Financial Fair Play - The Championship Model

Before I publish part 3 of my Championship Finances Review I want to outline Financial Fair Play in the Championship. The purpose of Financial Fair Play, how it is implemented, how it affects each club in the league, and how you should interpret your club's figures.

Financial Fair Play (FFP from hereon) is a set of regulations, negotiated between the Football League and its clubs, that attempts to establish a league of financially sustainable and responsible football clubs.

Each division in the Football League has its own set of regulations which differ slightly, but I will be focussing on the Championship as this is the league I have been covering in previous posts.

Acceptable Losses & Shareholder Equity

The clubs in the Championship must abide by the UEFA FFP model which requires clubs to at least break even, with operating losses only being acceptable within defined limits during the 'adjustment period'.

Shareholder influence will also reduced over time in order to stop a club being solely reliant on funding from ownership (known as shareholder equity).

Clubs will be required to provide The Football League with detailed financial accounts before December 1 of every year, which will then be assessed by the league and a 'Fair Play Table' will be released that ranks every club.

The Football League will assign each team a “Fair Play Result” which is based upon their financial performance. There are two tiers of the “Fair Play Result”.

1. A club that is break even or profitable (excluding external investment from ownership) will be given a positive value that is equal to the club's profit for the previous financial year. The league has outlined a plan to exclude certain items when calculating a club's P&L, such as infrastructure investment, but I will cover this later.

2. A club may be loss-making provided it is within an acceptable deviation and must be covered by shareholder equity. The permitted level of acceptable deviation or the amount of shareholder equity allowed will be reduced over time – the overall aim of this “adjustment period” is to remove the reliance and influence of ownership funds and force clubs to be sustainable as an independent entity.

Season	Acceptable Loss Deviation Permitted (£m)	Shareholder Equity Permitted (£m)	Total Permitted Allowances (£m)
2011/12	4	8	12
2012/13	4	6	10
2013/14	3	5	8
2014/15	3	3	6
2015/16 +	2	3	5

Spending Allowances

Whilst calculating a club's annual profit or loss, which in turn determines their 'fair play result', the Football League have outlined a few exceptions that will be made.

1. Investment in Youth Development or Infrastructure (including charitable or community expenses) which are deemed beneficial to the club or league will not be taken in to account when calculating their P&L.

2. The profit affecting element of the purchase, sale and depreciation of fixed assets excluding players (e.g. a club's stadium).

Sanctions

The financial performance of clubs in the 2011/12 and 2012/13 seasons will be monitored, but no sanctions will be put in place.

Going forward, any club that remains in the Championship that does not meet the regulations set out in FFP, will be subject to a transfer embargo, starting with the 2015 January transfer window. The club will not be permitted to make any signings (including free players) until they lodge information with the Football League that clearly shows they are falling in line.

Fair Play Tax - Promotion

If a club is promoted to the Premier League and it is later deemed that they have done so whilst not following the FFP regulations, will be subject to a fair play tax.

Clubs that are relegated from the Premier League will not be forced to abide by FFP regulations in their first year. This season of unregulation is strictly limited to one year.

If the club is immediately promoted back to the Premier League then they will be subject to a 'fair play tax' which is determined by the extent to which they deviated from FFP, and applied at the following thresholds:

Deviation from FFP	Fair Play Tax
£1 - £100,000	1%
£100,001 - £500,000	20%
£500,001 - £1,000,000	40%
£1,000,001 - £5,000,000	60%
£5,000,001 - £10,000,000	80%
£10,000,001 +	100%

Funds raised through the Fair Play Tax will be distributed amongst the clubs that have conformed to FFP.

Salary Cost Management Protocol (SCMP)

The Championship and the Football League have decided not to limit expenditure on player's salaries, whereas League 1 and 2 have defined spending limits which are directly linked to a club's total turnover.

By not agreeing a SCMP, it is at the discretion of each club to decide how much they want to spend on players salaries, but in deciding this amount, they must abide by the overall FFP model.

For sake of comparison, going forward from this season, League 1 clubs must not spend more than 60% of their total turnover on players salaries.

Points for discussion

1. A club may chose to ignore FFP regulations provided they are willing to gamble on immediate promotion and are happy to pay the fair play tax.

2. A club relegated from the Premier League will have an obvious advantage in the Championship as they are not required to abide by FFP in the first year.

3. If a club is promoted and has ignored FFP, surely stepping in and stopping them from being promoted would be a better disincentive? This might not be possible because they only have to submit their accounts by December 1 so the Premier League season would have already started.

4. A transfer embargo may actually worsen a club's financial position if their losses are not related to their spending on players but actually due to another factor.

I hope the above clears things up for you and puts you in a good situation to understand how FFP will affect your club. Make sure you stick around for "Part 3 - Profit & Loss" of my Championship Review.

Also - follow me on Twitter for first access to my articles.

Over & out,

JW

championship, Financial Fair Play 05:54 1 comment

Championship Finances - Part 2: Expenditure

Apologies for the slight delay getting this post online - I've recently changed jobs so had a little less time to get this complete. If you haven't read Part 1 then I advise you do so before going any further.

But as promised, here is Part 2 of my review of the Championship Finances focussing on club expenditure.

West Ham were the league's highest spenders splashing out just shy of £55m in total. Barnsley, who just avoided relegation, were the only club to spend less than £10m in total, an impressive feat if you consider they were playing against teams who were willing to spend far more on their playing squad.

Total league expenditure rose above half a billion for the first time, but only £4m was paid by clubs in direct taxation. In fact, Middlesbrough received a tidy £3m tax rebate for readjusting their previous financial disclosures.

As you all know, a high proportion of a club's costs are incurred through player salaries and as teams chase that golden promotion to the EPL (and the financial windfall that comes with it) they have been happy to break the bank to bring in better players.

9 clubs in the Championship were happy to pay more in player salaries than the amount the club actually generates, a worrying figure to say the least. Bristol City, who have a limited ability to generate revenue because of the size of their Ashton Gate ground (avg home attendance 13,836), spent £18.7m in player salaries but only generated a total turnover of £11.9m.

Unsurprisingly, the league's biggest spenders were West Ham at £41.6m, with second place going to Southampton who paid out £28.7m.

Reading spent 135% of their revenue (£19.9m) on players (£26.8m) but this gamble obviously paid off as they stormed to the Championship title and got their golden EPL pay day.

The league average was 93% which is far too high to be sustainable.

I included this graph in a separate post the other day as I think it throws up an interesting concept: effective player cost per league point achieved.

In essence what it tells you is this: how much (£,000s) the club paid in player salaries to achieve one Championship point. For example, eventual winners Reading accumulated 89 points by spending £26.8m in player salaries, an effective cost of £301,000 per point.

Peterborough Utd, who were promoted the season before and eventually finished 18th, had the lowest effective cost at £114,000. They paid out just £5.7m in player salaries and finished one spot ahead of Nottm Forest who had spent £17.4m in salaries.

Again, West Ham led the way on this measure, partly because they retained their core Premier League squad in the hope of returning to the EPL at the first attempt (they did through the play-offs). With a total wage bill of £41.6m, they effectively paid £484,000 per point.

Although they failed to return to the EPL, I think Blackpool were the stand out performers when you consider this measure. With an effective cost of £165,000, they were the only team to make the play-offs with a sub-£200k figure.

Total net debt across the league rose to £830m, with Brighton leading the way with net debts totalling £110m partly due to their recent investment in building the new Amex Stadium. The majority of this debt is owed to Brighton owner, Tony Bloom, who has bankrolled the club's recent rise through the league.

Although the graph does show that the majority of clubs in the league owe a substantial amount of money, these figures are likely to fall drastically in the upcoming years with the introduction of Financial Fair Play regulations. I am going to look at FFP in Part 3 when I look at the Profit and Loss Accounts for each club, but the majority of the debts owed across the league are directorship loans which will (probably) be converted into equity in order to bring clubs in line with the new regulations.

The above table shows the net debt to revenue ratio for each club in the league. For those who don't know, a number above 1 says that the club has net debts greater than their annual turnover. For example, Ipswich Town are holding net debts totalling £72.5m but the club only generated £15m in turnover that year, hence their net debt to revenue ratio of 4.8.

Only 8 clubs in the league have a ratio less than 1 (so they owe less than the amount they generate each year) with Leeds leading the way with a ratio value of 0.05 because they only hold a negligible amount of debt.

That pretty much concludes Part 2 of my review of expenditure. I've had a few people ask why I've split my review into three separate articles, so I think it's important to say why here.

In my writing I always try to explain figures and ratios using the simplest explanation or the most suitable graph. In doing so, I feel like I am able to target a greater number of football fans and therefore those who don't have a financial background are still able to understand their club's position. As a result I decided to split the core business of a football club into three simple functions - 1) Revenue 2) Expenditure 3) Operating Profits.

Hope you stick around for Part 3 as this is where the nitty and gritty analysis will be done when I look at Operating Profits (well, pretty much Operating Losses) across the league.

championship, Financial Fair Play 07:15 1 comment

Premier League - Data is Beautiful

Quick post again but this is well worth it.

Below is an infographic from the guys over at MatchStory which shows the fixtures and difficulty ranking for every EPL 2013/14 match.

It's a great example of how to incorporate a lot of data into a simple visual aid.

Observations:

• Both Manchester derby matches are scheduled immediately after potential Champions League fixtures (matches 5 and 28), which could lead to some selection dilemmas as they attempt to compete on both fronts.

• Villa have a pretty horrible start, without a relatively ‘easy’ game until October, so don’t be surprised if they spend the early part of the season near the foot of the table. February and April provide opportunities for a late surge up the table, although a stressful March could disrupt their momentum.

• January is a significant month for two of the three newly-promoted clubs which could well shape their respective destinies. Cardiff’s is truly horrendous with away trips to 3 of last season’s top 4, while Crystal Palace enjoy 3 of their more winnable home games.

• Sunderland and West Brom could benefit from having all four of their hardest games scheduled before or after Champions League ties which could distract their opposition. Both have away games against one of the big four either side of the semi finals (matches 35 and 37).

• After a potentially lousy run of games at the back end of March which may cause Arsenal to stutter, the Gunners have a relatively easy finish to their campaign which could see them finish strongly.

Also if you click on the image you will be redirected to their website which also presents an interactive version that displays betting odds for every fixture.

Over & out,

- JW

Premier League 00:36 No comments

Championship - Effective player cost per league point

In preparation for 'Part 2 - Club Expenditure" of my Championship Review I have decided to show you one of the graphs that I have created that I find a little interesting.

As an economist, I tend to focus on the small details and we use a lot of measures such as 'marginal cost' to analyse a company or something. This frame of mind got me thinking about the following -

"How much does a club effectively pay to accumulate one league point?"

I'm also quite a fan of the NFL and one of the things that I have took away from American Football is their constant focus on player performance and all of the measures they have created in order to analyse how successful a player, or a team, is during a season.

So what I've done is created a measure, "effective player cost per league point" which indicates the club's player wage bill as a ratio to the points they managed to accumulate that season. For example, my measure shows it cost Derby County £203,000 a year in player wages to get one point in the Championship 11/12.

So here's the graph, and I'll add the league table with the raw data just below.

It's a shame that the wage bill data for Pompey and Coventry isn't available but I still think there's a few things to point out. 

Firstly, Blackpool's effective wage cost per league point of £165,000 is the stand out figure. Doncaster, who were relegated with just 36 points, had an effective wage cost of £261,000. Birmingham City spent over twice as much on player salaries and managed to accumulate just one more point. Think it shows just how well Blackpool did to make it into the play-offs.

West Ham, who were relegated the season before but managed to make it back to the EPL through the play-offs, had both the highest annual wage bill (£41.6m) and highest effective cost per league point (£484,000).

At the moment I'm not too sure how much focus to give the measure, but it's certainly interesting. Would love to hear your comments in the box below.

-- Jack

championship, effective wage cost 07:03 No comments

Championship Finances - Part 1: Revenue

As Part 1 of my review I will be focusing on revenue, both at the aggregate level and on a club-by-club basis. Part 2 will provide a review of club expenditures and costs, and Part 3 will focus on the profitability and viability of Championship clubs going forward (including a look at where each club stands in terms of FFP).

The figures that I use have been obtained from the clubs financial disclosures but I have had to make a few financial adjustments in order to standardise the figures / categories.

Firstly, for the 2011/12 season, total league revenue has increased to £467m – an impressive increase of 13% on the previous season. West Ham Utd generated the greatest revenue at £46m (helped in part by the receipt of parachute payments) with Birmingham City finishing a distant second at £39m.

The three clubs that won promotion to the EPL (Reading, Southampton and West Ham) generated an average of £29.6m each – well above the league average of £19.5m.

Doncaster Rovers, who finished bottom of the league and were relegated with just 36 points from their 46 matches, only generated £8.2m from all of their activities as a football club. In comparison, the ambitious Brighton & Hove Albion generated 8.6m in commercial revenues after moving into their new £90m Amex Stadium.

The ”Other” category is only applicable to Reading who generated a tidy £5.2m through their Madejski Stadium hotel operation.

Clubs that are relegated from the Premier League receive a form of compensation, known as the parachute payment, that aims to allow clubs to absorb the resultant revenue losses. At present, clubs receive £48m over four years (Year 1 – £15m, Year 2 – £17m, then £8m the next two seasons).

For the 2011/12 season, the average revenue for the seven clubs in receipt of parachute payments (West Ham, Birmingham City, Blackpool, Hull City, Burnley, Middlesbrough & Portsmouth) was £29m, with the other seventeen clubs generating an average of just £16m.

Although many have criticised the practice of compensating clubs who are relegated from the EPL (former Barnsley manager Keith Hill called it “rewarding failure”), from the 2013/14 season, parachute payments are set to increase to around £59m, albeit with a slightly changed payment structure.

The FA and Richard Scudamore have refused to budge on their proposals for higher parachute payments. The argument against the payments, that they effectively create a 'Premier League 2' within the Championship, is well founded when we look at the revenue differentials between Championship clubs.

Each club not in receipt of any parachute payment receives an annual fixed sum of £2.3m for participating in the Championship, known as the 'Solidarity Payment'.

It is unlikely that the Championship clubs will be able to renegotiate any deal with the Premier League which would allow a more equitable distribution of Premier League TV rights. Parachute Payments are governed by a formula contained within the 'Founder Members Agreement' and are directly related to the amount that the Premier League generates through TV rights, whereas Solidarity Payments (which were negotiated in separate talks) aim to develop youth and community projects in teams outside the EPL.

However, it is only fair to point out that since the 2009/10 season, only two of the nine clubs that have been relegated from the EPL, and have benefited from the parachute payments, have subsequently won promotion back to the top tier.

The average attendance of a Championship match was 17,496, representing a 65% utilisation of total capacity. In comparison, for the same year, Premier League fixtures had a 95% utilisation.

West Ham, despite playing in the second tier of English Football, boasted an impressive 88% utilisation of Upton Park on match days. At the other end of the spectrum, Barnsley (45%) typically failed to fill up half of their stadium.

Only three clubs (West Ham, Southampton and Leeds Utd) generated over £10m in ticketing and match day revenues. Doncaster Rovers and Barnsley struggled to pass the £2m mark.

Total commercial revenue (shirt sales, memorabilia etc) across the league increased slightly to £115m, with the more traditional clubs generating substantially more than others. West Ham managed their commercial activities pretty well considering their previous relegation, with their retail and commercial operation only experiencing a £3.5m drop in revenue.

Although it doesn't add much in terms of a visual aid, I thought I'd include the final league table alongside the respective revenue figures.

The top six clubs (those who were automatically promoted or made it to the play-offs) generated 40% of the total league revenue (excluding Portsmouth and Coventry City who haven't released their financial statements due to the ongoing financial problems they are experiencing) - a significant proportion of the total league revenue and obviously a key factor in making the final push for the Premier League.

Stay tuned for Part 2 of my review of the Championship finances where I will be focussing on club costs and expenditures (including the much debated wage cap). 

Make sure you follow @Chairmansnote on Twitter for first access to articles and updates.

championship, revenue 06:41 No comments

Financial Fair Play - Brighton will struggle to fall in line

In April 2012, Championship clubs voted to introduce Financial Fair Play regulations that will regulate all clubs from the 2014/15 season. The purpose of the new regulations is to curb total spending and prevent owners from funding football clubs through directorship loans.

Brighton & Hove Albion, now competing in the Championship and who finished 4th last season narrowly missing out on promotion on the Premier League, are one of the few Championship clubs who will struggle to fall in line with the new FFP regulations.

The FFP regulations stipulate a number of restrictions on clubs but mainly target the bottom-line figure. Starting this season, clubs losing more than £8 million will be subject to sanctions. This figure will reduce to £5 million next year, effectively giving clubs an 'adjustment' period in which they must consolidate their spending.

Upon inspection of their accounts, over the last 4 years, Brighton have accrued staggering losses of £24,934,031 - a huge figure no matter the size of the club. Despite their Chief Executive Paul Barber's ambition to "build and build", the management will need to clamp down, and quick.

In recent years, Brighton have heavily relied upon their owner, Tony Bloom, to fund their activities. According to their latest accounts the club owe him £120m, with £40m already converted in to share capital raising his ownership to 91%. It is crystal clear that Bloom continues to support the club's losses, exactly what the FFP regulations are trying to stop.

The majority of Bloom's investment has been used to fund the development of the club's new stadium, the Amex. Ticket revenues have soared from £2.3m to £7.9m after the club sold 22,000 season tickets and retail & media has jumped to £2.6m (mainly thanks to selling the naming rights to American Express). In 2011-12, Brighton had the 5th highest match day revenue at £7.3m - only West Ham, Soton, Leeds and Birmingham beat them.

In the 2012 statements, it is noted by the auditors that the club rely on his "ability to generate further funding" and highlight the club's liabilities are currently exceeding its assets by £13.3m.

Despite their worrying losses, the general consensus around the club is positive. It appears that fans are happy to ignore the financial state of the club and only focus on team's league performance. Admittedly I am a little shocked by the Official Supporters Club's opinion on the whole issue. Stefan Swift, editor of the fanzine 'The Seagul Review", was quoted as saying "the stadium is so good and the fans have never had it this good"

Going forward, the success of the team will be relient upon the board's control of costs. Assuming they want to attract players which will allow them to challenge for the EPL (meaning their wage bill will remain at the current level ~ £13.2m) then they will need to employ some major cost cutting measures.

It is only fair to highlight that, being the year they finally moved into their Amex Stadium, the club have incured exceptional costs of £9.4m (£7.5m in 2011 to £16.9m) credited to the cost of furnishing their new digs. If I were to set this to one side then the club would have been in the black, just.

The benefactor model (where a club is substantially financed through a director) is being stamped out by league. Brighton are going to be hit hard and will need to seek & generate new sources of revenues, and cut costs substantially.

Brighton & Hove Albion, championship, Financial Fair Play 00:26 3 comments

West Bromwich Albion - striking a balance

It seems like a lifetime ago that West Brom were considered a new team in the Premier League. Last season, their third consecutive in the EPL, saw them register their highest ever points total (49) and finish 8th in the league. Under Roberto Di Matteo, Roy Hodgson and current Manager Steve Clarke, they appear to have progressed from being the 'yo-yo' club of English football and developed a sustainable model that is allowing the team to compete (or survive) at the highest level in English football.

Don't get me wrong, the Baggies are a team with a rich history. A founder member of the Football League in 1888, they have won the FA Cup on five occasions and many of you will remember the glittering 70s team led by Ron Atkinson. Since 2002, they have spent 7 seasons in the EPL but have been relegated 3 times. Their current run in the Premier League is their best for many years and is largely down to the prudent actions of their board.

For the 2012 financial year the club recorded a pre-tax profit of £1.5m. Although a modest figure, a team of the Baggies' size and resources registering a profit whilst surviving in the EPL is very impressive. In fact, according to the Deloitte 2012 Annual Review of Football Finance, only half of the twenty EPL clubs were in the black.

Mark Jenkins, the club's Chief Executive and former Finance Director, has plenty to be pleased about. “We know where to make our resources go the furthest," said Jenkins. "We're a club with rather limited resources, and we have to think cleverer than some of our competitors who have got more unlimited resources.”

In fact, in the last 3 years the club have banked £11.3m profit whilst reducing their net debt from £2m to just shy of £500,000.

For any club in English football, striking a balance between player investment and financial stability is extremely tough. Over the years, West Brom have had to carefully manage their expenditures due to their fluctuating revenues and have made a particular point of highlighting this in their Financial Statements.

“The board is aware of the risks which affect the company. It has analysed its previous seasons in the Barclays Premier League and has tried to implement lessons learned from this and as a consequence it believes that the squad will be stronger and more experienced. This is part of the long term policy of the club which is to improve the playing squad and infrastructure year on year”

The board and chairman have not been averse to making tough, often unpopular,decisions. In February 2011, after a run of defeats and poor performances, Roberto Di Matteo was dismissed as Manager “to give the club the best chance of remaining in the Premier League”. The decision paid off immediately and under the guidance of future England Manager Roy Hodgson, the team finished 11th that year.

Going forward the club and management will need to carefully track their expenditures. Last year, for the first time, the club's total wage budget exceed £50m - representing 74% of their total revenues. The club will clearly benefit from the record TV rights that the EPL are generating - this year they will generate atleast £73m from TV rights.

20:08 No comments

The curious case of Radamel Falcao

Yesterday evening, Radamel Falcao, the 27 year old Colombian superstar who was predicted to make a move to one of the European giants this summer, scored on his competitive debut for AS Monaco in a 2-0 win over Bordeaux. The French Ligue 1 team, whose average attendance last year was just over 6,000 and are now owned by Russian billionaire Dmitry Rybolovlev, were making their return to the top flight after a summer of big-name, extremely-expensive signings.

Back in 2009, Falcao left River Plate for Portuguese side Porto, and in doing so, became 55% owned by a private fund called Doyen Sports. The company, founded by super agent Jorge Mendez who also represents Cristiano Ronaldo and Jose Mourinho, "provide support and funding, in a very visible way" to clubs across Europe. In essence, they assist clubs to make signings by introducing private finance in return for a proportion of the players registration.

After two blistering seasons at Porto which included scoring 41 goals in just 51 matches, Radamel moved to Atletico Madrid. The Spanish club have had their own financial problems and disclosed they had liabilities of just over €500m at the end of 2011, were aided by Doyen's third party ownership of Falcao. In order to sign the striker they were able to agree a fixed fee with Porto for the 45% of his registration and a private arrangement with Doyen to allow them to register him with the league.

In this deal Doyen did not relinquish their control of Falcao - they held onto their 55% ownership with Madrid effectively paying "yearly royalties" to Doyen (who also take a healthy cut of Falcao's salary).

Falcao's ability has never been questioned. Over the last 5 years he has boasted one of the most impressive goalscoring ratios across all competitions (0.79 goals per appearance in fact) but his latest move has raised questions about the level of influence that these third-party companies can have on a player's choice of club.

Doyen's vested interest in Falcao comes in two forms; firstly they take a fixed percentage of his (after tax) wages and secondly, they still hold 55% of his registration.

In moving to AS Monaco Falcao is expected to earn £12 million pa tax free thanks to Monaco's principality status - a bigger slice for Doyen to pocket. In comparison, if Falcao signed for an English club he would be required to pay income tax of around £4 million pa.

Ultimately, Falcao's ability to negotiate with clubs has been severely diminished. Doyen are a private equity company whose purpose is to maximise return for it's shareholders. They have and will have the last say on any transfer relating to Falcao. Never has one player had so little control over his own future.

01:15 No comments

Third-party ownership: Increasing competition or player exploitation?

Earlier this year, UEFA General Secretary Gianni Infantino slammed the practice of third-party ownership in football claiming it damages the "sporting philosophy of financial fair play". In addition, the often outspoken and controversial Michel Platini, whose main concern is that TPO agreements result in capital flowing out of football, has started to lobby FIFA and promised to issue a European ban even if FIFA fail to make a ruling.

TPO is a contractual agreement between a player and an agent in which, for agreed sum of money, the player sells his league registration rights and/or a percentage of his future economic rights (wages, sponshorship, endorsements). TPO agreements are especially popular in South American football (where the majority of clubs are cash poor) and typically the agent will attempt to sell the player to a European club to make themselves a tidy profit.

After the Tevez & Mascherano saga back in 2006 the FA became the first regulatory body to outlaw the practice and strictly stated that no player registered in England is allowed to hold a third party interest. If an English club wants to buy a player who is (partly or fully) owned by a third party they must first buy out the third-party and obtain 100% of the player's registration.

Kia Joorabchian: agent responsible for transfering Tevez and Mascherano to West Ham in 2006

TPO agreements rose to prominence approximately a decade ago when a number clubs in Brazil were struggling financially and were in desperate need of capital. Clubs turned to private finance and put up a player's registration as collateral (security). A player's registration is highly liquid - if the club default on the loan then the agent can sell the registration to a different club and recover their investment.

Over a couple of years the parties and terms involved in a TPO agreement evolved. Companies began to seek young aspiring footballers and agree a deal directly with them. The majority of young players were keen to agree such deals because of the attraction of short-term riches.

Critics of the TPO practice claim that the player is treated as a commodity and could be manipulated or pressured into moving clubs just to allow the agent to make a profit on the sale.

I must say that, to date, I am not aware of any cases of forced transfers but there have been a couple of questionnable transfers, including Radamel Falcao's recent transfer to AS Monaco despite the player drawing strong interest from many elite clubs.

Conversely, there are many experts who, provided that both parties act fairly and responsibly, look favourably upon TPO agreements. They claim that having an agent who has a vested interest in the player's career will mean that they will always act in the best interest of the player. For example, it is claimed they are likely to negotiate harder for better wages, develop and use industry contacts to after lucrative sponsorship deals.

Jean-Louis Dupont, the sports lawyer who was responsible for 1995 Bowman ruling, publically criticised the FA's "over-reaction" and questioned the legality of completely banning TPO agreements. "The main principle under EU law is the freedom of enterprise, where the restriction is the exception."

As seen in the case of Tevez and Mascherano, TPO agreements can result in smaller teams attracting better players. Instead of having to pay 100% of the market value for the player, a club could purchase a 'smaller slice' and allow the agent to retain his stake. In theory, this can only lead to a greater level of competition in the game - a win/win for all fans of the game.

The effects of TPO agreements is a highly polarised topic, but no matter who you agree with, it appears unlikely they will be allowed for much longer. One thing is clear though, if the practice is stamped out, the biggest losers will be South American clubs and players who rely so heavily on exporting their talent into the European leagues

I think Neymar's agent summed true situation up nicely. "They [FIFA] are taking no account of local specificity and how football is financed in each market".

"The issue [TPO] needs to be addressed properly and FIFA need a full understanding of what it actually means".

Carlos Tevez, Kia Joorabchian, Man Utd, Neymar, Premier League, third party ownership, transfer 21:20 No comments

Wolves: The cost of failure

Just 2 seasons ago, Wolverhampton Wanderers were preparing for their third season in the Premier League after finishing a very credible 15th the season before. Today, they are beginning their first season in the third tier of English football after a dismal relegation from the Championship last year.

In 2007, Wolves owner Sir Jack Hayward relinquished control of his beloved club and sold it to property developer Steve Morgan for the nominal fee of £10. Morgan, the owner of Redrow Homes who once made an audacious attempt to buy Liverpool FC, promised that he would initially invest up to £30 million in the club "over a period of time ... to help re-establish Wolves as a Premiership club. "

At the start of the 2011/12 season Wolves fans had every right to be buoyant. The club was financially secure, they were preparing to invest and upgrade their Molineux stadium and they had managed to retain their core players which had performed so well the season before.

But like many before them, Wolves failed to maintain their level of performance and were in the relegation zone for the majority of the season. Midway through the season the Chief Executive, Jez Moxey, announced that the club had made a £9m profit the season before. Many fans were in uproar claiming that these funds should be reinvested back in the squad to try fight their way out of the relegation zone. They were not. And Wolves were relegated without much of a fight.

At the start of last year, back in the Championship, Wolves were expected to fight for promotion with many eyeing them up as possible winners. Indeed Sky Bet had them listed as third favourites offering the odds of 8/1 that they would be automatically promoted. 

Things did not go to plan. The new manager, the rather unknown Stale Solbakken from Norway who took over from Mick McCarthy, was relieved from his position in early January after being knocked out of the FA Cup by non-league Luton and the team lying 18th in the league. 

The Wolves board pondered their next appointment carefully knowing that it was probably one of the biggest decisions they would have to make. 

Highly-rated Dean Saunders, manager of promotion chasing League 1 side Doncaster Rovers, was charged with the responsibility of saving the historic club. Like Solbakken before him, Saunders struggled to get the side to work for him and the club continued to struggle in the league. Wolves were relegated and banished to League 1, Baggies fans jumped in joy and Saunders was quickly sacked after just 20 games in charge. Karl Henry, boyhood supporter and club captain, summed the situation up pretty accurately calling it a "sorry state of affairs".

The Wolves Board and Steve Morgan have continued to take flack all off-season as they struggle to offload some of the residual high earning players from their brief stint in the Premier League. With the sudden demise of the historic club it is likely that it will impact the club's finances and, ultimately, affect their ability to climb out of League 1.

So, after back-to-back relegations and investing significant sums in their infrastructure & players, how are Wolves fairing financially?

Wolves report their financial statements on a yearly basis starting every June. Therefore, the 2012 financial statements represent their final year in the Premier League and their 2013 statements (the year in the Championship) have not yet been released.

Overall, Wolves' financial statements are quite impressive. During their 3 season stint in the EPL they managed to bank profits totalling £13.5m, satisfy their outstanding loan of ~ £3m, and accrue just over £12.8m in cash reserves. In fact Wolves were the 5th most profitable club in the EPL in the year 11/12.

The financial benefits of playing in the EPL are evidently clear - in 09/10 turnover surged to just over £60m - a whopping increase of over 300%. This is due to the central broadcasting deal and the £2.1bn TV rights that the league generates. The club also signed a new sponsorship deal with SportingBet which is largely responsible for the £2.2m increase in commercial revenue. Wolves' revenue increases are offset in part by their activity in the transfer market (player amortisation increases from £3.7m to £9.5m) and the subsequent increase in wages (£16.7m to £29.8m). 

As a form of 'relegation compensation' Wolves will receive £48m over 4 years from the EPL.  Also known as the parachute payment, many Football League clubs have attacked the practice of paying huge sums to clubs as they argue it gives the relegated clubs an unfair advantage and effectively rewards failure in the EPL. Wolves will have received £16m last season and will receive a further £16m this season, despite being in League 1.

In March, in an attempt to curb excessive spending and the loss-making culture of many clubs, the Football League agreed to cap aggregate wages to 60% of the club's revenue. Even though Wolves will be receiving their second parachute payment of £16m they will not be allowed to consider this as revenue when calculating their wage cap limit because it is considered an 'exceptional item'. 

If Wolves want to avoid sanctions they will need to severely cut their wage bill. Many of the players at the club are still collecting Premier League wages and a few media articles have estimated their wage bill for the 2012/13 season was approximately £5m. As a point of reference, the team who wins League 1 gets just £25,000 in prize money.

The cap also includes a club's spending on non-playing staff (eg. Cleaners etc). Therefore, as Wolves inevitably cut back on luxuries, it is likely that many backroom staff will leave - another cost of the team's dismal performance on the pitch.

The importance of the upcoming season cannot be downplayed. Wolves fans will be expecting promotion and the owners cannot afford to stay in League 1 for more than one season. Some of more the more senior players will need to stand tall and help some of the youngsters settle into the pace of League 1.

championship, league 1, Premier League, wanderers, wolverhampton, wolves, wwfc 00:24 No comments

How football teams account for the millions they spend on players

The 2013/2014 season is rapidly approaching. Teams are rushing around trying to bring in their target players before the transfer window slams shut on September 1st.

Like many football fans, I too believe that the current level of transfer fees are absurdly inflated. However, knowing how teams account for transfer fees in their books, I do understand how Real Madrid, who seem to always make yearly losses in their accounts, are willing to pay up to €100m for Gareth Bale.

If we consider the fundamental structure of a business it becomes obvious that players are assets and we must account for these assets in our financial disclosures.

When we account for fixed assets, we must amortise (depreciate) the asset over a number of years. In football, this is determined by the length of the player's contract. At the end of a player's contract (assuming that he isn't sold prior and a new contract isn't agreed) they are allowed to leave for free - so the asset will be considered worthless.

Now, lets imagine RM pay €100m to Tottenham and Bale signs a 5-year contract, we will amortise this asset by €20m each year (€100m divided by 5 years). So at the end of the first year we will book the asset value at €80m (€100m minus €20m). At the end of the second year, we will change this book value to €60m. And so on. I think you get it now.

If a player is sold whilst under contract, the selling club will have to quantify their profit / loss surrounding the transaction. If we now hypothesise that Bale is sold to Man Utd in 2 years for the price of €45m, Real Madrid will experience a book loss of €15m, not €55m. The €15m figure is simply obtained by €45m (sales revenue from Man Utd) minus €60m (his book value at the end of year 2).

This accounting structure incentivises clubs to secure new signings to longer contract agreements. By doing so, the player's annual amortisation value will fall as it is spread over a longer duration.

Furthermore, teams will be keen to negotiate a contract extension with their players. Not only will this secure players to the club for a longer duration, they can also adjust the annual amortisation figure by adjusting the asset according to the new terms.

For example, if in the 3rd year RM negotiate and agree to a 3 year contract extension (so 6 years total) they will reduce the annual amortisation to €13.3m (year 3 book value of €40m divided by new 3 year contract).

depreciate, Gareth Bale, Man Utd, Premier League, Tottenham, transfer, transfer fees, valuing players 20:36 No comments