Imagine someone stealing £170 million from you, and the culprit eventually is fined a tenth of that sum having spent all the money elsewhere. That’s how Derby County and their fans are feeling following the EFL Financial Fair Play verdict against QPR.
On 24 May 2014, in the 90th minute of the Championship play off final against Derby County, (Sir) Bobby Zamora scored the only goal of the game to achieve promotion for Queens Park Rangers.
Had QPR complied with FFP properly, it is highly unlikely that Zamora would have been part of the QPR team, after the club was relegated the previous season from the Premier League, along with the likes of Rob Green, Joey Barton, Nedum Onuoha on big wages from the higher division.
In 2013/14 QPR signed players of the calibre of Charlie Austin, Danny Simpson, Richard Dunne, Gary O’Neill and Matt Phillips, as well as Niko Krancjcar, Ravel Morrison, & Beoit Assou-Ekotto on loan, as Harry Redknapp did what Harry Redknapp does best with a large amount of someone else’s money.
That season QPR’s wage bill was £195 for every £100 of income the club generated, even though the club earned over £28 million in parachute payments, having been relegated in 2012/13.
The wage bill of £75.4 million was only £3m less than that of the previous season in the Premier League. It works out as an average wage of £39,000 a week. The average total wage bill that season for the other 23 clubs in the Championship was £19 million, a quarter of that of QPR.
QPR’s accounts for 2013/14, published in November 2014, revealed that QPR Holdings Ltd made an operating loss (which is income less the day to day costs of running the club) of over £65 million, which works out at £178,000 a day, whilst in the Championship for 2013/14.
So what about Financial Fair Play (FFP), the rules which were supposed to prevent clubs from spending too much money on players and wages?
Under FFP rules for that season the maximum loss allowed by a Championship club was £3 million, or £8 million if the owners put made up the difference. Clubs that broke the rules were either subject to a transfer embargo (which has impacted the likes of Leeds United, Blackburn Rovers and Nottingham Forest in that division) or if promoted to the Premier League an FFP Fine/Tax is payable, with the proceeds going to charity.
Under EFL rules the fine was based on a sliding scale until losses exceeded £10 million above the FFP limit (which works out as a £6.7 million fine) and then 100% of the losses above this amount
Under these rules we estimate the QPR FFP fine would have been something along the following
Add back allowable expenses
Promotion bonuses (estimated)
This works out as an estimated fine of about £46 million.
The QPR approach was initially one of creative accounting. The owners wrote off £60 million of debt due to them by the club, and this was offset against the losses in the profit and loss account, meaning that in the eyes of the club the loss was only £9 million and that there was effectively no FFP tax to pay.
We’ve argued since day one of FFP that for most rules there are loopholes, accountants and lawyers are well practiced at finding them, and this was phase one of QPR owners’ attempt to avoid any penalties.
This approach was presumably rejected by the EFL, as it makes a mockery of the rules, which were aimed to preventing owners trying to buy promotion through their personal wealth.
QPR’s owners include Tony Fernandes (estimated wealth $745 million), Ruben Gnagalingam ($800 million) and Lakshmi Mittal ($18.6 billion) then took a different approach, seemingly taking the view that rules applying to other clubs were beneath them.
There was no reference to FFP in the 2014 accounts, but a year later, hidden away in the footnotes, was a reference to QPR challenging the legality of the FFP rules.
Since then, not a lot has happened, apart from time passing, and the advisors on both sides clocking up huge sums in fees as they argued over the small print.
Dragging out a ruling is a classic ploy, raising petty objections (arguing over what constitutes allowable expenses for FFP purposes, or which of the Tellytubbies would win in a fight*) and requesting further information that they know will take time to produce, with the sole aim of delaying any potential decision, and therefore payment, hoping the other side loses the will to keep on fighting and will settle for a smaller sum.
I have a mate who is a tax accountant in Swansea. If he knows a client is likely to have to pay more tax he writes an appeal letter in Welsh, as he knows there are a relatively few people who speak the language at HMRC, and so it will take a long time to reply, which will drag out the time until payment is made. If a rebate a due, he writes in English at it elicit a speedier response.
Sources close to the events advised PriceOfFootball.com a couple of years agao that a compromise deal was likely, with QPR likely to pay a much reduced fine, and both sides would claim a victory.
Rumours were that at EFL board meetings where the matter was being discussed the members became so nervous that no minutes were kept on the topic, for fear of this being used by the opposition to further find minor points to quibble about (at £1,000 an hour in fees probs).
An independent arbitration panel was created, with both parties seemingly committed to agreeing to the final decision
In October 2017 the arbitration panel published their decision, ruling against QPR and fining them £40 million, who instantly appealed to further delay any cash beng paid over (thus allowing their lawyers and accountants to upgrade from Range Rovers to Maserati brochures), dragging out the process again.
The ruling had consequences for Leicester and Bournemouth too, who had initially piggybacked on QPR’s claim that FFP was illegal. Both clubs settled with the EFL earlier this year and agreed to pay fines of £3.1 million and £4.7 million, less than had been initially forecast.
We now have the final ruling, after a carefully worded press release from EFL, the main points being:
QPR have dropped their objection to the previous ruling
QPR fined £17 million as an FFP Tax but it being paid in instalments over ten years.
QPR have transfer embargo in the January 2019 window
QPR pay EFL’s legal costs of £3 million (plus presumably their own costs too).
QPR owners convert £21 million of debt into shares.
The FFP fine will be excluded from QPR’s losses when calculating the 2018/19 figures.
Is this a fair settlement?
As a result of being promoted, QPR earned £148 million in broadcasting income and parachute payments between 2014/15 and 2017/18. Derby fans will no doubt take the view that this money could have ended up in the coffers of their club had QPR not flouted the rules.
The debts of QPR to the owners were effectively worthless as the club has no means of paying back the owners, so converting one piece of junk paper in the form of debt to another in the form of shares is accounting sleight of hand, no more than that.
The above table shows that prior to the ruling, assuming the club was worth £100 million (which is generous) then the loans due to the owners were last valued at £52 million, meaning their shares were worth £48 million. The total due to the owners if the club was sold would be £100 million.
By converting £22 million of loans into shares, the debt figure falls, and is offset by an increase in the value of the shares. The total value of the owners’ investment is still £100 million.
The aim here is simply to make the headline fine in the media reports appearfar larger than it is in reality. The press release is as best disingenuous , assumes that all football fans are financially illiterate and will swallow the headline figure of
Charities that could have received £41 million in the FFP tax, (and there has been discussion from QPR fans, rightly, that Grenfell survivors should be top of this list) will now receive £17 million, which, as some will not be received until 2027, is far lower than even this amount in reality.
If, as is rumoured, the £17 million fine is being paid over ten years, and using an imputed interest rate of 7.4% per year (which, according to HSBC, is their small business loan rate), then sticking the figures into a nerd calculator (see below) shows that the cash cost of the fine to QPR is the equivalent of £9.46 million being paid by the club in 2014 as a fine.
The interest rate chosen is by the way far lower than the interest rate which is being charged by QPR owners themselves of 1% a MONTH on some loans , and 2% a MONTH on others.
The comments from Shaun Harvey that ‘the board was conscious that the financial burden placed on the Club was manageable so as not to put its future in doubt’ is best filed under ‘bollocks’.
Tony Fernandes has previously stated that he was committed to the club irrespective of the decision, and he and his partners certainly have the resources to pay the fine and could have put the cash into the club in the form of shares or a loan to do so if they wished.
If you look at QPR’s accounts for recent years, the club borrowed £222 million, mainly from the owners, between 2013-17.
So there would appear to be little reason, apart from sulkiness or a loss of interest in the club, why the owners could not have invested a further £41 million either in shares or interest free loans to allow the correct amount of the fine to be paid. The claim that by spreading the fine over ten years will allow the club to avoid administraction is yet another smokescreen.
As for the transfer embargo, the club has sufficient notice to accelerate signings by a few months. The terms of the embargo are more on the lines of one player in and one player out rather than an inability to sign anyone. So this is a light tap on the wrists, along with the rest of the ruling.
Sadly, if you’re a Derby fan, as far as the EFL is concerned, grab your ankles.
For other clubs thinking of showing two fingers to the rules, the EFL has shown as much backbone as a jellyfish.
*Tinky-Winky, anyone who says different is clearly insane.
Bournemouth have just agreed a fine of £4.75 million with the English Football League in relation to a breach of FFP rules, a couple of years after initially showing an expected fine of £7.615million, so we thought we’d take a more detailed look at how this arose and the state of the Cherries’ finances.
Income £136.5 million for 11 months to 30 June 2017 (2016 £87.9 million for year to 31 July 2016)
Proportion of income from broadcasting 91% (2016 85%)
Wages £71.5 million (£59.6m)
Profit before player sales £15.2million (loss £6.1m)
Highest paid director £1,226,000 (£1,074,000)
Player signings £9.3 million (£69.8m)
League position 9th (16th)
For reasons best known to themselves, Bournemouth chose to reduce their accounting period to 11 months. Lots of clubs mess around doing similar issues (Manchester City, for example, had 13 months for 2016/17). It makes our job a wee bit harder, but we will try and compare on a twelve month basis when calculating percentages.
Clubs generate income from three main sources, broadcasting, matchday and commercial. Bournemouth, constrained by the 11,000 capacity of their stadium, are more reliant than most clubs on one source.
Bournemouth benefited from a record finish in the Premier League of 9th, compared to 16th the previous season. This earned them an extra £13.3million in prize money to £124.2 million, as the TV riches are partially split on final league position. In 2017/18 they ‘only’ earned £111.2 million as they finished 12th (and appeared on TV less often too).
Bournemouth also benefitted from the first year of a new three-year domestic broadcast deal from BT and Sky, which increased the total money earned by the English Premier League (EPL) by about £700 million.
The big gap between the ‘Big Six’ clubs (although this season joined by Leicester) and the rest is because in addition to the broadcast money from EPL participation, they also earn money from UEFA tournaments. Leicester pocketed £72 million from their progress in the Champions League.
The combination of a higher league finish, higher overall broadcasting rights and a small stadium meant that Bournemouth became the first team in the history of the Premier League to earn more than 90% of their income from this source, with £90.99 in every £100 coming from broadcasting.
Matchday income is number of tickets sold per match x average ticket price. Here Bournemouth are at a disadvantage.
Average attendances for 2016/17 were 11,182, effectively identical to the previous season. Whilst every match was a sellout, the capacity of the Vitality Stadium (Dean Court to you and me) of 11,360 meant the club was always going to struggle to compete against other clubs in this regard.
It will therefore come as no surprise that AFCB had the lowest matchday income of any club in the division.
Matchday income generated £605.6 million for Premier League clubs in 2016/17, but Bournemouth’s share was only 0.85% of the total.
Bournemouth’s matchday income actually fell in 2016/17 by 4.2%, mainly due to the cap on ticket prices for away fans, and less progress in cup competitions.
Bournemouth generated £456 per fan from matchday income in 2016/17, about mid-table, and this works out as just over £22 per match to watch the team, which is considerably lower than some of the ‘glamour’ clubs in the division who have a far larger proportion of prawn sandwich eating fans.
Whilst commercial income fell by 10%, this was mainly due to the accounting period being only 11 months long compared to 12 the previous season.
The club have realistically gone as far as they can go from this income source until they move to new premises.
The club have the second lowest level of income from this source, only beating that of the Premier League’s most boring club (from a sponsor perspective), Watford.
Such is the dominance of broadcast income though, that despite being in the relegation places for matchday and commercial revenues, Bournemouth had the 13th highest overall income in the division. They may even have overtaken West Brom had they produced a twelve month set of accounts.
A look at the club’s income for 2014/15, the year they were subject to the EFL FFP fine, shows income of only £12.9 million for the season, which was the sixth lowest in the division.
The main costs for any football club are player related, and are split between wages and amortisation.
Bournemouth’s wage bill for 2016/17 was £71.5 million for 11 months, which works out as a 22% increase on an annualised basis.
Bournemouth’s wages on an annualised basis are still some of the lowest in the division, which reflects the club’s policy of not being held to ransom by player demands, as evidenced by Matt Ritchie being allowed to leave to go to Championship Newcastle, who offered him a shedload more money.
The club presently have good control over wages, paying out just £52.42 in wages for every £100 of income, which is lower than the Premier League average.
The issue in relation to the EFL fine arose when the club was in the Championship in 2014/15, with a £30.4 million wage bill. This meant that Bournemouth spent £237 in wages for every £100 in income, which on the face of things blew a whole in the club’s FFP compliance.
This was a far higher proportion of income than any other club, although the Championship is a notoriously unruly division, with the wage bill regularly equalling or exceeding total income.
On an actual wage bill basis, AFCB were not at the top of the table, as clubs with parachute payments from the Premier League were able to bear larger contracts.
Bournemouth did however have the largest wage bill for clubs not in receipt of parachute payments, just ahead of Forest (who also had FFP sanctions as a result). Bournemouth did not break out how much of their wage bill that season was in respect of promotion bonuses to staff. This is important for FFP purposes, as promotion costs are excluded.
Looking at other clubs who have gone up in recent years though, we would expect the promotion costs to be in the region of £9 million, which brings Bournemouth’s recurring/sustainable wage bill down to about £21 million. This is still considerably higher than the club’s income, but not excessive by Championship standards.
The executives of Bournemouth have also done well as a result of promotion.
Compared to where they were in League One, the highest paid director at the club has had a 542% pay rise in the last five years…which is nice.
The other player related cost is amortisation. This arises when a club pays a transfer fee, which is then spread over the contract length in the profit and loss account. Therefore when Bournemouth signed Benik Afobe from Wolves in January 2016 for £10 million on a 4½ year contract, this works out as an annual amortisation cost of £2.22 million a year (£10m/4.5).
Bournemouth’s amortisation expense has increased as you would expect since the club moved from League 1 to the Premier League since 2013.
In the context of the Premier League, Bournemouth are where you would expect them to be, even adjusting for their 11 month accounting period. Relative low spenders along with a spine of a team from the lower leagues means they are close to the bottom of the table.
One thing that is mysterious in relation to Bournemouth’s accounts is the heading ‘other costs’. This increased by
This has increased by nearly 50% compared to the previous season in the Premier League, but the club give no clue as to what makes up this figure.
Profits are income less costs. There are a variety of different means of determining profits, many of which are tainted by the dark arts of accountancy.
The club announced in the strategic report an operating profit of £16.1 million, compared to £5 million the previous season. Operating profit is total income less total costs of running the club except loan interest and tax.
The only problem with such a figure is it contains some items which are either volatile from one year to another (such as gains on player sales) and others which are one-offs (such as FFP fines).
We therefore prefer to use something called normalised EBIT (Earnings Before Interest and Tax) which adjusts for the above items.
This profit measure shows that Bournemouth had their most successful year in the club’s history in 2016/17, mainly on the back of the increased broadcasting revenues. It also highlights the issue that has occupied those who snipe at the club in terms of the losses made in 2014/15 when the club was promoted to the Premier League and the FFP fine arose.
FFP profit is however a law unto itself. In 2014/15 clubs were allowed a maximum FFP loss of £6 million. Some costs are excluded from FFP, such as infrastructure (£2m in 2015), promotion bonuses (estimated £9m), academy (£2m est.) and community schemes (£0.6m est).
If these costs are added back to the operating loss then we arrive at the following estimate of an FFP loss.
Under EFL rules clubs promoted are subject to an FFP fine (as a transfer embargo is not feasible when clubs move to the EPL), which is calculated on a sliding scale as follows:
This gives an FFP fine estimate which is in within a gnat’s testicle difference from the figure shown in the Bournemouth accounts for 2014/15 of £7.615 million.
To give Bournemouth credit the club held its hand up, admitted that it had exceeded the allowable profits and set aside a sum (but did not appear to pay) the sum in the accounts.
Enter two flies in the ointment, both Queen’s Park Rangers (from 2013/14) and Leicester City (2014/15) were also subject to EFL potential fines when promoted. They took a different approach to Bournemouth and instead tried to claim that FFP was illegal and therefore fines unenforceable. Bournemouth therefore awaited how these two clubs were dealt with before handing over the money, and to an extent that seems a fair approach to take.
The fact that they knew the FFP rules whilst members of the Championship appeared to have bypassed the clubs’ respective owners. QPR have a potential fine of about £40 million from the season in which their income was £38 million and wages were £73 million, resulting in a loss of £65 million. Since then their lawyers, esteemed London firm Cockwomble, Wankpuffin and Co, have used every wriggling, prevaricating and filibustering scheme known to man to try to weasel out of paying the sum due.
Our snouts close to the EFL advise that the League became so paranoid about the constant stream of queries, points of order and delaying tactics from Cockwomble, Wankpuffin and Co that whenever QPR was discussed at EFL meetings it was agreed that no notes would be included in the minutes of the meetings to try to reduce the ambulance chasers from finding yet another excuse to push back judgement day. Even though the case went to arbitration in 2017 and QPR lost, there has been an appeal to further drag out the outcome (whilst of course the lawyers have their meters still ticking, and Range Rover Sport brochures are looking decidedly thumbed).
Leicester agreed to a fine of £3.1 million in February this year, after their lawyers Sue, Grabbit and Runne advised the club to reach a settlement. It is probably on the basis of the calculations and appeal used by Leicester that Bournemouth have managed to have their FFP fine reduced from £7.6m to £4.8m.
Our view here at Price of Football towers has been unchanged since FFP was first introduced. It discriminates against smaller clubs (such as Bournemouth) who have less ground capacity than others and also against all clubs that are not in receipt of parachute payments.
FFP also encourages clubs to get creative with their accounting policies (see our blog on Derby County if you fancy the tedious details) as compliant auditors with the spines of jellyfish and legal firms (and yes we know there are good ones too) with the moral compass of Gary Glitter in a flooded cave full of Thai schoolboys see FFP as an opportunity to fill their boots with fees.
As such we think that the rules are a waste of space in the Championship, where EBIT losses in 2016/17 were a staggering £392,000,000…and that is with FFP in place.
Rant over, and back to The Cherries. Bournemouth have been relatively cautious in the transfer market compared to their peers, but still spent record levels by the club’s own standards.
The club did have a spending spree in the first season in the Premier League, but care should be taken when looking at the 2016/17 figures, as by reducing the club’s year end from 31st July to 30th June to “align internal financial reporting dates with the financial year”, which is management-speak for complete and utter bollocks, it also meant that player signed in July 2017, which is a major period in the transfer window, were effectively excluded from the numbers.
In the small print to the accounts it does reveal that the club spent a further £39.8 million on players before the accounts were signed off.
In the year they were promoted, transfer spending of £13.2 million was not excessive in a division that spent a total of £157 million on players that season.
The only slight concern is that a lot of the transfer purchases appear to be on instalments, which might cause problems should the club fall out of the Premier League. At 30 June 2017 the club owed £22.8 million for transfers, and remember this is before they spent money the following month in the window.
AFCB’s owner, Maxim Demin, remains a mystery. He’s certainly put his hand in his pocket and loaned the club about £35 million. Demin’s ownership is via a company called A.F.C.B Enterprises in the British Virgin Islands (nothing to do with Virgin boss Richard Branson, or, for thinking about, the country’s most well known non-virgin connected to football, Katie Price).
The club’s other shareholder, US based Peak6 Football Holdings are owed a further £19 million. Both these loans are interest free, unlike those of the battery powered device salesmen at West Ham, who have charged the club over £14 million in interest since they took over the club.
Demin’s motives are unclear, but whilst he continues to support the club, and is keen to allow it to expand via a stadium expansion, fans probably don’t care too much.
Bournemouth generate a lot of resentment, and we think that most of it is fairly harsh. Thunderbird pilot lookalike manager Eddie Howe is fairly inoffensive, if a bit of a media darling, but the claims that the club somehow cheated their way to promotion in 2014/15 are excessive and unwarranted.
They were fairly open about their ambitions, and spent money well, unlike the approach taken by Aston Villa in 2016/17, who laid a trail of £50 notes to anyone who had a Panini Card collection and wanted to wear a claret and blue shirt, spunking a quite ridiculous £88 million on players that season.
Bournemouth were promoted to the Premier League because they played the best football in the division that season. Spending money a bit excessively by FFP purposes certainly helped their recruitment, but it didn’t give them a competitive advantage over many ‘bigger’ clubs in the division and those in receipt of parachute payments, it merely reduced the advantage those clubs had over The Cherries.
The biggest deceipt of FFP is that it makes fans think it is something to do with ‘fairness’ and that compliance with the rules is somehow egalitarian and honourable, but in reality its aim, especially at the higher levels of football, is there to lock in the differential between existing large and small clubs.
Starting with the elephant in the room, we’re Brighton fans here on this blog, so stop reading if you’re a Palace fan and think the aim is to have a pop at your club’s finances.
The Palace accounts cover the year to 30 June 2017, they were due to submitted to Companies House by 31 March 2018 but were a few months late.
Eagles fans (and those of their rivals) have speculated as to why the club has taken such an approach, as all other clubs had submitted their accounts some time ago.
Vast amounts of social media space have been taken up with fans arguing, often with themselves, as to the reasons behind the delay, but our focus is on what has been published, so we’ll leave point scoring and petty one-upmanship to others.
Every club must split its income into at least three categories to comply with Premier League recommendations, matchday, broadcasting and commercial.
Palace’s matchday income fell 11% in 2017 to £10.6 million. This initially appears odd as attendances rose from 24,635 to 25,160.
A quick look at Palace’s matches the previous season suggests that their success in getting to Wembley twice in the FA Cup would have been significantly beneficial to the club’s matchday coffers. Combine this with the cap on away fan ticket prices in 2016/17 at £30 (Palace were charging £32-£40 the previous season) and the fall in revenue becomes more understandable.
Residing probably where their fans would expect to see them in the matchday income table, Palace have more matchday income than many provincial teams due to being able to charge London prices, but less than those with bigger stadia and regular European home games.
In terms of broadcasting income, Palace were major beneficiaries of the new BT Sport/Sky TV deal, with an increase of 50% due to the £8bn three-year deal kicking in for 2016/17. This was combined with the club appearing on TV four times more than the previous season (worth about £1m per appearance) and £2m for prize money in finishing a place higher in the league table too.
Selhurst is a good ground from which to broadcast from due to the noise generated, and whilst it winds up some opposing fans (and some of Palace’s too) it looks good on the box, more than the sterile atmosphere at some big grounds full of corporate backslappers.
How much further Palace can go up the table is open to question as they only had 12 matches live in 2017/18 but this was offset by an 11th place finish worth an extra £6m compared to 2016/17.
How the Premier League divides money up is complex (and about to become more complex after the League chairmen stitched up clubs in the lower league with a new formula which reduces money available to greedy grasping clubs such as Bury, Grimsby and Accrington Stanley). Simply put half of the money is split evenly, a quarter linked to live domestic TV appearances and the rest is based on the final league position, with each place worth an extra £1.9m).
A lot of clubs in the Premier League are very dependent upon broadcast income and Palace are no exception, with nearly £5 in every £6 coming from this source. There are mutterings from fans of many clubs that TV money ruins the game in the top flight, but we would argue that it is a democratising force, allowing the likes of Palace to compete for decent players and pay them accordingly. This makes the Premier League more competitive, something the owners of the big clubs are out to destroy, especially since Leicester broke their little cartel by winning the Premier League.
Successfully being able to outbid most clubs in Europe apart from the Champions League regulars for players has allowed clubs of the stature of Palace to recruit the likes of Cabaye and keep Wilfred Zaha. Even expensive flops such as Benteke aren’t going to drag the club down whilst they remain in the top division.
Commercial income is again where you would expect it to be. Less than the global brands masquerading as local representatives and ahead of clubs that are so spectacularly inoffensively dull that no one wants their products to be associated with them (and yes, we are looking at you Watford there). A rise in commercial income of 28% is impressive although both the shirt sponsor and manufacturer were the same as the previous season the club may have signed deals on the back of the previous season’s FA Cup run (or earned bonuses that kicked in on the back of this).
Ridiculous gaps between the likes of United and most other clubs can only be overcome on the pitch if there are other sources of income, which brings us back to the view that the present split of broadcast income helps level the playing field…and if this is only by a small amount it surely must be welcomed.
An additional source of income for Palace in 2016/17 was £4 million of ‘other income’. In the accounts this is described as ‘compensation for…award in favour of the club by the Premier League Manager’s Arbitration Tribunal. This would appear to the money Palace received when former manager Tony Pulis tried to stiff the club by taking a £2.5m bonus for keeping them up in 2013/14 and then left.
Pulis was however only entitled to the bonus if still at the club at 31 August but quit having asked for it to be paid early and then resigning on 14th August. Palace sued for the bonus to be repaid by Pulis and the case went to tribunal.
Pulis’s reputation as an obnoxious deceptive shitbag that was established by the tribunal sadly has not prevented him from finding other work since then as a manager.
Palace’s main costs were in relation to players, and the wage bill rose by 39% to nearly £112 million, nearly six times the amount they paid out when promoted from the Championship in 2013.
Having a wage bill rising at this rate does look alarming, increasing as rapidly as the notches on Katie Price’s bedpost. Normally wages rise substantially when a club is either promoted or there is a new Premier League TV deal commencing. This would explain the jumps in 2014 and 2017, but in between too there have been significant increases in wage costs as the club has invested in new players and keeping some existing ones.
A wage bill of this magnitude puts Palace almost neck and neck with Leicester, who had won the Premier League the previous season and had the benefit of Champions League participation in 2016/17 too. The extra wage cost is on the back of substantial player recruitment for the season, as players on big transfers expect to be rewarded in line with the fee paid.
It’s difficult to see the rationale behind Palace’s wage rise compared to that of many other clubs. The three promoted clubs are self-explanatory, City had to fund Guardiola’s spending spree, Leicester had new contracts having won the Premier League (and had Champions’ League bonuses to pay). Chelsea’s wage bill fell despite winning the Premier League because of lack of Champions’ League participation. Premier League wages overall rose by ‘only’ £135 million (6%) as the clubs promoted had lower totals than those they replaced (Villa, Newcastle and Norwich).
Representing £78.30 of cost for every £100 of income in 2016/17, wages at Palace are proportionately the highest of any Premier League club. This suggests both Pardew & Allardyce we’re backed during the season. It does however limit wriggle room to increase wages in future years unless they generate extra income, hence the proposal to expand Selhurst.
Because of the boost in staff costs, Palace players have an average weekly wage of over £50,000 a week.
Rich owners of Premier League clubs have managed to restrain wage rises through the introduction of Short Term Cost Control (STCC) rules for 2016/17. STCC is designed to prevent what Alan Sugar described as the ‘Prune Juice’ effect, where additional broadcast income flows straight through the club into wages as unscrupulous working class players demand more money from the poor multi-millionaires, private equity funds and sovereign wealth bodies which represent Premier League clubs’ owners in the present age.
STCC works by limiting player (not that of all employees) wage rises to £7million a season plus any non-broadcast income plus the average profit on player sales over the last three years.
Looking at Palace, they had a wage increase of £31.2 million, which in order to satisfy STCC would look something like this.
It’s not sure if the Pulis money is allowable, but we have bunged it in just in case. As far as Palace are concerned, it effectively means that provided non-player wages increased by less than £3.2 million then they are within the limits.
Employing the likes of Sam Allardyce won’t have been cheap and it is unclear how much it cost the club to sack Alan Pardew, but this is likely to be in the overall wage cost.
One of the directors also had a substantial pay rise.
Only one director appears to be on the payroll, and the likely recipient is Steve Parish. There’s nothing wrong with Parish earning such a sum, he’s been a contributor to the club being promoted and securing a position in the Premier League. The sum earned is broadly in line with the average income for a first team player.
The accounts do appear very defensive in relation to this money though. First there is a note in the directors’ report stating that a bonus the previous season had been foregone and then implied that the bonus and more had been invested in the club.
Directors are entitled to be paid, and with the riches of the Premier League the Palace recipient is not the highest paid in the division (step forward Daniel ‘Steve Austin’ Levy at Spurs) nor the lowest (although Manchester City’s figures are best filed under creative accounting as whilst the club’s accounts show a zero figure, the parent company, which also owns clubs in Australia, the US and South America has total key management pay of over £4 million).
The note also showed the directors’ commitment in terms of the amount of money injected into Palace to fund the player purchases under Allardyce in January 2017.
Then in the footnotes to the accounts further explanation appears showing both the gross and net sum received by this director. The inference being that by earning ‘only’ just over £1.1 million net Parish (assuming it is him) is somehow slumming it.
In addition to the salary earned, Steve Parish controlled companies that sold services to Palace.
VMM Ltd appears to be a property company with one employee, and Smoke & Mirrors Group Ltd by all accounts rents a property in Soho to Palace, which seems a bit odd, as does tripling the rent for 2016/17.
Some things from the directors’ comments seem inconsistent though. As the cash flow statement for 2016/17 shows that the shares issued by the club have been used to pay back loans to former shareholders and loans from directors have been repaid along with interest. The loan from the parent company in the year needs to be reviewed when the parent publishes its accounts.
The mysterious third party proposed investment mentioned in the directors’ report does not seem to be mentioned in the cash flow statement. This could be because it was received in 2017/18, although you expect to see this mentioned in the note to the accounts that summarises post year end transactions.
This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. So, when Palace signed Benteke from Liverpool in the summer of 2016 for £27 million on a four-year contract, this results in £6.75 million (£27m/4) being added to costs for four years.
The total amortisation cost for the club for 2016/17 rose 80% to nearly £33 million, reflecting the investment in the playing squad in both transfer windows.
Palace’s figure is a record for them but about mid-table by Premier League standards.
If wage and amortisation costs are combined, then Palace are the only club in the Premier League to have spent more money on total player costs than they generated in income.
Profit is income less costs, but it contains lots of layers and estimated figures. Palace’s profit and loss account refers to a few different profits, so they need a bit of explanation.
Operating profit is income less all the running costs of the club except loan interest & tax. On the face of things, it looks as if Palace have had a good year in 2016/17, with an improvement of nearly £19 million.
Included in operating profits are some volatile income and costs such as profit on player sold and the income from successfully winning the claim from obnoxious bellend crook Tony Pulis and player write-downs. Palace made profits on player sales of £35m.
If these non-recurring items are removed, we get something called EBIT (earnings before interest and tax) which in theory is a sustainable/recurring profit figure.
Palace’s EBIT profits are less impressive, as the profit becomes a loss reflecting the increase in wages and other operating costs in the year.
The Premier League made EBIT profits of £147 million in 2016/17, but these vary substantially from club to club. Palace had the third highest EBIT loss.
If non-cash costs such as amortisation and depreciation (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.
The good news for Palace is that they made an EBITDA profit, the bad news is that it was the second lowest in the division. The Premier League made EBITDA profits of £1,183 million, of which £10 million was earned by Palace.
Palace splashed the cash in 2016/17 with over £104 million on player purchases such as Benteke, Townsend, Milivojević & Van Aanholt, making them the fourth highest gross spenders in the division.
The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans will rightly point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.
Taking this into account Palace spent over £65 million net in 2016/17 and shows the extent of the achievement in 2013 in being promoted with a negative net spend (Sir Glenn Murray being recruited on a Bosman).
Palace once again come fourth in the Premier League in terms of net spend.
One concern for Palace is that many of the players who were signed have the transfer fees payable in instalments. Consequently, the club owed over £45 million in respect of fees at 30 June 2017, but also themselves were owed £11 million from player sales, to give a net player trading creditor of £34 million.
Palace’s total creditors come to £107 million. This is sustainable whilst they are part of the Premier League, and even if relegation does arise then parachute payments and potential player sales should enable debts to be paid.
In 2017/18 the club spend a further £42 million on players but this time there was far less recovered from sales.
Palace’s finances are a curate’s egg. Higher income and profits are offset to a degree by an investment in players which had significantly increased wages and player costs.
Fans might question the sustainability of a business model in which more money is expensed in player costs than in generated in income, which is a common occurrence in the Championship, but not the case in the Premier League.
Ultimately Premier League membership is the most critical element of income generation and here the club has been successful, so the directors would argue that the policy has worked.
The very defensive comments in relation to director wages and interest on loans paradoxically brings them into greater scrutiny, but at least the Palace owners aren’t stiffing the club for £14 million in interest, unlike Gold and Sullivan at West Ham.
Some questions remain, such as the source(s) of funding for the stadium expansion, but these are capable of being overcome, provided there are not significant interest costs on any loans.
As for the delay in sending in the accounts, there seems to be little justification.
Some of the ‘Big’ clubs feel that they get a raw deal from the existing way that broadcasting monies are split in the Premier League, so want to change the rules.
Q: What’s their particular beef?
At present the Premier League divides money into five pots.
(a) Domestic broadcast money from BT/Sky of £1.7 billion a year is split into three pots
50% is split evenly between all 20 clubs
25% is split based on the number of times the clubs are shown live on TV.
25% is split based on the final league position.
(b) Central advertising for sponsorship of the Premier League is split evenly between all 20 clubs.
(c) Overseas broadcast money worth about £1bn a year is split evenly between all 20 clubs. It is this issue that is creating the aggravation.
Q: What’s wrong with splitting the money evenly?
Nothing, except the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal, Chelsea and Spurs) claim that viewers overseas are only interested in seeing their clubs on the box and so should get more of the cash.
When the Premier League was set up in 1992 (and football was invented) the overseas TV rights were so miniscule that nobody cared about them, so the club chairmen were happy with an even split.
Q: Surely a more democratic split of monies makes the game more competitive?
Yes it does, and the Big Six were happy to go along with this, until Leicester City spoiled their little cartel and won the Premier League in 2016. This caused the owners of the big clubs to soil themselves and try to ensure it did not happen again.
Q: I thought the smaller Premier League clubs were against such a split?
They were, in October 2017 a vote for the Big Six plans to redistribute overseas money partly on a merit (league position) basis was delayed/deferred. According to inside SAUCES this would have resulted in 65% of the overseas money being split evenly between clubs and 35% on merit.
If this had been approved the broadcast distribution between clubs would have been as follows:
The proposal would have resulted in 12 clubs being better off and 8 worse off than under the original rules. The reason why it was 12 and 8 rather than 10 and 10 is that less money would have gone to clubs relegated (who receive parachute payments) and ‘solidarity’ payments to the other clubs in the Football League Championship, League One and League Two.
This is because the Football League agreed to a deal with the Premier League such that a fixed percentage of money given on an equal basis to Premier League clubs would be allocated to parachute and solidarity payments. Reduce the amount of Premier League money split evenly and therefore the amount that filters through to the EFL clubs by about £48 million.
The reason why a vote did not take place at the Premier League chairmen meeting was that Richard Scudamore, the often maligned but actually pretty decent Premier League chairman, realised the proposal would not get the 14 votes required for a change in the rules and so managed to put off a decision being made.
Since then the Big Six have been quietly fuming at not getting their way and there has been a muttering and unfulfilled threat of quitting the Premier League and joining a European Superleague if their wishes were unfulfilled.
They clearly believe that the Premier League’s success is all due to their clubs. This is very harsh on Scudamore and his team, who have marketed the Premier League superbly, partly on the grounds of it being more competitive and unpredictable than other leagues.
In 2017/18 Burnley and Palace have beaten champions Chelsea, Swansea have beaten Liverpool, West Brom and all three promoted clubs have beaten Manchester and practically everyone has beaten Arsenal.
Scudamore has spent the last six months trying to keep all 20 club owners, if not happy, then at least not moaning too much, and he’s succeeded.
Q: Why should the Premier League give money to clubs in the Football League?
It’s an issue that clearly vexes Liverpool’s American owner John Henry. He was quoted in an interview with Associated Press as saying “it’s much more difficult to ask independent clubs to subsidise their competitors beyond a certain point”.
Henry clearly thinks that clubs in smaller towns and cities are an irrelevance and whether they survive or die is of little consequence for him. Point out the Liverpool signed the likes of Kevin Keegan from Scunthorpe, Phil Neal from Lincoln City and Ian Rush from Wrexham and he would probably look confused (as after all soccer began in 1992).
Q: Why were the other Premier League clubs opposed to the change?
Many of them would have ended up with less money and the Premier League would have become less competitive too.
Q: What are the agreed changes?
Under the rules which kick off in 2019/20, any INCREASE in overseas TV money will be split on a final league position. This means that the existing level of overseas cash will still be distributed evenly.
To stop the clubs at the top running streets ahead of the lower/midtable clubs, there is a cap such that the club who wins the Premier League cannot have more than 180% of the Premier League TV money than the side finishing bottom, under the present rules it works out at about 161%.
Q: Who will be the winner and losers then under the new rules and why did smaller clubs vote in favour?
Whoever came up with the new rules (and I have my suspicions who it may have been) has created a distribution method in which no one is worse off, as it is only the additional overseas money that is split on the new method. Everyone is therefore guaranteed their former income.
The teams who will lose out, as already mentioned, are those outside of the Premier League.
Under the old rules, if the Premier League generated an extra £100 million, £27 million of this would ‘leak’ out to the EFL clubs as follows:
The Premier League clubs would each therefore receive an extra £3.65 million whereas the likes of greedy clubs such as Grimsby, Barnet and Forest Green in League 2 would receive an extra…err…£32,000 each per season, enough to play the average wage of one Liverpool player for all of three days.
John Henry could claim that these lower league clubs have done nothing to deserve any extra money, and under the new rules, his wish has come true.
The Premier League will now keep £100 million out of each extra £100 million generated from overseas income. Having crunched the numbers (and this was beyond me so I was lucky to use the talents of some university boffins for assistance) shows how an extra £100 million would be distributed using both the present (2018/19) and new (from 2019/20) rules.
As can be seen from the above, 14 clubs would be better off under the new rules than using equal distribution, as no money goes to the Football League.
Funnily enough 14 votes were needed to pass the new rules and they were duly approved. If overseas money increased by a larger amount, say £750 million a season, then 15 clubs would be better off than under an equal share basis.
Q: But what about the EFL clubs, couldn’t they vote against this?
The EFL clubs were the ones who negotiated and voted for as agreed set percentage of equally distributed Premier League monies. At the time they were delighted with the result but may be regretting it now.
It’s not the first time in this country in recent years that people have voted for something that makes them economically worse off though.
If you are a big club owner things are looking great. There’s more money coming into your club from the Premier League and in addition UEFA have announced an extra £780 million of annual prize money each season too.
This money won’t go to players, as under the Premier League’s Short Term Cost Control rules wages can only increase by £7 million a season plus any money generated by the clubs themselves through commercial and matchday income.
The money won’t go to the EFL either, so who does that leave as potential beneficiaries apart from club owners themselves?
Morecambe had a nervous finish at the end of the 2017/18 season, surviving in the Football League on the final day. Perhaps they should have expected a close shave after being taken over by a Brazilian in 2016.
What was probably cause for a party at the time has then no doubt been replaced by the sombre reality of trying to survive financially after being railroaded by an owner whose relationship with the truth is about the same as Sam Allardyce’s ego is with modesty.
Being a fan of a lower league club is no different to that of a Premier League club, except there are fewer zeroes at the end of player’s wages and less chance of seeing a Japanese tourist with a selfie stick in the club shop.
The Shrimps were promoted to the Football League in 2006/07 and have done well to maintain their league status on meagre resources.
The club has recently produced their financial results for 2016/17, a bit late, partly due we suspect to resolving issues in relation to Diego Lemos, the absent parent who had a habit of forgetting to pay the wages.
Credit should however be given to someone at Morecambe for producing full sets of figures for us to analyse, as too many of their peers take advantage of Company Law loopholes to avoid full disclosures.
We are aware that the Football League (EFL) have been pressed on the issue of clubs only publishing cut down versions of the accounts by the likes of the Football Supporters Federation.
Sadly, the EFL’s standard response is to do nothing and then look surprised when so many clubs attract charlatans, conmen and scumbags at their helm. This takes away from the many brilliant owners of lower league clubs that put body and soul into supporting their local team.
Before writing this elegy to lessons learned we didn’t even know what colour kit Morecambe played in, or the astounding fact that they’ve only had three managers since 1994.
Present incumbent Jim Bentley has just become the longest serving manager of the 92, following the complicated departure of Paul Tilsdale at Exeter City.
Bentley has outlived the club’s recent owners, including the former head of Umbro, Peter McGuigan, Lemos (along with Qatari sidekick Abdulrahman Al Hashemi who lasted two months) via a company called G50 Holdings Ltd.
When Lemos resigned, or kicked out, the truth is murky, the club effectively was then owned by Graham Burnard, a tax consultant, who appeared from nowhere.
The club now appears to be taken over by a company called Bond Group Investments Ltd, which was set up with the princely sum of two pounds by two blokes called Jason Whittingham, owner of a pawnbroking empire, and Colin Goldring, a London lawyer.
These two only became directors of Morecambe on 14 May 2018. EFL approval of the takeover is required, and surely a pawnbroker and ambulance chaser at the helm means that they will satisfy the ‘Owners and Directors’ test of the EFL?
The club also appears to have taken out a mortgage secured on the Globe Arena, their home ground, with Mayfair Fin UK Ltd, an Essex based lending emporium, whose contact email address is that of…Jason Whittingham, and whose signature on the agreement is…Colin Goldring.
Income £2.70 million (up 9% from £2.47 million)
Wages £1.93 million (down 3% from £1.99 million))
Losses £350,000 (down 41% from £598,000)
Player sales and purchases zero (no change)
Borrowings £1.74 million (down from £3.32 million)
Most clubs split their income between three sources, broadcast, matchday and commercial. Morecambe have added a fourth, hospitality.
Morecambe’s income has been broadly static for the last few years, but the whole club generates about the same amount of money as the average annual wage for a single Premier League footballer.
Clubs in the EFL get a share of two forms of broadcast income. The Football League has a £90 million a season deal with Sky, and splits the money 80% to the Championship, 12% to League One and 8% to League Two. Some of the pot is allocated to the Professional Footballer’s Association, and a proportion is set aside for those clubs whose matches are broadcast live. This results in a League 2 team getting a basic payment of about £472,000, plus additional £30,000 for a match televised live at home and £10,000 if they are the away team.
In addition, the Premier League gives money to the EFL in what are called ‘Solidarity Payments’, which are a constant percentage of the Premier League TV deal. These solidarity payments increased from £230,000 to £430,000 in 2016/17 due to the commencement of the new BT/Sky TV deal kicking in.
If Morecambe were relegated to the National League, they would receive some parachute payments for a couple of years in respect of the basic payment money from the EFL deal, but after that they would effectively be generating nothing from this source.
Overall TV money is about a third of the total for Morecambe.
Morecambe averaged home crowds of 1,704 in 2016/17, the second lowest in the division, with only the mighty Accrington Stanley attracting fewer fans that season.
Consequently, the club only generated about £848,000 from gate receipts for the season, much lower than that of the large clubs in the division such as Portsmouth (£3.86 million) who have the benefit of larger crowds.
Without knowing too much about the club, it is unclear whether hospitality refers to matchday sales to food and drink fans, presumably the prawn, (or should that be shrimp?) sandwich brigade in the posh seats, or something else. Either way this is a significant source of revenue for the club, bringing in over a quarter of total income.
Hospitality income fell by 10% in the year.
Shirt sponsors were sponsored by Omega Holidays, a company owned by the club’s vice chairman. The club continued to have their kits produced by Carbrini and these sources, combined with perimeter and other sources, generated just under £1/4 million in the year, a 4% decline since 2016.
The main running costs for a club are wages, and Morecambe is no exception to this rule.
The wage bill is slightly lower than five years ago, reflecting the tight control that the club must keep in terms of player contract negotiations. It’s always tricky to determine player wages but using our standard formula we estimate the average weekly wage was about £928.
Morecambe player did have the further worry during 2016/17 of not knowing whether they would be physically paid at the end of each month, as salaries failed to be paid over on more than one occasion as the club takeover meant that no one was willing to foot the bill until they established whether they owned the club. The PFA had to step in and pay its members until the ownership issue was resolved.
The other player related cost for some clubs is that of transfer fee amortisation, which is where the club spreads the fee over the contract life. The two big Manchester clubs have annual amortisation costs of over £120 million a year, whereas Morecambe’s was a big fat zero, as it has been for living memory.
This reflects the hardship of many clubs at the arse end of League Two, in that they cannot afford to sign players for fees, instead relying on Bosman deals, existing squad members renewing contracts and loans.
One director was paid £30,000 for the year, a far cry once again from the million pounds plus average in the Premier League.
The main non-player costs were stadium and machinery depreciation (£85,000) and interest on loans (£97,000).
Profits and losses
Profit is the difference between income and expenses. For a club such as Morecambe it is a case of trying to keep losses to a minimum and hope for either selling a player or two at a profit or the benevolence of directors to balance the books.
The above shows that the club has lost on average £11,000 a week over the last five years. The losses fell in 2016/17 due to the additional TV monies being received.
These losses are underwritten by the club owners. It is unclear how much, if any, of these losses were covered by the unseen Mr Lemos.
Financing the club
If a football club loses money, it must cover these losses somehow. Some clubs can sell players at a profit, but this does not appear to be the case with The Shrimps. The accounts are a bit sketchy here but whilst there’s no evidence of players being sold for a fee for many years, Jack Redshaw did generate money apparently (£200,000?) when sold to Blackpool in 2016.
The club therefore must rely on lenders and investors to make up the shortfall. This can come in the form of issuing shares to investors or borrowing money from them. The main difference is that borrowings may attract interest payments. Whilst shares could in theory result in dividend payments this is highly unlikely in practice.
Morecambe have relied on owner/director loans and in the last four years they have put over £1.7 million into the club. This is the side of football that few show an interest in. It’s often local businessmen/supporters who know that the club provides a focal point for the town who do this, and most of the time they get nothing but abuse for their efforts (there’s no evidence of this in the case of Morecambe though, the fans were delighted that they have new owners who are prepared to do the right thing.
It looks as if the directors have gone further in converting over £2.2 million of loans into shares. This is effectively writing off the loans, as realistically the club has no means to repay them. It does mean that should someone take over the club they will inherit less debt.
Morecambe fans face an uncertain summer. The ownership issue is unresolved and it will take time to see whether The Shrimps have jumped from the frying pan to the fire.
The club is a textbook example of poor governance and control by the EFL, who have done their best Nero impersonation whilst players and backroom staff went unpaid on regular occasions under Lemos.
For all those fans of other clubs who are moaning about the lack of big money signings, glamourous managerial appointments and carefully choreographed kit launches, spare a thought for those who are nervously awaiting to see if they have owners who can continue to fund the club as a member of the 92.
Villa easily satisfied FFP in 2016/17 due to parachute payments and player sales despite spending £88 million on players.
They should easily satisfy it in 2017/18 as player trading position reversed and sold more than they bought.
Will need major belt tightening in 2018/19 as parachute payments fall from £34m to £15m and FFP loss limit falls from £61m to £39.
If you want the long version read on…
There’s nearly as many questions about Financial Fair Play (FFP) these days as there is about Katie Price’s love life, and the answers are usually equally confusing.
I’ve been asked to look at Villa’s FFP position, and this will involve an element of guesswork in places, as some figures are not yet published or have never been in the public domain.
In the Championship FFP is based on a rolling three-year period, with the aim of keeping losses to an ‘acceptable’ level.
Presently the rule is that a club can have an FFP loss of £13 million for every season it is a member of the Championship within the three-year period, and £35 million for each season in the Premier League.
Therefore, for Villa, for 2016/17 the allowable FFP loss was £83 millon (2x£35m + £13m) falling to £61 million in 2017/18 and £39 million in 2018/19.
The known losses
According to Villa’s accounts, the club lost £81.3 million in 2015/16 and £14.4 million in 2016/17 giving a grand total of £95.7 million, so it initially looks as if an FFP breach had occurred, but we now enter the world of murky accounting and additional FFP rules.
To add to the confusion, some costs are excluded when calculating FFP losses. This is because they are considered ‘good’ as they represent an investment in the future of the game or its facilities.
These costs include:
Academy running expenses
Community support schemes
Infrastructure costs (usually depreciation on the stadium and training facilities etc)
Promotion bonuses to staff should the club go up to the Premier League.
Looking at Villa’s accounts for 2016/17
The club has a tier one academy, it looks as if this cost was £5.9m for Villa. (£5m in 2015/16)
Community support was £2m (£2.2m in 2015/16)
Infrastructure cost (depreciation) was £2.9m (£48.5 million in 2015/16 due to a bit write off of the value of Villa Park).
This means that Villa could have had an FFP loss of £31.8 million (£61m allowable three-year loss less £29.2m FFP loss incurred in last two years) for 2017/18.
Squeaky bum time
Have Villa managed to get in under this figure of £31.8 million for 2017/18?
I would say they have, but there is not a lot of room to spare.
In 2016/17 the loss of £14.4 million was AFTER selling players at a profit of £26.6 million. Villa have made significant sales in 2017/18 and it looks as if they’ve made a profit on these of a further £15 million.
Now for the bad news, Villa’s broadcast income for 2017/18 is down by about £7 million from £41 million to £34 million due to a reduction in parachute handouts. It’s likely the club’s other income will fall by £2-3m too as commercial deals expire.
The wage bill will still be high, and the figure for 2016/17 of £61 million was the third highest in Championship history, only beaten by Newcastle (who were promoted) in 2016/17 and QPR in 2013/14 and are now facing an FFP fine of between £40-50 million.
Expect the wage bill to be trimmed a bit but Villa have recruited John Terry and signed some loan players who are on big money. I’ve gone for a 10% reduction in wages to £55 million
Villa also spent a fortune on players in 2016/17 of £88 million on players. The cost of these are spread over the length of the contract signed. So if we assume players are on four year deals this is a cost of £22 million a season unless the player is sold.
These two costs put together are likely to be in the region of £70 million, and expected income is about £65 million, taking into account the fall in parachute payments.
Villa’s overheads in 2016/17 were £91 million excluding amortisation, of which £61m was wages, so lets assume that if there have been cutbacks for 2017/18 there are £25m of non-wage overheads.
Putting this together we have
Estimated accounting loss
Gain on player sales
Allowable FFP costs
Therefore over the three years to June 2018 Villa will have a rolling FFP loss of £44.2 million, well within the £61 million limit.
This is where I fear Villa will face its biggest challenge. The allowable three-year FFP loss will fall to £39 million from £61 million and parachute payments from £34 million to £15 million. Put those together and it’s a financial squeeze of £41 million.
In addition, they may struggle to get players on big wages such as Ross McCormack off the payroll. Even if he goes out on loan Villa will be picking up the majority of the tab.
It suggests that the club may have to sell Grealish and Chester to ensure they don’t exceed the limit.
Mike Ashley, Newcastle’s colourful owner, has finally submitted the club’s accounts for the year ended 30 June 2017 for public scrutiny.
In first announcing a selected set of information from the accounts on the club’s website Ashley has laid himself open to accusations of trying to massage the message from the club’s season in the Championship.
Kind words are in short supply in Tyneside for Ashley, who bought the club in May 2007 and has overseen two relegations during that period.
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 share in the club too?
A look at the accounts suggests that the bleak picture painted by the press announcement last weekend perhaps overegged the pudding in terms of just how big a gamble the club took last season in incurring record losses of over £90 million.
Starting at the top of the income statement, Newcastle had total revenue of £85.7 million, a record for a club in the Championship, but nearly a third less than the previous season in the Premier League.
Having a lot of money is one thing, and Newcastle have earned exactly £900 million under Ashley’s ownership, but putting it to good use is another, and Toon fans will question a lot of the decisions made in how that money has been utilised.
Looking at the breakdown of the income total, the biggest contributor is broadcast income from the Premier League in the form of parachute payments.
Earning Newcastle £40.9 million in 2016/17, parachute payments, which worked out at 55% of the Premier League’s ‘Basic Award’ (the part of the broadcast deal that is split evenly between clubs, aim to cushion the blow of relegation when clubs have players on Premier League contracts which otherwise would be difficult to fulfil in the Championship (or, in the case of Sunderland, League One).
Year by year parachute payments fall, from 55% of the basic award in the first year outside the Premier League, to 45% in year two and 20% in year three.
Income from broadcasting in the Championship for non-parachute payment clubs is a basic of about £6.5 million a year, plus £100,000 for every home match shown live on Sky.
Some of the Championship broadcasting income (about £2.3 million per year in the Championship) comes from ‘solidarity payments’ from the Premier League, which is an annual handout to the 72 clubs in the Football League.
A huge gap therefore exists between those clubs in the Championship earning parachute payments and those that do not.
Fans of parachute payments point out that it allows clubs to negotiate long term contracts with decent players who might otherwise go elsewhere if there are large wage reductions clauses in their contracts.
Allowing clubs three years (or two if they are promoted and immediately relegated, such as happened to Middlesbrough in 2016/17) means that there doesn’t need to be a fire sale of player of the calibre of JonJo Shelvey if a club goes down.
This allows a club relegated to regroup and familiarise itself with the financial constraints of the Championship and reduce the risk of going into administration.
Critics of the parachute payment system claim that it gives clubs relegated from the Premier League an unfair advantage over their rivals.
Only one club in receipt of parachute payments in 2016/17 was promoted though, and that club was Newcastle, Norwich finished 8th and Villa 13th, despite also receiving nearly £41 million from the Premier League.
Commercial income for Newcastle in 2016/17 was £14.8 million, down from £28 million the previous season.
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.
Newcastle fans take the view that they should be earning far more commercial money given the history, heritage and size of the club, but it already is fairly competitive with many in the Premier League whose matches are broadcast around the world each week and who generate vastly bigger viewing figures than those teams in the Championship.
Earnings from matchday sales were maintained due to Newcastle fans turning up every week and average attendances at St James Park were an amazing 51,108, beaten by only five teams in the Premier League.
You must give respect to Newcastle fans for turning up in numbers as matchday income at St James’ Park was twice that of any club in the Championship as crowds averaged 51,000.
Wages are a club’s biggest expense, and Newcastle spent a record amount of £112.2 million in 2016/17, up 50% from the previous season in the Premier League, but this headline sum includes some one-off costs.
A sizeable chunk of the wage bill (£9.9 million) was paid for promotion bonuses and a further £22 million was for players who were not considered part of the first team and so had their contracts paid up or went on loan with NUFC picking up some or all the wage bill.
Nevertheless, even if these figures are excluded the wage bill would have been over £80 million, compared to the average Championship figure of £29.8 million.
Kowtowing to Mike Ashley as Newcastle United Ltd.’s only director is Lee Charnley, who earned ‘only’ £150,000 for his services in the year and waived his right to a bonus.
Every club needs a front man and Charnley acts as the interface between unhappy Toon fans and the Ashley.
Rightly or wrongly, Charnley is seen in as bad a light as Ashley on Tyneside but his pay is far lower than that of other football executives, with the average in the Premier League being £1,008,000 a year and some other CEO’s in the Championship earned seven figures too.
The other major cost is transfer fee amortisation. This is how clubs deal with the sums paid for player transfers. This is achieved by spreading the cost over the contract life. So when Matt Ritchie was signed in the summer of 2016 from Bournemouth for £11million on a five year contract, this works out as an amortisation charge of £2.2 million (11/5) a year.
The total amortisation cost incurred by Newcastle was £35.8 million, far higher than that of any other club in the division. This also reflects ‘impairment charges’ which is when the club writes down player values in the accounts when they are a bit rubbish. The sum involved within the amortisation figure is not shown, but I’m sure Toon fans can name the players and the manager(s) who signed them.
Amortisation is not however a cash cost, so there’s a case for treating it cautiously when looking at the figures.
Profits are income less costs, and here the club has been disingenuous by promoting in the press release a £91 million loss figure. However, this is before considering gains on player sales of over £42 million and includes the non-recurring costs from promotion bonuses and the contract write ups.
If you strip out the one-off costs and income and exclude amortisation claiming it is a non-cash expense, we get to something called EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). This is the profit most focussed on by analysts, at it is a sustainable cash equivalent of profit.
This gives a figure of £19.8 million, still sizeable but far less than the sum being touted by the club to the media when the results were announced.
Newcastle made substantial EBITDA profits in previous years so were able to absorb this loss reasonably easily.
There is no chance of Newcastle being subject to Financial Fair Play sanctions from the Football League as promotion bonuses are excluded and gains on player sales included when calculating FFP losses.
Mike Ashley’s reluctance to spend money in the transfer market is legendary. In the period since he bought the club he has spent £308 million on players (less than what Mourinho and Guardiola each spent in their first 15 months in charge) and raked in sales income of £244 million.
This gives a net spend of just £65 million over the period.
Last season in the Championship Newcastle bought players for £41 million in the shape of Ritchie, Gayle, Yedlin and Clarke, but managed to rake in £70 million from selling Sissoko Wijnauldum and Townsend.
Compared to the rest of the division Newcastle certainly spend big, but it was less than half the sums paid by Villa, who finished far down the table.
Mike Ashley lent the club a further £15 million during the year, taking his total interest free loans to £144 million. The club also had an overdraft at 30 June 2017, presumably used to pay the promotion bonuses, but this overdraft would have been wiped out when the Premier League broadcast income for 2017/18, which eventually totalled £123 million started to flow to the club.
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 £400 million, but this price looks optimistic for a business that realistically has a 1 in 4 chance of losing its main source of income (PL TV money) at the start of each year.
Newcastle under Mike Ashely did take a gamble in investing in players in 2016/17 to engineer a return to the Premier League, but not as much as the club has claimed.
The motive of this spending is however unclear, we estimate the value of NUFC as a Championship club to be £80-100 million, but as a Premier League club it is £270-£800 million. Ashley could therefore be seen to be protecting the value of his investment in the club by funding the promotion push, and once back in the Premier League returning to his more stingy spending style.
Astute management from Benitez combined with canny signings on players who have a good resale value during the season helped them bounce back.
What happens next with Mike Ashley at the helm is unknown, he is the football Fog on the Tyne and it won’t lift until he leaves.
As the 2017/18 season comes to an end, all but one Premier League (EPL) club has submitted their accounts for publication, and that has allowed us to estimate values.
The new domestic broadcasting deal that came into play in 2016/17, combined with wage restraint due to the EPL’s Short Term Cost Control rules, has boosted club income and profitability.
As a result the total value of EPL clubs has risen over 30% from £12.1 billion to £15.8 billion.
The clubs have been valued using the Markham Multivariate Model (MMM) devised by Dr Tom Markham, a graduate of the University of Liverpool’s Football Industries MBA programme, and is now head of Strategic Business Development at Sports Interactive, the producers of Football Manager.
The model has been slightly tweaked to remove some of the volatility in gains arising from selling players in individual years, which explains why some of the comparative figures from 2016 are different to those published last year.
The average value of a club in the EPL is now £791 million, up from £607 million the previous season. This helps explain why there are so many investors, speculators, wide boys and charlatans keen to get involved in the division.
The formula used to calculate club values is (Revenue + Net Assets) x (Revenue + Cleaned Net Profit + average gain on player sales over last three years)/ Revenue x stadium utilisiation % / wage control %
The formula assumes that the club will continue to be in the EPL for at least five years. If the club is relegated then values in the Championship (and for Sunderland League One) are probably 15-20% of the EPL figures.
1: Manchester United £2,463 million (2016 £2,402 million)
United have consolidated their position at the top of the table as a result of higher broadcast income and making profits of £11 million compared to losses of £10 million on player sales. Not selling players at a loss helped too, along with winning two trophies (three if you believe Mourinho).
2: Chelsea £ 2,062 million (2016 £1,837 million)
Chelsea’s ability to continually sell players at a profit (£159 million in three years), bonuses for winning the EPL & new kit deals pushed them into second position. Biggest constraint is matchday income, only £65m compared to over £100 m for United and Arsenal
3: Manchester City £1,979 million (2016 £2,139 million)
A bit of a slide for City, as the investment in new players and wages under Pep meant profits fell from £20m to £1m despite income up 20% & wage control percentage rose from 50% to 56%. Profitability is an irrelevance to the owners, but an increase is on the cards for 2018.
4: Arsenal £1,822 million (2016 £1,269 million)
Arsenal’s ability to extract money from fans is very impressive, their matchday income is second only to Manchester United. Lower wages than Liverpool, the Manchester clubs & Chelsea help. Profits up from £2m to £35m contributed too. Lack of CL exposure in 2018 will restrict value growth.
5: Spurs £1,445 million (2016 £1,169 million)
Champions League income & tight control over wages (apart from CEO Daniel Levy’s £6 million) which are £80-£140 m less than the other ‘Big Six’ clubs mean Spurs value is higher than you would expect from a club that has not won the league for nearly 60 years.
6: Liverpool £1,129 million (2016 £626 million)
It might upset Reds’ fans to see their club sixth, but remember the owners only paid £300 million for the club a few years ago. The club’s value increased by over £500 million in 2017 & expect to see another big jump in 2018 due to the Coutinho sale and CL success.
7: Leicester £955 million (2016 £339 million)
Leicester’s value nearly trebled due to participation in the Champions League & earning more from the competition than winners Real Madrid due to the formula used to award prize money. Expect to see a big fall in 2018 though.
8: Southampton £508 million ( 2016 £299 million)
For a club that was sold for £260 million little over a year ago this looks impressive. Gains on player sales of £112 million in three years is a driving force, and the sale of VVD in 2018 is likely to keep this figure high this season.
9: Everton £440 million (2016 £107 million)
Moshiri wiping off the club’s debt, a reversal from being loss to profit making, better wage control & the sale of John Stones were the major drivers of Everton’s quadrupling of value this year
10: West Brom £381 million (2016 £165 million)
If something looks too good to be true, it’s probably not true, and the Baggies valuation is a classic example of this. The club had underinvested in players for a few years up to 2017 & survived until then. Whilst good for profits (£32m in 2017) it meant that it was a high risk for relegation if any new recruits failed to deliver, as the club found out in 2018.
11: West Ham £368 million (£142 million)
West Ham’s value shot up mainly due to income rising far quicker than wages, substantial gains on player sales and debts being paid off after the controversial sale of the Boleyn (where did the profits end up there?)
12: Burnley £352 million (2016 n/a)
The EPL’s best run club? No frills in the boardroom or the dressing room meant that promoted Burnley made a substantial profit, pay out just over half their income in wages and are debt free. A formula for success in terms of value for a club on gates of 20,000. Likely to be maintained in 2018 with a 7th place finish.
13: Bournemouth £344 million (2016 £143 million)
Flying under the radar as they have done since promotion to the EPL. £124million of TC money, quadrupled profits, wages under tight control & owners who lend interest free mean that AFCB can thrive on gates of 11,000.
14: Middlesbrough £312 million (2016 Championship)
Boro’s lack of ambition in the EPL transfer market in terms of trying to survive meant that whilst they were very profitable, and wages dropped from £149 for every £100 of income in the Championship to £53 in the EPL, their value of £312 million will have plummeted in 2018 following relegation.
15: Stoke £300 million (2016 £132 million)
Stoke are a textbook beneficiary of the new TV deal. Wage control improved from 79% to 62%, income rose by nearly a third & the club has no external debt. Whilst the value is likely to hold in 2018 that ignores the impact of relegation, so expect the value to fall in 2019.
16: Watford £283 million (2016 £184 million)
Another club who cope well with a relatively small stadium. Wages kept under control, the Hornets generate modest profits. Sales of Ighalo & Vydra helped boost results in 2017. Could be attractive to a buyer in their present state as close enough to London to command a premium.
17: Hull £257 million (2016 Championship)
Recent Yo-Yo club, value in Championship likely to be about £40-50 million following relegation as TV accounted for 80% (£94m) of their income in 2017.
18: Sunderland £216 million (2016 £128 million)
The only EPL club last season to lose money after player sales, Sunderland are about to be given away for nothing as they face League One. Daft transfers, boardroom payoffs and a revolving door in the manager’s office. The last club run this poorly was the Haçienda in Manchester in the 80’s. Owner Ellis Short may have lost over a quarter of a billion pounds from his involvement with the Black Cats.
19: Swansea City £183 million (£108 million in 2016)
Swansea are bottom due to paying out a higher proportion of income as wages than nearly any other EPL club. Value would be lower but saved to an extent by sales of Ayew & Williams which boost profits in short term. Value likely to be about £40 million in Championship.
20: Crystal Palace £142 million (£142 million in 2016)
Small London club Crystal Palace shouldn’t really be bottom of the table, but for reasons best known to themselves they have chosen to not submit their accounts to the registrar, even though the due date was 31 March. Would expect value to be closer to £300 million if our estimates for 2016/17 are close to the actual figures when they are finally published.
As Sunderland’s new owner Stewart Donald picks up the reigns of the club and former head honcho Ellis Short walks away with the debts of £161 milion (and £40m in instalments from Donald) , the figures for their final season in the Premier League contain some grim reading although are rescued to a degree by the sale of Jordan Pickford in June 2017.
Summary of key figures (Sunderland Limited)
Income £126.4 million (up 17%)
Broadcasting income £95.6 million (up 34%)
Wages £84.4 million (up 1%)
Loss before player sales £38.9 million (up 30%)
Player purchases £47.5 million (£30.7 million in 2016)
Player sales £43.1 million (£11.7 million in 2016)
Borrowings: £161.7 million (£137.3 million in 2016)
The Black Cats have been in the Premier League (PL) since 2007, and Ellis Short took control of the club a year later.
Their income has broadly been linked to new PL broadcasting deals, which are negotiated every three years.
The impact of the new TV deals that commenced in 2011, 2014 and 2017 have been the biggest drivers of extra income for the club.
The problem for a club such as Sunderland is trying to find other ways of generating income when there is so much focus on the self-styled ‘Big Six’ (United, City, Liverpool, Chelsea, Arsenal and Spurs).
During their ten years in the Premier League, Sunderland earned £866 million, their fans will wonder how well that money has been spent.
Nineteen clubs who were in the Premier League last season have reported their results to date. Only small London club Crystal Palace, whose owner also controls a company called ‘Smoke and Mirrors Limited’ are now outstanding in sending in their results to Companies House, although they have sent them to the Premier League as the figures have to be scrutinised by the end of the calendar year.
All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 19 clubs that have reported to date is £233 million, up 28% from £182 million the previous season. The average in the Championship is just £28.6 million.
The median income, (remember that from your GCSE Maths class?) perhaps more relevant to a non-Big Six club, is £171 million.
Sunderland are in a bunch of nine clubs who are in the £117-138 million income bracket.
The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.
Overall the Big Six already have 56% of the total income of the Premier League clubs but want more.
Like all clubs Sunderland broadly their income from three sources, matchday, broadcasting and commercial/sponsorship.
Matchday income fell by 15% to £9 million. Whilst stated attendances fell only 4% to an impressive sounding 41,287, anecdotal evidence was that many fans, especially those with season tickets, did not go to many matches, such was the dismal performances on the pitch.
Sunderland’s matchday income per fan fell by over 10% to just £217. This works out at just £11.41 per match and is one of the lowest in the division. For Sunderland fans querying the figure remember this is the average price so included children and other concessions and is also net of VAT at 20%.
Part of the reason why the figure is so low is that Sunderland is not an affluent city and does not attract large numbers of football tourists who are willing to pay large sums to attend matches (and spend a lot on merchandise).
Being knocked out of the FA Cup in the third round didn’t help matchday income either.
The lack of decent football had a more significant impact on the prawn sandwich brigade, as it’s very difficult to sell boxes and hospitality packages at high prices to watch poor football.
Under Ellis Short, Sunderland’s matchday income fell by over a third during the nine years he oversaw the club. He can’t be accused of fleecing the fans, as overall in the Premier League, matchday income counts for £1 in every £7, but for Sunderland it is only £1 in every £14.
The large capacity of the Stadium of Light meant that Sunderland did have greater matchday income than nearly half the clubs in the Premier League last season, but their total pales into significance compared to the big boys.
Care should also be taken when looking at individual figures, as different clubs calculate numbers in different ways. Some clubs include merchandise sales as part of matchday, whereas others stick it into the commercial heading.
Overall the Big Six hoover up 75% of matchday income of the Premier League, as they have larger stadia in the main and also are able to attract daytrippers and tourists to watch their matches, at premium prices.
Broadcast income for Premier League clubs is linked to deals signed by the PL on behalf of all 20 clubs in the League.
Sunderland suffered in 2016/17 from finishing bottom of the table compared to a squeaky bum 17th the previous season. This was more than compensated though by the new domestic BT/Sky broadcasting deal, which was worth 70% more than the previous one that expired in 2015/16.
Premier League TV money is divided into 5 pots, as follows:
For domestic rights there are three pots.
50% of the money is split evenly between all 20 clubs (called the ‘Basic Award’)
25% is split based on the number of times a club appears live on TV, with each club being guaranteed ten matches, and an extra £1 million for each additional appearance
25% is based on final league position, with the bottom team receiving £1.9 million, and every place above that being worth an additional £1.9 million. Therefore, by finishing four places higher in 2016/17 than the previous season Sunderland earned an additional £7.6 million, which is more than they earned through matchday income.
Overseas TV rights are presently split equally between all 20 clubs, but a bunfight is likely to take place this summer as the ‘Big Six’ claim they are main reason why overseas broadcasters pay so much for PL rights. The Big Six’s argument conveniently ignores that they earn additional broadcasting rights from appearing in European competitions.
If the Big Six are to be successful, they will need 14 votes at the meeting of club owners in the summer. Expect to see tantrums and threats of joining/creating a European Super League should they not get their way. They are of course more than welcome to close the door should they leave.
The PL’s central advertising/commercial contracts are also split evenly between all 20 clubs.
Despite stinking out the Premier League in 2016/17, Sunderland’s broadcast income increased by a third to nearly £96 million. In the three previous season the figure was broadly static, reflecting the Sky/BT deal that was in operation during that period.
It comes as no surprise that Sunderland were close to the bottom of the table in terms of broadcast income for the season, given that they only received £1.9 million in prize money for finishing 20th in the PL.
The relatively democratic division of broadcast income is highlighted in the above table. For every £1 of TV income received by Sunderland, the top earning team (ere Manchester City) earned £213. When it comes to matchday income that figure rises to £580 earned by Manchester United for every £100 by Sunderland, and commercial is £999 by United for every £100 by Sunderland.
As the club was relegated in 2016/17 attention now turns to the PL’s snappily named rule D.25, more commonly called parachute payments.
Sunderland therefore will have received for 2017/18 55% of the basic award (£35.3 million in 2016/17) and overseas broadcasting money (£39.1 million in 2016/17), which works out at £41 million.
For the forthcoming season in League One, this will drop to £33.5 million, and then there will be a final payment of £14.9 million in 2019/20.
After that the club’s broadcast earnings will be governed by the EFL broadcast deal, which is worth about £2.3 million a season for clubs in the Championship, £345,000 in League One and £230,000 in League Two.
In addition, clubs in the EFL receive solidarity payments from the PL. Here a proportion of the PL’s broadcast deal is passed down to the 72, and this is worth about £4.3 million for a Championship club.
Commercial income in the Premier League is a case of the haves and the have nots. Here the Big Six mop are to an extent able to name their price, as it is a seller’s market and the likes of Liverpool exploit their global appeal by signing deals for individual products and end up having an official…err…timing partner with watch manufacturer Holler.
For clubs such as Sunderland the outlook is different. Here the buyers can play the likes of The Black Cats, Bournemouth, Everton, Stoke etc. off against each other when negotiating shirt and commercial deals, so the prices are far lower. In addition, smaller clubs have limited overseas appeal as football tourists and other plastic fans only tend to ‘support’ the major clubs. There are relatively few fans in Malaysia and Lagos who support the non-Big Six clubs.
Sunderland split out their hospitality/conference income out in the accounts, unlike most clubs.
Sunderland’s catering income fell by 30% in 2016/17, mainly due to some season ticket holders becoming so disillusioned that they did not turn up to matches, and the club struggling to sell hospitality packages in respect of a team that only won three games at home all season. Commercial income fell too, Dafabet continued their shirt sponsorship, worth about £5 million, but the club struggled with other deals.
The main costs at a football club are player related, wages and transfer fee amortisation.
During the Ellis Short era, Sunderland paid out £600 million in wages in nine seasons. Both he and Sunderland’s fans must be scratching their heads over just how well that money has been spent, although fans will still probably have nightmares at the memories of the likes of Santiago Vergini, Jozy Altidore and Danny Graham taking home large sums each week.
Wages increased during the Short era in all but one season. Although the total wage bill only increased by 1% in 2016/17, Sunderland have a financial year end of 31 July. This means that for some players relegations clauses would have kicked in on 1 July as at that date the club is officially no longer a member of the Premier League.
Sunderland’s accounts therefore suggest the average wage was (we estimate) about £40,500 a week, although that includes one month at the lower rate in the Championship.
Their total wage bill is broadly where you would expect it to be for a club that has been a constant feature of the Premier League for the last decade, above that of promoted clubs and below that of clubs with bigger stadia and resources.
The riches of the Premier League TV deal meant that Sunderland only paid out £67 in wages for every £100 of income. If the club is relegated to the Championship the outlook is different. In the last season for which there are full records clubs paid out an average of £101 for every £100 in wages, which leaves nothing to pay for the other other running costs…including player signings.
One reason why Sunderland’s wages to income ratio has fallen is due to a variant of Financial Fair Play (FFP) called Short Term Cost Control (STCC). This restricts wage growth to £7 million a season plus any money the club generates itself from matchday and commercial sales. For a club such as Sunderland this gives a significant challenge, especially with matchday and commercial income declining.
Ellis Short has always been a hands-off owner and has tended to delegate the day to day running of the club to a chief executive. This person has been very well paid, although the competence of the decision making must surely be questioned given the many crises the club has encountered during that period.
Running a company that is effectively only open for business 20-25 times a year should allow the chief exec to concentrate on operational issues, but Sunderland seem to have had too many embarrassing moments that call into question the culture of the club, which should be set at boardroom level and filter down via the manager and coaching staff.
Chief executive Martin Bain is presumably the lucky recipient of the £1.24 million package for the highest paid director of the club for 2016/17, although it is suspected he will be packing his bags (with a large payoff) should the club sale proceed shortly.
Sunderland have had three big payoffs under Ellis Short for directors who left the club rapidly and were given ‘compensation for loss of office’. In 2011 someone (probably CEO Steve Walton) received a £573,000 payoff, the following year it was an eye watering £1,996,000 (probably to Niall Quinn) and in 2016 Margaret Byrne, who oversaw the Adam Johnson incident was rewarded to the tune of £850,000.
Transfer amortisation is the method used to expense transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Sunderland signed Didier Ndong for £13.6 million from Lorient on a 5-year contract, the amortisation charge works out as £2.72 million a year (£13.6/5).
The total amortisation expense in the profit and loss account of £29.4 million for 2016/17 is the sum of all the players who have been signed by Sunderland and for whom there has been a transfer fee.
Sunderland’s amortisation total of £29.4 million is marginally lower than the previous season, but over the last few years has been reasonably consistent. The advantage of looking at amortisation instead of player signings and sales for an individual season is that it removes the fluctuations that can arise on a short-term basis.
Whilst they are not operating in the stratospheric levels of the Big Six, Sunderland had a reasonably high amortisation cost in 2016/17 compared to the other 14 clubs who are in the relegation shakedown at the start of each season.
This would appear to suggest that Sunderland’s managers have been backed in the transfer market by the owner, but whoever oversees recruitment has wasted the budget.
If wages and amortisation costs are added together, then they took up 90% of Sunderland’s income in 2016/17, and this was the lowest figure for this ratio during Short’s ownership period.
Over his nine years in charge of the club in the Premier League, it had total income of £803 million, but had wage and amortisation costs of £833 million, which means that Ellis Short was responsible for all the remaining costs of running the club.
The first signs of how relegation is affecting local people who work for the club is shown in terms of staff numbers, as these fell by 10% in 2016/17. It is highly likely that this decline will accelerate in 2018 as the club was once again relegated, and this is the real tragedy in relation to the club. Footballers are transient in nature and moving from club to club is an occupational hazard, but for the people employed behind the scenes, they tend to be often supporters whose job at the club pays their day to day bills.
Sunderland also had a couple of one off costs in 2016/17. They were forced to pay £9.7 million in a disputed court case with Inter over the signing of unwanted Ricky Alvarez, who was signed on loan with a clause that Sunderland had to buy him in 2016 if they avoided relegation. The club duly did this, but didn’t offer Alvarez a new contract, so he disappeared to Sampdoria, and Sunderland effectively had to pay £1.2 million per game for his eight- match career at the Stadium of Light for his transfer fee, plus his wages.
Following relegation, Sunderland then valued the players in the squad using their best estimate of market values. They then wrote off over £14 million from the accounting values of the players, which is a huge sum given the way that players are accounted for in the books.
The club have not given the names and amounts by which they have written down individual players, but Mackem fans will no doubt have a long list of the guilty parties.
Sunderland have considerable debts. Ellis Short’s loans are thankfully interest free. The club also has a £70 million loan from American lender SBC. This loan attracted an 8.5% interest rate, which meant that an interest charge of £6.5 million clocked up on the loan in the year, and along with other borrowing costs, the club was charged £130,000 a week in interest over the season.
Profits and losses
Profits are income less costs. Sunderland made losses before player sales in 2016/17 of £38.9 million, which works out as £750,000 a week. Even if the one-off costs discussed above are eliminated, the loss falls to a still substantial £14.8 million.
Under Ellis Short Sunderland lost a total of £248 million before player sales, and this is the richest division in the world.
EBIT (Earnings before interest and tax) remove volatile one-off transactions such as legal issues on disputes, player sale profits and payoffs.
In the Premier League Sunderland had the fifth highest EBIT loss.
Profits on player sales are calculated in a complicated manner. Rather than compare the sale and purchase price for the player, instead the sale fee is compared to the accounting value of the player, which is the cost less any amortisation charges. Sunderland sold Jordan Pickford came through the youth team, and so the whole fee is treated as a profit.
This allowed Sunderland to show a profit of over £33 million on player sales for the year to 31 July 2017. This is however lower than many of the clubs around them who made an EBIT loss. Chelsea, for example, sold Oscar to China for about £60 million, and showed a total profit on player sales of £69 million.
If profits on player sales are added in, Sunderland’s losses fall to £6 million. They are however the only club to make a loss after player sales in the whole of the Premier League.
Sunderland showed a profit of are the only club in the Premier League last season to make a loss before player sales last season, which again is an indictment of how poorly the club has been managed.
After a long period of time in which nearly all clubs were loss making, partially due to Alan Sugar’s ‘prune juice’ effect, where any increases in TV income went straight through the club into player wages, the Premier League is now far more lucrative.
Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. In the Championship it is £39 million over three years.
So, for the season that has just ended Sunderland will be allowed an FFP loss of two years in the Premier League plus one in the Championship, which gives a figure of £83 million. Some costs, such as infrastructure, academy and community schemes, are ignored for FFP purposes, so the club should be relatively safe in respect of FFP compliance.
Accounting for player trading is troublesome. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. However, when the player is sold, the profit, which is based on the player’s accounting rather than market value, is shown immediately in the profit and loss account.
This creates erratic and volatile figures in the profit and loss account, which is why these are separated out from the rest of the financial results.
If we instead focus on the actual purchase and sales, Sunderland have the following figures:
The above table shows that over the nine years under Ellis Short’s ownership Sunderland have bought players for £329 million and generated sales of £169 million, a net cost over the period of £160 million over the period.
At the start of 2016/17 the squad had cost a total of over £109 million, so money had been invested in the players, but it included an awful lot of duffers.
Sunderland’s spending in 2016/17 was competitive by the standards of clubs who are not part of the PL elite. It reinforces the view that signing rubbish players, rather than not backing the manager in the market, was the driving force behind the club’s relegation to the Championship.
Debts to and from the club
Whilst Sunderland sold Pickford in June 2017, it appears that Everton paid a fair amount of the fee in cash, as amounts due from other clubs were only £11.4 million.
Of greater concern is the fact that the club owed other clubs £45.2 million for player transfers. This may be insignificant compared to the likes of Manchester United who owe over £180 million, but United do have huge income streams and don’t have league games at Fleetwood and Plymouth next season.
aption]Since Short took over, the club has borrowed £250 million from both him and SBC.Some of these borrowings have been converted into shares, but at 3
Since Short took over, the club has borrowed £250 million from both him and SBC.
Some of these borrowings have been converted into shares, but at 31 July 2017 Short was owed £93 million via his Jersey based company Drumaville, and a further £70 million is due to SBC.
These loans are secured, which officially means that should repayment be sought (and the SBC loan is officially due for repayment in August 2019) the lenders could force the sale of the Stadium of Light and training facilities.
When the takeover of the club by Stewart Donald’s consortium was announced, Ellis Short inferred he was leaving Sunderland debt free, effectively writing off his loan and taking on the responsibility for the one from SBC.
What is uncertain in respect of the takeover is whether the consortium is paying anything for the shares, and if there are sums due to Short should the club return to the Premier League soon.
Ellis Short’s tenure as Sunderland owner is a textbook example of someone who thought the Premier League was an opportunity to make a lot of money and getting it spectacularly wrong.
He has effectively written out a cheque for half a million pounds every week for ten years to keep the club afloat, and during that period has seen a series of executives and managers come and go at the club.
Whilst he can afford to lose this sum, it’s still an unpleasant experience for anyone to walk away from such a spectacular financial mess.
The reaction of Sunderland fans seems to be measured. They appreciate Short’s benevolence but are angry at the quality of decisions made by a series of well remunerated professional business managers in charge of club operations.
The irony is, having measured the club value using the industry standard Markham Multivariate Model, Sunderland as a Premier League club was worth about £215 million if managed correctly, but as a Championship, and now a League One club, it is effectively worthless, as the losses each week and lack of TV income is too much of a burden.
The new owners are taking on either a black cat…or a white elephant.
It’s of little consolation to West Brom fans as their club is facing relegation, but the club’s holding company have just published their financial results for 2016/17 revealing record profits. A few months later though it was the night of the long knives in the boardroom and the club’s boardroom big cheeses were shown the door.
Summary of key figures (West Bromwich Albion Holdings Limited)
Income £137.9 million (up 40%)
Broadcasting income £118.7 million (up 51%)
Wages £79.1 million (up 7%)
Profit before player sales £26.7 million (Loss of £5.2 million in 2016)
Player purchases £37.4 million (£28.2 million in 2016)
Player sales £19.8 million (£6.3 million in 2016)
The Baggies have been in the Premier League (PL) since 2010/11, and their income has broadly been linked to new PL broadcasting deals, which are negotiated every three years.
The impact of the new TV deals that commenced in 2014 and 2017 have been the biggest drivers of extra income for the club. The problem the club has is that it is constricted by a 27,000-seater stadium and not being one of the ‘Big Six’ in terms of commercial appeal. Such is the success of the PL in selling broadcasting rights that West Brom are in the top 30 revenue generating clubs in the world in 2016/17.
Eighteen clubs who were in the Premier League last season have reported their results to date. Only car crash Sunderland, probably too busy setting the club coach’s sat nav to Accrington, and Crystal Palace, whose owner also controls a company called ‘Smoke and Mirrors Limited’ have failed to do so.
All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 18 clubs that have reported to date is £239 million, up 31% from £182 million the previous season. The average in the Championship is just £28.6 million.
West Brom are in a bunch of eight clubs who are in the £117-138 million income bracket.
The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.
The Premier League divide money into five pots. Three of the pots cover the domestic TV deal, and they are split 50% evenly, 25% based on the number of TV appearances (every club is guaranteed a minimum of ten of these) and 25% based on final league position. Each place up the table is worth just under £2 million.
Overseas broadcasting income and centrally agreed commercial deals are split evenly between the twenty clubs. This arrangement is likely to come under fire in the summer as the ‘Bix Six’ want to grab a bigger slice of this pie for themselves. Their argument is that overseas TV fans would rather watch one of their clubs than that of a team such as West Brom, and so they ‘deserve’ more money.
Whilst this argument is true in terms of the number of viewers, it ignores the fact that the ‘Other 14’ can compete against most clubs in Europe apart from the elite for players (all 20 EPL clubs are in the top 35 richest in Europe) and thus can put up a decent performance against the Big Six.
This partly explains why West Brom won at Old Trafford, Burnley won at Stamford Bridge, Swansea beat Liverpool and many clubs have turned over Arsenal.
Like all clubs West Brom earn their income from three sources, matchday, broadcasting and commercial/sponsorship.
Matchday income fell by 12% to £6.8 million. This was due to average attendances falling 3% to 23,876 and non-existent cup runs.
Overall in the Premier League, matchday income counts for £1 in every £7, but for West Brom it is only £1 in every £20.
West Brom had the second lowest matchday income total in the division, but still managed to survive in the Premier League for many seasons. This suggests that in the Premier League it is case of spending money wisely, rather than just spending it quickly, that counts.
Ticket prices seem to have fallen since West Brom’s last season in the Premier League, with matchday income averaging £283.51, about 9% lower than in 2016. This works out at £14.92 per match, which may surprise some Baggies fans, but remember this is the average of adults, seniors and kids, and is also net of VAT.
The reduction in prices may be a combination of fewer hospitality packages being sold as the club was pragmatic if unexciting under Tony Pulis, and the capping of away fan prices in the Premier League.
Broadcast income for Premier League clubs is linked to deals signed by the PL. West Brom benefitted in 2016/17 from finishing 10th in the table compared to 14th the previous season, but more importantly from the new domestic BT/Sky deal.
Premier League TV money is divided into 5 pots, splits as follows:
For domestic rights there are three pots.
50% of the money is split evenly between all 20 clubs (called the ‘Basic Award’)
25% is split based on the number of times a club appears live on TV, with each club being guaranteed ten matches, and an extra £1 million for each additional appearance
25% is based on final league position, with the bottom team receiving £1.9 million, and every place above that being worth an additional £1.9 million. Therefore, by finishing four places higher in 2016/17 than the previous season West Brom earned an additional £7.6 million, which is more than they earned through matchday income.
Overseas TV rights are presently split equally between all 20 clubs, but a bunfight is likely to take place this summer as the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal , Chelsea and Spurs), already far richer than the other clubs, want more of this money as they claim they are main reason why overseas broadcasters pay so much for PL rights. The Big Six’s argument conveniently ignores that they earn additional broadcasting rights from appearing in European competitions.
If the Big Six are to be successful, they will need 14 votes at the meeting of club owners in the summer. Expect to see tantrums and threats of joining/creating a European Super League should they not get their way.
The PL’s central advertising/commercial contracts are also split evenly between all 20 clubs.
The present domestic deal lasts until 2018/19, so it is likely that West Brom’s broadcast income peaked last season. If the club is relegated then the PL’s snappily named rule D.25, more commonly called parachute payments, applies.
West Brom would therefore receive 55% of the basic award (£35.3 million in 2016/17) and overseas broadcasting money (£39.1 million in 2016/17) next season, which works out at £41 million.
Commercial income in the Premier League is a case of the haves and the have nots. Here the Big Six mop are to an extent able to name their price, as it is a seller’s market and the likes of Manchester United have a strategy of signing deals in individual countries for individual products, such as an official tractor partner in Japan.
For clubs such as West Brom the outlook is different. Here the buyers can play the likes of The Baggies, Bournemouth, Everton, Stoke etc. off against each other when negotiating shirt and commercial deals, so the prices are far lower. In addition, smaller clubs have limited overseas appeal as football tourists and plastic fans only tend to ‘support’ the major clubs. Accordingly, Manchester United make £22.10 from their commercial activities for every £1 generated by West Brom.
West Brom’s commercial income increased by nearly 6% in 2016/17, mainly due to a new shirt sponsorship deal with generic Chinese online casino operator UK-K8.com.
The main costs at a football club are player related, wages and transfer fee amortisation.
West Brom’s wages have grown steadily over the last give years, and the average wage is (we estimate) about £38,000 a week. Their total wage bill is broadly where you would expect it to be for a club that has been a constant feature of the Premier League for the last decade, above that of promoted clubs and below that of clubs with bigger stadia and resources.
The riches of the Premier League TV deal meant that West Brom only paid out £57 in wages for every £100 of income. If the club is relegated to the Championship the outlook is different. In the last season for which there are full records clubs paid out an average of £101 for every £100 in wages, which leaves nothing to pay for the other other running costs…including player signings.
One reason why West Brom’s wages to income ratio has fallen is due to a variant of Financial Fair Play (FFP) called Short Term Cost Control (STCC). This restricts wage growth to £7 million a season plus any money the club generates itself from matchday and commercial sales. For a club such as West Brom this gives a significant challenge.
Under the new ownership of the club, the highest paid director has taken a significant reduction in pay. Under the former regime this person, presumably the CEO, was earning over a million pounds per year. This fell to ‘only’ £181,000 in 2016/17.
In February 2018 the club however sacked the CEO and the chairman. The following month the new CEO, Mark Jenkins, claimed to be ‘shocked’ at the state of the club’s finances, especially in relation to wages.
Amortisation (skip this bit unless you want a quick and dirty accounting lecture) is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when West Brom signed Jay Rodriquez for £12 million from Southampton on a 4-year deal, the amortisation charge works out as £3 million a year (£12/4). The amortisation fee in the profit and loss account includes all players who have been signed for a fee (assuming they are still in their initial contract).
West Brom’s amortisation total of £17 million is 30% higher than the previous season, and over five times the figure of 2013. It shows that the club decided in 2014/15 to invest more significantly in players, signing the likes of Ideye, Livermore, Chester, Rondon and Chadli for £10million plus fees.
However, compared to the rest of the division, West Brom are relative paupers. Their amortisation charge for 2016/17 was by far the lowest in the Premier League.
The danger of such an approach is that by trying to survive in the Premier League by spending less on players may be successful in the short term, it is likely to drag the club down over a longer period. The West Brom hierarchy may point out that they finished a creditable 10th in 2016/17 and thought they could repeat the success with a lack of investment in players but the club is playing with fire taking such an approach.
Profits and losses
Profits are income less costs. West Brom made record profits before player sales in 2016/17 of £26.7million
This was mainly due to the club only spending £5 million of the extra £40 million TV money on wages. The previous season, when West Brom finished 14th in the Premier League, the club loss £100,000 a week.
After a long period of time in which nearly all clubs were loss making, partially due to Alan Sugar’s ‘prune juice’ effect, where any increases in TV income went straight through the club into player wages, the Premier League is now far more lucrative.
West Brom had the sixth highest profit in the Premier League using this measure, but it does perhaps suggest once again that the club was setting itself up for a fall by not investing in players.
If you strip out the impact of player amortisation and depreciation (the cost of the stadium and training facilities spread over several years, then another profit measure, called EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) arises. This is popular with analysts looking at businesses as it is the nearest thing they can find to a sustainable cash equivalent of profit.
Once again West Brom did well here, comfortably mid table.
Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. West Brom clearly have little to fear in this regard. In the Championship the club will be allowed to have lost £83 million in the three years to 2018/19 if they are relegated.
Accounting for player trading is a financial quagmire. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit, which is based on the player’s accounting rather than market value, is shown immediately in the profit and loss account.
This creates erratic and volatile figures in the profit and loss account, so these are best separated out from the rest of the financial results.
If we instead focus on the actual purchase and sales, West Brom have the following figures:
The above table shows that over the last five years West Brom have bought players for £96.3 million and generated sales of £44.2 million, a net cost of £52.1 million over the period.
West Brom’s spending in 2016/17 was a record sum for the club, but pales into insignificance in relation to the big Manchester and London clubs. By being the fourth lowest spender on signings in the division and regularly being towards the bottom of the table in this regard for many years it means that the club cannot afford too many poor signings if they are to stay in the Premier League.
Pulis was replaced by Alan Pardew, whose name is an anagram of Warped Anal.
Under Pardew West Brom only had one victory, against a very poor Brighton, in eighteen games in charge.
Debts to and from the club
West Brom didn’t sell many players before the 2017/18 window, and so were only owed £13.4 million by other clubs for players at 30 June 2017.
The club did owe other clubs nearly £23.4 million for player transfers, but this is chicken feed compared to the likes of Manchester United who owe over £180 million.
Perhaps more importantly the club is debt free, with no borrowings from either banks or the club owners. The owners have not put any money into the club though for many years, but the club still had nearly £40 million in the bank at 30 June 2017.
West Brom have shown that a club can survive for many years in the Premier League on a relatively modest wage bill.
They have had a strategy, which to be fair has worked for many years, of spending less on transfers than their peer group. It now, unless Darren Moore can pull off the greatest escape of all time, as if this approach has finally caught up with them. At the start of each season they have been in the dozen or so clubs who ‘could’ get relegated for some time, and this looks like being the season when gravity finally wins.