When Saturday comes

When Saturday comes

The Premiership opens this weekend and fans will be dreaming of a trophy or just praying for survival. But for clubs it is a delicate balance between chasing success and seeking financial security

On 22 July 2002, then Premiership football club Leeds United sold lynchpin
central defender Rio Ferdinand to sworn enemies Manchester United for a British
record transfer fee of £30m.

The transfer was a bitter pill for Leeds fans, who had seen the club through
a successful run in the prestigious Champions League just months before. But the
deal was accepted as a necessity to drag the club out of crippling debt, which
at the time stood at around the £80m mark.

Two years later, and other star players had departed, including Robbie
Fowler, Jonathan Woodgate and Robbie Keane, yet the club’s level of debt was in
excess of £80m, and Leeds United was still on the brink of collapse.

Only intervention by experienced accountants, and a painful restructuring
process, led to solvency. Just two weeks ago, Ernst & Young partner and
Leeds joint administrator Garry Wilson repaid the last of the club’s creditors,
including the milkman.

The Leeds crisis was just one of the many that threatened the future of the
beautiful game over the last few years. Leicester City, Bradford City, Cambridge
United, Wimbledon (now Milton Keynes Dons) and York are just some of the clubs
that have come face to face with the harsh realities of the football business in
the 21st century, and faced ruin.

The clubs themselves are run by successful business people, well versed in
balancing investment with risk. Yet tales of financial mismanagement are at the
heart of many of these clubs’ woes. So what happened?

Garry Wilson believes that the root of Leeds’ problems stems back to a
‘different climate’ to the one currently facing football. The turn of the
century saw spiralling wages and transfer fees, secured against club assets and
supplemented by ‘wealthy benefactors’.

Leeds, along with other clubs, paid huge sums to players and also became
involved in the process of ‘leasing’ players. This leasing helped to push the
club into debt, and transferring those players barely covered the money owed to
the leasing agency.

This, along with a wage bill of £56m in 2003 – the equivalent of 80% of the
club’s turnover then – pushed Leeds to the brink of disaster. ‘Clubs were all so
caught up in market conditions at the time. Rio’s deal to Manchester United was
the one that happened before the [transfer] market collapsed. Assets the clubs
thought they had became worthless,’ says Wilson.

But clubs still face other risks. Those making the leap from the Coca-Cola
Championship to the Premiership have been presented with great wealth, yet this
can become a poisoned chalice. Wimbledon and Ipswich, for example, fell out of
the Premier League and faced financial difficulties, culminating in
administration.

One of the main issues has been inflexible player contracts that stretch the
player wages-to-turnover ratio. Huge contracts were signed with little room for
manoeuvre, allowing players to earn Premiership wages even though the clubs had
been relegated.

Former Leeds CFO Neil Robson found the club in a dire situation, strangled by
debt from ‘transfer leasing’ and unmanageable player wages. ‘It was a double
whammy – when revenues started to fall, costs could not be brought down,’ Robson
tells Accountancy Age.

The collapse of ITV Digital also had a catastrophic effect. Around £180m owed
to the Football League by ITV Digital went unpaid. Reports suggested that as
many as 30 clubs faced administration due to its collapse.

The introduction of ‘parachute payments’ to clubs slipping down the leagues
has eased the financial burden. The controversial ‘super-creditor’ status, which
places certain creditors such as the players and HMRC above others if a club
enters administration, provides a level of certainty regarding their financial
exposure.

Despite the many financial disasters and calamities that befell many of
England’s biggest football clubs, there is finally light at the end of the
tunnel. Deloitte’s survey of football finances reveals that clubs are getting to
grips with managing the balance between revenues and wages.

Football League clubs’ revenue increased by 7% to £440m in 2003/04, while
wage bills fell by around 10%. Total wage bills for Premiership clubs, excluding
Chelsea, fell from £706m (2002/03) to £696m (2003/04). And wage/turnover ratios
fell from 61% to 59% across the same 19 clubs.

Grant Thornton’s Joe McLean, who has provided advice to many clubs, believes
that they are beginning to cut costs and manage their finances better and most
have emerged from the ITV Digital hangover. ‘League clubs are gearing themselves
accordingly – new contracts are as low as £1,000 a week to top players – they’re
driving down costs.’

McLean believes the introduction of the Bosman ruling, which effectively
wiped out any transfer fee between clubs if a player is out of contract, has
helped lower debt.

But he warns there are still huge risks. ‘On the one hand, clubs are slowly
spending less of other people’s money, but the scenario they find themselves in
is balancing success on the field with financial success in the boardroom – they
get sucked into the pursuit of glory.’

The Football Governance Research Centre (FGRC) at the University of London
has seen clubs learning from the ‘Leeds Utd’ example by taking risk management
more seriously. Fewer clubs are increasing their overall level of debt, and more
clubs have disposed of assets, deferred capital expenditure and extended credit
periods.

Professor Christine Oughton, director of the FGRC, says that while the
situation has improved, there are still risks associated with the knock-on
effect of Chelsea’s recent high level of transfer and wage expenditure.

Clubs chasing Chelsea could be dragged into increasing expenditure, which
entices other to follow suit. ‘Because of Chelsea’s expenditure there’s a danger
it could encourage more spending on wages. It’s an industry with a lot of risk,’
Oughton says.

But pressure to bring success, while balancing the books, is onerous and
constant. ‘That’s the issue – the line between success and failure is so narrow,
yet an awful lot rides on which side you fall,’ says Robson. ‘The normal
business risk is that, falling short of a target wouldn’t necessarily be
catastrophic. But the potential revenue losses for not winning can be
catastrophic, in terms of wages and transfers.’

On and off the pitch it seems that, despite the ongoing risks, the game may
have finally learned from the mistakes of the past.

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource