Financial Fair Play rules see English clubs curb risks

20 October 2017 Consultancy.uk

UK football clubs are adapting to key changes, as financial fair play rules curb excessive risk taking. Most clubs, in a new survey of the sport, find that clubs are in relatively strong financial positions, with higher-tier clubs planning to invest in boosting fan engagement, particularly across the domestic segment. Keeping their spots, or advancing, remain key motivations for clubs - with EPL level clubs in particular investing profit into retaining talent.

Financial Fair Play (FFP) was introduced by UEFA seven years ago to stop clubs involved in European competition from spending more than they earn. The basic principle is that, beyond a small loss, currently set at €5 million over three years, clubs’ outgoings must match their income. FFP has been deemed a success in curtailing losses sustained by clubs. However, in spite of being bound by tighter regulations, English Premier League (EPL) football clubs recorded a combined pre-tax loss of £110 million earlier this year; the first loss of this kind since the 2012/13 season. Research from Deloitte found that despite colossal revenues of £3.6 billion – up 9% from 2014/15 (£3.4 billion) – a combination of increasing amortisation debt charges and record transfer spending meant the elite division’s clubs had still lost money. The League’s collective wage-bill also continued to climb, growing by 12% to £2.3 billion.

Beyond the lofty broadcast revenue of England’s upper tier, research from consultancy BDO recently suggested that many teams outside the UK’s highest level are in a more financially precarious state. The study found that 23% of English Championship clubs and 40% of Scottish Premiership teams believed that their finances needed urgent attention, or were a cause for real concern – evoking memories of 2008 FA Cup winners Portsmouth and former Scottish champions Glasgow Rangers’ respective periods of administration in 2012.

Following up on the firm’s previous investigation, a new report by BDO, titled ‘Behind the Numbers’, considers the wider impact of new financial fair play rules on three of the UK’s top football leagues, the Premier League, the Football League Championship (FLC), League One (FL1) and League (FL2).

Financial positions

Contrasting with the gloomy picture of the previously mentioned 23% thinking their finances required urgent attention, this study found club finances to be relatively stable across all division – with 45% of clubs surveyed believing that their finances were very healthy, while a further 41% concluded that their financial situation ‘could be better, but [is] not bad’. 12% said that additional attention may be required, while just 2% said that there is a cause for grave concern / on the verge of administration.

The EPL noted the largest number of respondents indicating ‘very healthy’, at 71%, followed by FLC, at 46%. FL1 and FL2 were both relatively positive, with ‘could be better but not bad’ categories at 38% and 36% respectively, although the latter also noted 10% in the ‘in trouble’ category.

EPL clubs benefitted from changes in the media rights landscape particularly – which has delivered a windfall of up to £5.1 billion over three years. Ticket revenue also increased last season, and while English football's top clubs are still averaging lower attendances than many of their German counterparts, the EPL remains the second best attended league in Europe, while a continued campaign of stadium expansions means the Premier League is making ground.

Switching sides

77% of FLC clubs have access to external funding, partly to help them attain access to the more lucrative EPL, as well as to prevent demotion into less prestigious leagues. Lower level clubs remain relatively dependent on shareholder funding to support operating losses – although such losses are often, as noted by the firm, well planned for – with 64% of FL1 and 60% of FL2 clubs supported in this way.

Shareholder support is relatively fragile in lower leagues (FL1 and FL2), with 30% of respondent clubs suggesting that they believe their owners are planning a full or partial exit in the coming 12-18 months. Few clubs in the EPL suggest that their owners will play ball elsewhere (8%), while in the FLC, no club is expecting to see key changes in ownership.

The study suggests that the fan experience (51%) and growing their domestic fan base (47%) are seen as the most common factors for clubs surveyed. One area that boosts both qualities is investment in infrastructure and other non-player related capital spending over the coming two years. The relatively finance-flush EPL is set to be the most likely to invest between £2.5-£50 million during the coming two years, followed by the FL1, at 54% of responding clubs. FL2 and SP are far behind, on 10% and 0% respectively. 

Profit profiles

In terms of profitability, an apparently healthy portion of respondents across the leagues surveyed expect to turn a profit (43%); although this is skewed largely by EPL clubs, 93% of which expect to generate a profit, while the FLC in its bid to go up, or prevent going down, is the second least after FL1 (18%), to derive profit before trading and amortisation.

However, the picture changes significantly when player trading and amortisation is factored in, whereby EPL profit projection falls to 57%, while FLC increases to 38% and SP jumps to 67%. The large shift for EPL clubs reflects the pressure they are under to meet the stiff competition of the wider European arena.

War of talent

Player trading and retention has become a key part of the sport in recent years, with new ‘Financial Fair Play’ (FFP) rules aimed at creating an even playing field and reducing investment risks – 83% of clubs surveyed said that the new rules are broadly workable. The rule also appear to be impacting investment, with around 47% of all clubs, and 79% of EPL clubs saying that they would have invested more without the rules. While EPL clubs would focus investment on staying put, around 50% of FLC clubs noted that they would want to invest more to climb the ranks, risking financial oblivion in some cases.

The EPL also implement a more rigid regime of restrictions regarding ownership of its clubs in order to prevent a recurrence of Portsmouth FC’s famous 2012 bankruptcy. This was exemplified by the acquisition of Championship outfit Reading by Renhe Sports Management, with the company, owned by Chinese brother and sister team Dai Yongge and Dai Xiu Li, purchasing 75% of Reading FC’s shares following lengthy negotiations beginning in November 2016, having been advised on the purchase by BDO themselves. While the English Football League had declared as early as April 2017 that it had no objections to the takeover, giving conditional permission to the Chinese investors to purchase the club, the Premier League, who also have a say in take-overs of clubs that could win promotion to their league said they were “cautious” regarding the sale. The EPL had been rumoured to have broken up a similar deal by the duo for then-Premier League outfit Hull City, with speculation suggesting Renhe Sports Management had failed to meet the League's fit and proper persons requirement for owners.

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