Football Finances: falling foul of the money game

Many football clubs in the Nationwide league are heading for a financial shoot out. Chris Evans looks at the need for applying sound business principles

The financial landscape of football has changed dramatically over the past decade, but even more so in recent months following the collapse of ITV Digital. Several Nationwide clubs are now in great danger of disappearing as their funds dry up and players' wages escalate. Never before has the need for sound financial management been so necessary.

Chairmen, financial directors and managers face increasing financial problems, including spiralling player costs, increased borrowing, stagnant transfer income, constraining transfer windows, uncertainty over future TV revenue, and most importantly the possibility of insolvency.

At Watford Football Club, for example, players have to contribute towards the costs of cleaning their kit, according to a club spokesperson, following a huge spending spree last season under former manager Gianlucca Vialli.

Every Nationwide club is being forced to cut costs. However, commercial cost-cutting measures used by more traditional businesses do not necessarily apply to football clubs. A good example would be mergers; a solution highly unlikely to be accepted by fans, board or creditors! Raising cash on the stock market is also an unlikely answer to their problems in the current financial climate. Instead, lower division clubs are being forced to be more self-financing. With a huge lump taken out of income from the collapse of the TV deal, clubs need to balance their books and cut their costs. Much like any other business this can be achieved through prudent management.

The key advantage that football clubs have over other businesses is that while most companies fight a constant battle to retain customers, football benefits from a very loyal customer base. The key problem for chairmen and financial directors is keeping their star players on expensive contracts in the hope of performing well throughout the season, and having to remove them to maintain the balance sheet and in the long run possibly saving the game from ruin.

Last season, the wage bills of a third of division one clubs exceeded their revenues, according to the 2002 Deloitte & Touche football finance review. This is a balance sheet that few other companies would dare present to their accountants.

The original TV deal agreed by ITV Digital with the football league and Nationwide clubs was for £315m over a three-year period, with first division clubs receiving an 80% slice of the fortune, 15% for division two and 5% for division three. But the new TV deal with BSkyB is worth considerably less than that at £95m over a fouryear period.

Several clubs have bought new players over the past couple of years on the strength of the ITV Digital money, and now have a big hole in their cash positions. But Baker Tilly partner John Ariel believes that clubs are unlikely to go bankrupt immediately. 'Clubs will have been spending season ticket money over the summer as it came in and will have got what is left of the TV money in October along with the upfront sponsorship money; that will be keeping them going. But by January as the funds dissipate, I think we could see between five and 10 clubs going bankrupt.'

Alastair Beveridge, a partner at insolvency specialists Kroll Buchler Phillips, argues that banks are unlikely to let clubs to go into receivership, but what they will do is limit the amount of money they loan to a club. 'Banks will only withdraw if they can't see any better course of action,' he says.

Own goal

According to Alex Burmaster, campaigns director for the Football Fans Union, banks are in a predicament because they can't call in the debts at clubs. 'If they did and the club collapsed, this would be very bad publicity for the bank and they would be hated by thousands of supporters.'

On the whole, banks have shied away from financing football clubs over the past few years because of the extraordinary risks attached to club finances. Ariel argues that instead the responsibility should be passed to shareholders; but the problem is that they are also unlikely to cough up extra money.

In the past, clubs have relied on a sugar daddy to bail them out. Harrods owner Mohamed Al Fayed, for example, has injected more than £90m into former first division club Fulham, with very little return. But even these donors are beginning to tighten their purse strings.

The cost of running a club has increased dramatically over the past decade from about £150,000 a year in 1992 for a third division club to £500,000 a year at present and £750,000 for a division two club, according to D&T. Britain's millionaires would have to dig very deep to save football.

The buck has now been passed to the chairmen and financial directors to change clubs' fortunes.

According to a football finance survey conducted by accountants PKF, almost one in four clubs is now relying on a director to personally guarantee loans. The problem is most acute among first division clubs.

Ariel argues that clubs and directors had been ignoring the problem even before the ITV Digital debacle, playing on in the hope of getting a good cup draw or selling a player. But now they are subject to harsher realities. 'Directors should not continue trading when they know, or ought to know, that liquidation is inevitable.'

Directors are increasingly in the public eye as a result of the pressure on them to improve the fortunes of their clubs. 'It's a tough position to be in at the moment, especially having to provide personal guarantees, but it is a necessary evil as these clubs are businesses that need financial support,' Ariel says.

Borrowing tactics

The crisis at Bradford City has drawn attention to the need for clubs to address their borrowing methods in particular, and it has raised an issue that could have serious implications for the game's finances.

Off-balance sheet third party transfer funding, known in the City as 'sale and leaseback', is a relatively new phenomenon that allows clubs to buy players by leasing them from a third party, for example, a bank, over the length of the player's contract.

The benefit for the selling club is that it receives the money upfront rather than in instalments, while it enables the buying club to spread its payments. Last year D&T revealed that around £120m was deployed in this way.

This transfer funding method effectively changes the status of a club's debt from football debt to unsecured debt. With the failure of the ITV Digital deal, and claims that as many as 15 clubs could go into administration, the issue of sale and leaseback for players' transfers is set to feature more prominently in the future.

'Sale and leasebacks will continue because it is an easy way to get finances, it's a quick fix, but it ups the gearing and there are huge risks involved. The club will still be piling up the debts,' Beveridge argues.

Dan Jones, director of D&T's sport division, believes that clubs need to take a more business-minded approach to their finances. 'It is about taking normal sound business decisions, weighing up costs of debt and the level of interest rates charged by banks on transfer deals.'

Another transfer funding process that has come under attack is the super creditor rule. Finance directors joined a long line of critics recently calling for the controversial rule to be kicked into touch. The rule gives football players, managers and creditors first slice of the pie if a club runs into financial difficulties. Although it has so far run peacefully alongside national business laws, the preferential rule has now come under fire as a major hurdle in restructuring ailing clubs in the wake of the ITV Digital collapse.

The Inland Revenue has added its voice to insolvency practitioners complaining about the concessions that football clubs receive. They have pleaded with the football authorities to scrap the rule altogether.

Nagle argues that there is no need for it to be scrapped and that the insolvency policy had been reaffirmed by the league board on two occasions during the summer.

As an alternative, Beveridge suggests that the rule should be changed, or suspended for a period of negotiations. At present, players are receiving the largest amounts of money in the creditor arrangements, while in normal business practice it is the banks that are paid first, then the tax man and finally the company itself. This process is unfair for non-football creditors that deal with football clubs.

It will be impossible to scrap the super creditor rule altogether, Beveridge argues, because there needs to be something in place to protect the players if they are not to be treated as shabbily as they were 30 or 40 years ago.

However, players are in a strong position and often get paid more than their market's worth - and there is very little the clubs can do about it. 'The league has got to act on this favouritism,' he adds.

Yellow card for football league

The football league itself has come under attack from several clubs, especially in the lower divisions, and by other interested parties. KPMG has released a secret report, commissioned by first division chairmen, asking for a restructuring of the football league board.

The report has not yet been released to the public and has only recently been placed in the hands of second and third division chairmen. The proposals put forward in the report would give more power to first division clubs in the running of the football league and see them keep a greater share of TV and commercial deals.

The football league is a representative body that helps to run the league, but the decisionmakers consist of just six people, made up of chairmen from clubs in the top two leagues. 'This is not an ideal situation because these chairmen are going to look out for the interests of their own clubs and therefore this a misrepresentation of all 72 clubs affected,' argues Alex Burmaster of the Football Fans Union.

It will be interesting to see what the second and third division chairmen say when they see the report because it is not going to benefit them, says Burmaster. They are going to have even less of a say in terms of power, and TV and commercial deals. The fact that it was commissioned by first division chairmen indicates that there might be a few fireworks among their counterparts in the lower leagues.

One proposal in the report suggests accountants and businessmen should run the football league to keep a tighter lid on financial proceedings at clubs. Ariel thinks this a possibility, but that a balance between accountants and football experts is needed.

Already there are some accountants among the chairmen and finance directors at the clubs themselves, including the new finance director at Chelsea, John Birch. It's an exciting place to be, especially if you are a big football fan, but there are great risks involved. Strategies are very different at football clubs.

Much like in other businesses, there is a possible role for accountants as non-executives at clubs, providing an independent or impartial approach. But there are obvious complications with maintaining that independence.

John Nagle, head of communications at the football league, argues that as football increasingly becomes more subject to ordinary business rules, it should therefore be managed properly, which includes a role for accountants. Clubs are already using insolvency experts to help them through times of trouble and this will continue as the season progresses. A

Unsustainable contracts

The main problem that directors face is unsustainable players' contracts, according to Nick Wood, business recovery partner at Grant Thornton, the new ITV Digital liquidators.

Many of these contracts have years to run and are very difficult to terminate. Unlike with most companies you can't just reduce the workforce in times of trouble. Very few clubs would be willing to buy these players anyway because most of them are also struggling financially. Recently implemented transfer restrictions also provide a major stumbling block for clubs.

'Clubs are no longer able to sign players, but are releasing their own players once the contracts have ended. The Grimsby manager announced recently that he had 34 players in his squad this time last year and now only has 19,' John Nagle, head of communications at the football league, says.

Dan Jones, director at Deloitte & Touche's sport division, argues: 'Star players are a club's biggest asset, but also the biggest headache. At the moment players' wages are 90% fixed and 10% performance related. That balance needs to be changed in the future.' The difficulty is persuading players to accept lower pay.

'Some clubs, in order to guarantee survival, will have to be radical in their approach and bite the bullet, undertaking some of the more unpopular measures such as ground-sharing and in the worst case scenario, possibly exploring merger solutions,' concludes Wood.

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