CoverStory
Football's finance failings
Have football clubs dropped the ball in their pursuit of success? Calum Fuller reports
Illustrations Michał Bednarski
You do not have to like the ‘beautiful game’ to appreciate it is big business where risks and rewards are heightened, and the effects of accounting decisions – good or bad – are quickly felt.
Like many industries, professional football can be fuelled by charisma, ambition and over-optimism. As always, the challenge is to bring these into right balance with prudence, critical thinking and sound accounting practice. This is more easily said than done, and here we examine a few current examples of Premier League clubs that are arguably struggling to get it right.
Rules of the game
- Premier League profit and sustainability rules: These prohibit all clubs in the Premier League from accumulating losses in excess of £105m in a three-year period. Infrastructure, women’s football, investment in youth and community work are all deductible.
- Champions League: Finishing in the top four is a priority for clubs so they qualify for the lucrative UEFA Champions League competition.
Chelsea FC’s use of amortisation
Chelsea has found an ingenious way to be more competitive in the transfer market. Since the takeover by American Todd Boehly (pictured) in May 2022 it has splurged around £1bn on new players. But it has also handed out longer contracts – often eight years, rather than four – to new players, allowing it to amortise the cost of signings over a longer period.
This has enabled it to pay higher prices in the transfer market: two signings have cost over £100m, and half a dozen over £60m. But it’s a risky business. What if the investment doesn’t produce success? What if the player doesn’t fit? The club’s revenues and the resale value of the players could potentially fall. In spite of spending £1bn, the club finished 12th last season, and is lying 10th at the time of writing — well below lucrative qualifying places for the UEFA Champions League.
In December 2023, Premier League clubs, including Chelsea, voted to limit amortisation to five years. While it meant Chelsea could not use amortisation to the same extent, it prevents other clubs engaging in the practice, locking in its gains, explains Dr Dan Plumley, senior lecturer in sport finance at Sheffield Hallam University.
“Amortisation in football player transfers isn’t new. Those amortised figures are what go towards complying with the domestic profit and sustainability rules each year.”
Lessons learned
If Chelsea’s expensive player acquisitions are not successful and, for example, the club fails to qualify for the Champions League, it could find itself weighed down by expensive, underperforming players who are hard to move on to other clubs. A neat parallel to Chelsea’s use of amortisation is buy-now-pay-later credit products, which enable users to spread their costs out over three instalments and are available to customers of a wide range of consumer retailers, including in clothing and fast food. Customers who make heavy use run the risk of falling behind on their payments, and damaging their credit score.
Manchester City FC and arm’s-length principles
Manchester City is an unusual club in many ways, as it is owned by the Abu Dhabi royal family, along with 13 other clubs around the world through its City Group vehicle. Abu Dhabi also owns and runs a variety of other enterprises, including Etihad Airlines, which sponsors Man City’s shirts and its Etihad Stadium.
This structure gives rise to questions around arm’s length principles, market rates and transfer pricing (not to be confused with player transfers) — i.e. is Etihad paying the going rate for shirt sponsorship and stadium naming rights?
Whether these issues are real or perceived, this comes down to beneficial ownership IAS 24 Related Party Disclosures accounting regulation, says Kieran Maguire, senior teacher in accountancy at the University of Liverpool.
“A related party is one which has influence or control over another. In the case of Manchester City, and especially its initial commercial and sponsorship dealings, many of those were from companies in the UAE, which were subject to common control via the Abu Dhabi authorities. Therefore, it could be argued they were negotiating against an open door.”
Since Man City disclosed these transactions, the football authorities, both domestically and at a European level, have introduced fair value panels to examine clubs’ commercial contracts.
Lessons learned
These issues will be familiar to many multinational companies. When an overseas business establishes a UK presence, it charges royalties to the UK arm for use of its intellectual property, which is subject to transfer pricing rules to ensure those royalties are paid at the market rate. The aim of this from the corporate’s perspective is to achieve tax efficiency and protect profits. The controversy around Starbucks’ UK tax affairs in 2013 is a good example of this in action.
Manchester United and brand value
Manchester United is famously one of the most profitable football clubs, with the most effective sports marketing operation in the world. Its partners include an official noodle provider, chocolate, hotels, fashion brands and more.
All of this is based on the club’s historic success and domestic dominance. But since legendary former manager Sir Alex Ferguson’s retirement in 2013, after 24 years dominating English football and the European stage, that success has dried up.
While those historic trophies managed to continue attracting commercial partnerships, some feel there is a danger that over time, without success, it becomes less attractive commercially. Indeed, University of Liverpool’s Kieran Maguire points out that two years ago, the club lost out on some sponsorship money from Adidas for failing to qualify for the Champions League. However, it still posted revenues of £709m for 2022, its best year since before the pandemic.
Sheffield Hallam University’s Dan Plumley agrees, noting the club “has remained one of the top revenue generators in world football”. Maguire believes the club’s brand is so strong, it is insulated from poor on-field performance. “Fans around the world often support Man Utd because everyone around them does, regardless of how the team is doing. No one wants to be an outlier in life.”
Lessons learned
In business terms, it’s helpful to compare Man Utd with a mega-brand such as Apple. Like Man Utd, a legendary figure, Steve Jobs, drove the company’s success, and since his passing in 2011, it has continued to have commercial success despite some critics arguing the company has lost its way. Man Utd’s commercial side is able to operate effectively independent of the fortunes of the football department, which increasingly resembles a developing business arm. However, businesses that trade on their history and fail to invest or innovate are vulnerable to competition.
Lessons learned
Like most businesses, no football club could have foreseen a pandemic or the war in Ukraine, but assessments in risk exposure and scenario planning would have enabled Everton to build in some head room and ensure it was compliant with the Premier League’s financial requirements. Businesses that make routine use of scenario planning – and allow margin for the unforeseen – are more resilient and less likely to be wrong-footed by shocks.
Everton’s big gamble
In November 2023, it was revealed that Everton had breached Premier League profit and sustainability rules. The accounts showed it had suffered combined losses of £371.8m over the previous three years – well over the Premier League’s maximum of £105m. The 10 points it was docked by the Premier League as as a result puts it at risk of relegation and loss of revenue. This has since been reduced to six points.
Everton’s issues stem from a combination of imprudence and a chain of events that have hit its income and funding hard. The club had spent heavily on players prior to the pandemic hiatus – players it then found hard to sell on due to poor performance. The war in Ukraine has also been a factor as the club lost a key financial backer – Uzbek-Russian oligarch Alisher Usmanov.
Finally, all this occurred as the club is funding a new stadium, for which it has had to borrow money from its owner, Farhad Moshiri. Had the club borrowed from a bank and stated that the borrowing was to fund the stadium, it may have been closer to or below the limit. Under IFRS and UK GAAP, capitalisation of the borrowing costs is permitted when it’s funding the creation of a qualifying asset.
“Everton applied for loans and said they would be used for working capital purposes, so therefore they couldn’t capitalise the interest,” Kieran Maguire explains. “If it had said some of it might be used for the stadium, it potentially could have capitalised the costs.”
