as ‘operating profits’. This a ‘dirty’ measure in that it includes one-off non-recurring costs such as redundancy when a manager is sacked or volatile gains arising from player sales that are best eliminated when trying to work out long term sustainable profitability.

Burnley’s operating profit was even more impressive than the figure quoted in the club website at a £45 million, higher than that of Manchester United.

A big driver of Burnley’s profits for 17/18 was profits from player sales. The sales of Keane and Gray generated a profit of over £30 million, compared to just over £1 million the previous season.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more constant profit measure called EBIT (Earnings Before Interest and Tax).

Burnley’s EBIT profits are still impressive but lower than the two previous seasons in the Premier League when the club’s wage bill was far lower.

The Premier League EBIT table shows just how dependent clubs are on player sales in making the books balance. Liverpool, for example, saw their profits fall from the world record £131 million quoted in the press to just £7m once the Coutinho profit (which won’t arise every year) was removed.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Burnley’s EBITDA profit was £44 million which shows that the club is generating cash from its day to day activities which can then be reinvested into the playing budget when Sean Dyche is looking to recruit players.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings, which in Burnley’s case was nothing, and tax on profits, which came to £8.5 million. Adusting for these two figures gives pre and post-tax profits, which takes us to the record profit figure quoted by the club itself of £36.6 million.

Player Trading

Burnley spent £43.5 million on new players in the year to 30 June 2018 as the club strengthened its squad, note that the sum committed was broadly similar to the EBITDA profit from the previous season.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

Burnley had a net spend of only £7 million in 2017/18 so to achieve their final legal position on such as modest outlay is a testament to the management, coaching team and commitment of the players.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Historically Burnley have run a very tight ship and used the money generated through on the field, especially broadcast income and parachute payments to fund player purchases and this continued in 2017/18. The club owners have not had to dip their hands in their pockets for many years.

Key Financial Highlights for year ended 30 June 2018

Turnover £139 million (up 15%)

Wages £82 million (up 33%)

Pre-player sale profits £14.4 million (down 45%)

Player sale profits £30.7 million (up from £1.3 million)

Player signings £44 million (up from £43 million)

Summary

Burnley achieved a miracle in 2017/18 that went relatively unheralded. Unloved by broadcasters, too workmanlike for the pundits to get excited about, they went about their business and the players were drilled repeatedly to get results.

The Europa League at the start of 2018/19 was a step too far and it was a blessing in disguise they were eliminated so early as it allowed Sean Dyche to get back to what he does best, training players hard for five days for the next fixture.

Barring a miracle they will be in the Premier League in 2019/20 where once again they will fly under the radar, accumulating points but getting little credit for doing this without handouts from owners.

Bournemouth 2017/18: Boom Boom Ba-Ba Boom

Introduction:

Establishing yourself as a Premier League club, especially with only an 11,000 capacity stadium, is as much as a challenge as promotion from the Championship in the first place.

Down at the Vitality stadium Bournemouth can look forward to their fifth consecutive season in the top flight in 2019/20 although financial results are not as impressive as those on the pitch.

Detailed accounts have just been published which show that the price of recruiting the likes of Ake, Begovic and Defoe came at a significant price and the club made a loss in 2017/18.

Investing in the squad wasn’t enough to prevent the Cherries falling from 9th to 12th in the Premier League, although this was still an impressive performance for a club that spent nearly all its time in the lower leagues.

Eddie Howe’s management has enabled the club to compete with most of the ‘Other Fourteen’ clubs on the pitch and his biggest problem will be preventing some of the star names leaving as players such as Wilson and Brooks attract admiration from wealthier rivals.

Having an accounting period of eleven months in 2016/17 does make some comparisons tricky so bear this in mind when looking at the figures.

Key financial figures for year to 30 June 2018: AFC Bournemouth Limited

Income £135 million (down 1%).

Wages £102 million (up 42%) .

Operating loss before player sales £13 million (previous season profit £15.2 million)

Player signings £56 million (previous season £9 million but distorted by moving year end from 31 July to 30 June)

Player sales £9 million (previous season £3 million)

Owner loans £70 million (up £17 million)

Income:

Overall income for Bournemouth decreased slightly, mainly due to lower prize money from the Premier League.

With a ground capacity a fraction of that of other clubs in the division it was no surprise that Bournemouth had the second lowest matchday income of any club in the Premier League in 2017/18.

Earning so little money from this source does give the club a financial disadvantage and it would benefit significantly from moving to a bigger venue.

Realistically the club cannot generate any more money from matchday unless it increases prices (not popular with fans) the number of matchday events (only likely if get a Europa Cup place) or the number of seats (not feasible at the Vitality).

Everyone knows that the Premier League is a success due to its popularity with TV audiences and this is reflected in the large sums distributed to clubs.

Selling Premier League rights at a loss overseas in the initial years of the division have proven to be a masterstroke and these now bring in about £1.3 billion a year compared to about £1.7 billion for the domestic rights.

Every club has historically received an equal share of the overseas rights but this is set to change after the ‘Big Six’ (Spurs, Arsenal, Chelsea, Liverpool, Manchester United and City) threatened to join a European SuperLeague unless they receive more money from this source in future years.

Many fans will see this as fair because overseas viewers are more likely to tune into matches featuring the Big Six but the relatively democratic way that TV money is distributed in the Premier League.

Broadcast income represents over 88% of Bournemouth’s total and shows just how essential continued existence in the Premier League is to the club.

Lower broadcast income was a result of Bournemouth finishing three places lower in the table than in 2016/17 (each position is worth an additional £1.9 million) and two fewer live TV appearances (each is worth about £1 million).

Earnings from commercial sponsors increased by 45% to over £10 million for Bournemouth but this was still the lowest in the division as the constraints of operating from such a small stadium reduce opportunities to generate money from this area.

Sponsor and commercial income include things such as retail sales, so a move to a new stadium would allow Bournemouth to address this issue.

A club such as Bournemouth has to be realistic in terms of attracting commercial partners as it does not have the global fanbase of the Big Six but a longer period in the Premier League and the attractive football it plays will increase its popularity with these providers of money.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Having a 42% increase in wages when income decreased appears surprising, but the main players recruited came from Premier League clubs on large salaries.

Unlike the previous season, where Bournemouth lost Matt Ritchie to Newcastle due to a better wage offer despite being in a lower division, existing squad members were offered substantially improved terms of their deals.

Nevertheless, to see any established business’s wage costs rise by 738% in five years in astounding and a testament to the pulling power of the Premier League in attracting viewers.

Despite joining the £100 million a year wage bill club Bournemouth’s average weekly wage (and we fully accept that these are rough and ready figures) of £49,000 a week is slightly below the Premier League average.

Ensuring that Bournemouth’s best players continue to play for the club comes as a price and the club paid out £76 in wages last season for every £100 of income, above UEFA’s recommended benchmark of 70%.

Reversing this upward trend is important if the club wants to break even, although there’s no sign that owner Maxim Demin is concerned about the wage costs and compared to the years before the club joined the Premier League the figures are low.

Being second only to Everton, who spent money wildly on players in 2017/18 in the wage control table is a cause for concern although Bournemouth are not alone in being above the 70% UEFA danger sign.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 8% to £1,356,000, which puts the club into the top half of the table by Premier League standards.

Rather than show the full transfer fee of a player in the year he signs as a single expense that year, football clubs use an accounting method called amortisation.

Dividing the transfer fee cost over the contract length gives the annual amortisation charge, so when Bournemouth signed Nathan Ake from Chelsea for £20 million on a five year contract this works out as an annual amortisation cost of £4 million (£20m/5).

Premier League clubs spend a lot of money on players and this is reflected in high amortisation charges as evidenced by Bournemouth’s total increasing from £1m when in League One to £27m in the EPL.

If the cost of player purchases is spread over the life of a contract you might intuitively expect similar from player sales, but this is not the case.

Large profits on player disposals arise when they are sold because this is calculated as the sale price less the accounting value (cost less total amortisation) and all of this sum is shown in the year of sale.

Over a period of years profits on sales even out but they can be very volatile in a single season, often dependent on whether the player was sold a few days before or after the club year end.

The strategy of Bournemouth appears to be one of trying to hold onto their players and this has resulted in relatively modest profits and losses on disposals in recent years.

The large profit in 2015/16 relates to Matt Ritchie who was sold in July 2016 and as Bournemouth used to have a 31 July year end this appeared in the 2015/16 accounts.

In addition to profits on player sales Bournemouth made over £5 million from loan fees in respect of players given to other clubs.

Clubs with significant borrowings such as Bournemouth may have significant finance costs but all of the sums lent are from the owners and are interest free.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are types of Brexit.

A simple definition is that profit is income less costs, and if this figure is negative it is called a loss.

The headline figure for Bournemouth was a loss of £9.1 million before taking into consideration finance costs and tax. Taking such a profit figure as a measure of success is okay, but it includes some items which are volatile (such as player sales gains, redundancy costs and player write-downs).

Stripping out the above distortions gives something called normalised EBIT (earnings before interest and tax) profit, which is a better measure of profits generated by day to day activities excluding the non-recurring transactions.

Bournemouth’s EBIT is lower than the operating profit for two reasons. There was a small profit on player sales and income of £2.9 million due to the EFL reducing the FFP fine relating to 2014/15 from £7.6m to £4.5m. Bournemouth says this is due to the EFL agreeing that ‘there was no wrong doing by the club’ but surely if this is the case then the fine would have been wiped out altogether?

The club’s share of Richard Scudamore’s leaving present from the EPL is also shown as a non-recurring fee, which seems a bit strange as this is being paid over three years and there is no guarantee that Bournemouth will be in this division for all of them.

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Bournemouth’s EBIT losses worked out at £240,000 a week in 2017/18 and they are modest by Premier League standards.

If non-cash costs such as player amortisation are stripped out, the position however improves, and Bournemouth have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit of £15 million.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Bournemouth were failing to break even in the lower leagues using this measure but since promotion have generated £60 million to use in player trading.

Player trading:

Bournemouth had a significant 2017/18 in terms of player purchases as Ake and Begovic were the main recruits, but not too much should be read into 2016/17 as the finances ran from 1 August 2016 to 30 June 2017 and so did not include the traditionally busy transfer month of July.

At 30 June 2018 the total squad cost was £126 million which is far lower than their market value.

Summary of figures

Compared to their peer group, Bournemouth’s spending is very modest.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Bournemouth, the club have focussed on owner loans. Bournemouth borrowed a net £3 million in the year and at 30 June 2018 owed Maxim Demin controlled AFCB Enterprises in the British Virgin Islands tax haven’t £46 million and the American Peak6 Football Holdings a further £24 million.

Since the year end Peak6 have sold their investment to Maxim Demin.

Conclusion

Bournemouth continue to defy the odds in terms of reasonable finishes in the Premier League, an attractive style of play and developing good young players.

The level of investment in the squad in 2017/18, especially in terms of player wages, is not sustainable at the present rate of growth and could result in a breach of FFP rules.

An overreliance on broadcast income is only a genuine problem if the club is relegated and there appears to be little chance of that happening provided the club holds onto its best players.

Aston Villa 2017/18 Finances and FFP: Devil in the Detail

Introduction

Down at Villa Park fans are hopeful that the recent return to the first team of Jack Grealish can cement the club’s playoff position as they have the benefits of the final year of parachute payments.

Over the other side of the city rivals Birmingham City have just been docked 9 points as a punishment for a breach of the EFL’s Profitability and Sustainability rules.

Championship football is challenging as the clash between those with parachute payments, stalwarts of the division and recently promoted League One teams means that there is a lack of a level playing field between the 24 competing clubs.

The reign of Doctor Tony Xia, the flamboyant club owner until the summer of 2018 nearly took the club into liquidation but there appears to be some greater financial stability since his departure.

Income

Overall total income for clubs is split into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Relying on fans to turn up and watch a team is more important in the Championship than the Premier League due to the lower sums earned from broadcasting.

Throughout the last decade Villa had a big decrease in matchday income in 2011/12 when the club finished 16th under Alex Mcleish and began a period in the lower half of the Premier League prior to relegation in 2015/16.

Of the £11.8 million of matchday income for 2017/18 about £1m came from the playoff final as it is custom for the side promoted to forego its share of the Wembley receipts as it is about to receive a large cash injection upon joining the Premier League.

Nevertheless, Villa still generated more matchday income than any other club in the division, although Leeds are yet to publish their 2017/18 accounts and may run Villa close.

Year on year Villa’s matchday income increased by 10% in 2017/18.

Getting an average attendance of over 32,000 last season was an achievement and this year the figure has increased to over 35,000 as fans bought into the commitments of the new owners.

In terms of broadcast income Villa saw a drop of 16% to just over £40 million as the second year of parachute payments results in a fall from £41m to £34 million with the remainder of the money being from the EFL deal with Sky Sports.

Villa will see a further drop in broadcast income of about £20 million this season due to a further cut in parachute payments to about £14 million.

EFL clubs earn about £2.5 million from the broadcast contract plus £100-140,000 for a home match that takes place before the cameras and £10,000 for an away match.

Some clubs feel this deal undervalues the Championship and there are rumours of a breakaway to try to negotiate better terms although as yet there is nothing concrete.

Sponsorship and commercial income are therefore essential for Championship sides and here Villa posted a 9% increase mainly due to the training ground being sponsored.

The problem with the Championship is that because it is seen in less countries than the Premier League in terms of a TV audience commercial partners are not willing to pay the same levels for deals and that is why Villa’s income has halved since 2016.

Every club in the Championship (with the possible exception of Dirty Leeds) would like to be in Villa’s position in terms of commercial income as the benefits of a being a big city club and a legacy of the time spend in the Premier League make it attractive compared to much of the competition.

Villa’s overall income was therefore a division leading £68.6 million which explains the paradox of the club’s financial performance as it was also the lowest generated at Villa Park for over a decade.

Earnings in the Championship as a whole are split between into three broad tiers, with those in receipt of parachute payments at the top followed by Championship regulars such as Leeds and Forest and finally clubs who have been bobbing up and down between the division and League One.

Costs

Player costs

Being so close to the Premier League and its riches has meant that clubs often overspend on player costs as they gamble to get promoted.

Running up huge wage costs was one of the reasons why Tony Xia nearly destroyed Villa as the club was effectively paying out Premier League salaries whilst in its second season in the Championship by recruiting the likes of John Terry and Robert Snodgrass on loan as well as the legacy of previous disastrous purchases such as Scott Hogan on lucrative contracts which meant they could not be moved on.

Usually relegated clubs reduce wages in the second season following relegation from the Premier League but Villa’s increased by 19% to £73 million.

Compared to other Championship clubs Villa had by far the biggest wage bill in the division paying more than the bottom five clubs combined with an average player salary of £1.8 million a year.

Earning so much from parachute payments meant that Villa ‘only’ paid out £107 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially this season and even more so in 2019/20 should they fail to be promoted unless there is a major clear out of highly paid players.

Having a big wage bill is only part of the player costs for a club, as there is also transfer fee amortisation to consider too.

Amortisation works by spreading the cost of transfers over their contract life, so when Villa signed Scott Hogan in January 2017 for £12 million on a four year deal this results in an annual cost of £3 million in the profit and loss account over that period.

Normally a club relegated from the Premier League would have a reduced amortisation charge but the huge spending in 2016/17 on player of £88 million sanctioned by Tony Xia meant there was an increase that season of nearly half and a legacy cost of the same sum the following season.

Doubters of Villa’s modest transfer spend in 2017/18 should not the club was second to ‘Boro in the Championship amortisation table and Villa’s total player investment cost worked out at £141 in wages and amortisation for every £100 of income, meaning the club was dependent upon Xia to pay for the excess as well as all the other club running costs.

Profit

Jumping over other expenses and looking at profit, which is income less costs and Villa, like all clubs show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs such as redundancy, write downs and gains on player sales that distort the underlying figures when trying to work out long term sustainable profitability.

Both Randy Lerner and Tony Xia oversaw a club that had operating losses every single year during the last decade despite the benefits of Premier League membership and parachute payments.

Stripping out the volatile impact of player sale profits and other one off events, which are unpredictable and not part of the clubs’ day to day trading, gives a profit measure called EBIT (Earnings Before Interest and Tax) which gives even more depressing news for Villa fans.

In the case of Villa, the club had non-recurring income of £3 million from ‘Income from compensation deed relating to freehold land’ which appears to compensation for part of Villa’s training facilities being used the for HS2 rail project.

Villa’s EBIT losses average £790,000 a week over the last decade and the only way these can be covered is by selling players, borrowing money or having the owner invest by buying more shares. Villa made a profit of £16 million on player sales in 2017/18 and may need to sell more players if they fail to be promoted this season.

Total losses in the Championship from the 17 clubs who have reported to date are £366 million and could easily be increased by at least £100 million more once the likes of Sheffield Wednesday, Derby and Sunderland have reported their figures.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Villa’s EBITDA loss was still more than £500,000 a week and it has had losses in nine years out of the last ten which shows that is has failed to generate cash from its day to day activities.

Profitability and Sustainability/FFP issues

The present incarnation of Financial Fair Play is called Profitability and Sustainability. Clubs are assessed over a three year period and allowed to lose a maximum of £35 million before tax for each year in the Premier League and £13 million in the Championship. Therefore, for Villa in 2017/18 the allowable loss was £61 million.

Some expenses are excluded for FFP purposes, namely promotion bonuses, academy, infrastructure, women’s football and community schemes.

In 2016 Villa wrote down property values by nearly £45 million when the club was relegated from the Premier League.

The above calculation suggests that Villa were within the FFP limits by £2.6 million in 2017/18, with the HS2 land sale being just enough to keep the right side of the limit.

Being so close to the limit does also mean that Villa (and other clubs which are too close to the FFP naughty step for comfort) will have had to submit regular monthly financial reports to the EFL to ensure they are compliant with P&S rules for the present season.

Player Trading

Villa spent just £1.8 million on new players in the year to 30 June 2018 as the club had a hangover from the previous season when purchases were £88 million.

The large spend on players in previous years is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. In the year ended 31 May 2018 Villa issued nearly £70 million in shares to investors as Tony Xia stuck money into the club for a period of time. However, when Xia’s money ran out the club was unable to continue to pay the bills, leading to the crisis that nearly destroyed it.

Nassef Sawiris and Wes Edens acquired control of the club in the summer of 2018 and injected the cash needed to continue trading.

Summary

Key Financial Highlights for year ended 31 May 2018

Turnover £68.6 million (down 7%)

Wages £73.1 million (up 19%)

Pre-player sale losses £54.0 million (up from £41.1 million)

Player sale profits £15.9 million (down from £26.6 million)

Player signings £1.8 million (down from £87.9 million)

Villa gambled and lost under Tony Xia in the last two seasons trying to return to the Premier League. The failure to achieve this meant that it came close to ceasing to exist. If the club is not promoted this season there will be a tough challenge ahead as income will fall again leaving the club with high running costs and a likely player exodus to balance the books as the FFP limit falls from £61m to £39 million.

Middlesbrough 2017/18: Babylon’s Burning

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To attempt promotion to the Premier League is an expensive business as revealed when Middlesbrough submit their accounts to the government registrar for the 2017/18 season and reported a £20.2 million operating loss

Only the receipt of parachute payments and some player sales prevented these losses from being too damaging for Boro, who are fortunate to have a benevolent owner in Steve Gibson to fund the club’s operations.

Key Financial Highlights for year ended 30 June 2018

Turnover £62 million (down 49%)

Wages £49 million (down 25%)

Pre-player sale losses £20.2 million (2016/17 profit £10.3 million)

Player sale profits £15.3 million (up from £11.3 million)

Player signings £66 million (up from £48 million)

Income

Nearly every club in its accounts splits income into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

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Year on year Middlesbrough’s matchday income fell by 18% last season to £7.1 million.

Premier League attendances averaged 30,499 and this fell to 25,544 in the Championship despite Boro having a relatively successful season and reaching the playoffs before losing to Villa.

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Until parachute payments run out Middlesbrough are not hugely dependent upon matchday as an income source, as it only represents one pound out of every nine generated by the club last season.

Losing its Premier League status was a blow for the club and the town last season and being relegated in the first season after promotion means that Boro only are entitled to parachute payments for two seasons instead of three as would have been the case had they avoided relegation.

Income for clubs in the Championship from matchday varies depending upon ticket prices, attendances and the number of corporate seats each club is able to sell, with the likes of Villa and Leeds having an advantage in the latter two categories.

Such is the magnitude of the Premier League TV deal that Middlesbrough received over £41 million from parachute payments out of total broadcast income of £46.3 million in 2017/18.

Having another parachute payment this season will generate about £35 million, but Boro are promoted they will then revert to the EFL deal with Sky, which is worth about £2.3 million a year plus a £4.3 million ‘solidarity’ payment from the Premier League, this can then be topped up by £100,000 for each home fixture and £10,000 if the club are playing away if chosen for live broadcast.

A lot of clubs in the Premier League are reliant on the BT/Sky deal for the majority of their income and Boro are no exception, even in 2017/18 TV was still providing three-quarters of their revenue.

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So, looking at the Championship as a whole it appears that parachute payments have created a two or three tier division, with those clubs who have just come down earning the most and then this tapers for those who have been relegated for two or three seasons.

Getting commercial partners to sign up for deals is more difficult in the Championship than the Premier League as sponsors prefer to see the names of their products when a team is playing Liverpool or Manchester United compared to Barnsley or Burton.

In Boro’s case commercial income fell nearly 30% to £8.6 million, which is less than two seasons previously when the club was promoted to the Premier League, although there may have been promotion bonuses paid that season.

Nevertheless, commercial deals can be significant and Boro are earning over £170,000 a week from such arrangements, which puts them into the top half of the table in the Championship sponsor-wise.

Growing commercial income is the best way for a club to increase overall income as broadcast income is negotiated centrally and matchday income can only go up if prices are raised (not popular with fans) or ground capacity increased (time consuming and expensive).

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Earnings overall halved last season to £62 million and will fall by about a further £10 million in 2018/19 as parachute payments decrease, before returning to the £20m a year level unless ‘Boro are successful in being promoted by May.

Costs

Player costs

Running a football club is an expensive business and Middlesbrough’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation.

Paying players a competitive wage is a challenge as owners and fans want promotion and to achieve that means acquiring top talent in an industry where small improvements in the quality of players doesn’t come cheap.

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Usually when clubs are promoted they give players improved contracts with relegation clauses should the worse happen and Middlesbrough appear to have applied this principle to a degree as wages fell by a quarter in 2017/18.

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Boro players still earned an average of £23,000 a week from our formula (we have no inside knowledge so this is an educated guess) as the club invested heavily in new signings as owner Steve Gibson tried to recruit players to help the club bounce straight back to the Premier League.

Earning so much from parachute payments meant that Middlesbrough ‘only’ paid out £79 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially in 2019/20 should they fail to be promoted, unless there is a major clear out of highly paid players.

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Sanity is in short supply in the Championship when it comes to wage control, with the division overall paying out £101 in wages for every £100 of income and Birmingham last season under I’m A Celebrity favourite Harry Redknapp somehow paying out twice that sum.

Player Amortisation

This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. For example, when Middlesbrough signed Britt Assombalonga from Forest in the summer of 2017 for £15 million on a four-year deal, this works out as an annual amortisation cost of £3.75 million (£15m/4). The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Middlesbrough’s total amortisation surprisingly increased in 2017/18 compared to their season in the Premier League due to the club investing heavily in buying players in a bid to achieve owner Steve Gibson’s desire to ‘smash the league’ and ‘go up as champions’.

Consequently ‘Boro have the highest amortisation total of any club in the Championship for last season, although this could be overtaken when Villa eventually publish their results. Even so it is clear that Gibson has backed his managers in the transfer market.

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Adding amortisation and depreciation together gives total player costs for Boro of £118 for every £100 of income.

Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Middlesbrough, like all clubs, show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs that are a bit bobbins when trying to work out long term sustainable profitability.

Despite the benefits of parachute payments Middlesbrough lost nearly £100,000 a week last season using this measure, although it is far lower than when the club previously was in the Championship.

Total operating losses in the Championship in 2016/17 were £260 million, so Middlesbrough’s finances appear to be far healthier than those of their competitors.

If these profits were invested wisely in the playing squad then the club should have been in a strong position to compete this season, but this does not appear to be the case.

A bit driver of Middlesbrough’s financial success here is profits from player sales. The likes of de Roon, Rhodes and Ramirez were sold and this helped to reduce the losses to tolerable levels for Steve Gibson.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

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For Middlesbrough this was a loss of nearly £400,000 a week in 2017/18, despite the benefits of parachute payments.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality is a series of severe spankings by big clubs interspersed with celebrating like a loon when beating the likes of Swansea and Bournemouth.

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If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Middlesbrough’s EBITDA profit was £7.1 million which shows that the club is generating cash from its day to day activities, although as said before, this is mainly driven by parachute payments. This suggests the club was making money which could then be invested in player transfers.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings, which cost Boro £30,000 a week in 2017/18.

Player Trading

Middlesbrough spent £66 million on new players in the year to 30 June 2018 as the club recruited Assombalonga, Braithwaite, Fletcher, Howson, Randolph, Shotton, Christie and Johnson in multi-million pound deals.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

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Steve Gibson did bankroll a net spend of over £20 million which showed his faith in the managers, although Boro fans might question the quality, if not the quantity, of the recruitment.

The player recruitment does seem to have been funded on credit though, as amounts owing to other clubs increased to over £56 million, compared to just £1.5 million in 2013.

In the footnotes to the accounts it shows that the big spending on 2017/18 has subsequently been reversed as the club had net income of £27.7 million in summer 2018 from selling Traore and Gibson.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Historically Steve Gibson has lent ‘Boro over £93 million as well as about £90 million in shares, although this did not increase during 2017/18. Instead it looks as if the club bought most of its signings during the season on extended credit terms, which will result in significant payments being made for them over subsequent years.

Summary

Middlesbrough went for broke in 2017/18 in trying to immediately return to the Premier League. The failure to achieve this objective has resulted in cost cutting in the present season but if the club is not promoted this season there will be a tough challenge ahead as income will halve again likely to lead to a player exodus to balance the books unless Steve Gibson is willing to invest substantial amounts of cash once more.