Football clubs: stop chasing an unaffordable dream
03 Dec 2010 Posted by: Guest Blogger
As Sheffield Wednesday is the latest club to hit financial problems, football money expert Brendan Guilfoyle of The P&A Group, told Channel 4 News that major clubs are paying a heavy price for an unrealistic dream.
1. What is the difference between Administration and Liquidation?
Administration was introduced in the 1980s to promote a “rescue culture” and to assist in the rescue of companies and businesses as opposed to them going out of business. Like liquidation, it can be instigated by company directors or by a creditor.
In the context of football clubs, most administrations are instigated by directors seeking to save their club in response to HMRC seeking liquidation through a winding up petition.
2. Football clubs owing HMRC
HMRC have had enough of football clubs. They are involuntary creditors whose Pay as You Earn/National Insurance Contributions arising on wages and VAT on sales mean that they continually owe HMRC money.
They are not prepared for the monies due to them to be retained by football clubs and used as working capital and therefore are increasingly willing to seek liquidation to recoup the money that they are owed.
If a club is liquidated then it is expelled from the league, its results are expunged and its players’ contracts revert to the league.
3. They chase the dream of promotion and spend too much on players’ wages
By contrast the league will only suspend membership of a club in administration. It will also allow the transfer of the ‘ share in the league’ that all clubs have to allow them to compete to new owners. This can be done upon the agreement of a Company Voluntary Arrangement by the club with its creditors, thereby facilitating a rescue.
However, a product of administration is that creditors are not paid. The league’s view this as cheating and will apply ’sporting sanctions’; currently a deduction of 10 points in the Football League and nine points in the Premiership.
4. Heavy losses at football clubs
Why are so many clubs in financial difficulty?
It is a simple fact that the vast majority of clubs’ expenditure exceeds their income. They chase the dream of promotion and spend too much on players’ wages.
The current wages to turnover ratio amongst football league clubs is 103 per cent. This is simply not sustainable.
Most clubs are funded by benefactors who routinely spend their own money to make up the shortfall of income over expenditure. It’s when the benefactor ceases to be able to support the club that problems arise.
There is currently no benefactor at Sheffield Wednesday and problems have arisen because there is nobody to finance the losses following their demotion from the Championship. At an estimated £2-3m a year, Wednesday’s losses are significant.
I have been involved in the administration of Leeds United plc, Luton Town Football Club and, most recently, Crystal Palace Football Club.
All had different problems and different solutions – but all suffered from the basic problem of expenditure outstripping income.
5. The bigger the club, the bigger the problem?
Leeds United lived the dream. They competed in the Champions League and acquired players and paid wages commensurate with other top European clubs. When they failed to qualify again for the Champions League the club was unsustainable and was sold by administrators to a local group who had limited experience and, more importantly limited, funds.
When a scheme to sell long term season tickets was not taken up by fans they sold players and ultimately the club to Ken Bates who put the club into administration and promptly bought it back. After a meteoric decline down the divisions the club has now succeeded in getting into the Championship where after a couple years consolidation I expect it to return to the Premiership.
Luton Town suffered greatly from sporting sanctions for both going into administration (again) and irregularities in paying football agents. The sanctions and the embargo on player loans, the resignation of the manager, were amongst other factors, matters that meant the club lost its league status and is currently in the upper reaches of the conference.
6. Premier League failures
By contrast Crystal Palace maintained their membership of the Championship despite the sporting sanctions and the club was sold to a consortium of five local businessmen (who are all fans) and will hopefully prosper and consolidate their position in the Championship.
Could a Premier League club fail? Yes. Despite the increasing and very large revenues in the Premiership many clubs are loss making but still pay ever escalating player wages.
As we recently saw with Liverpool Football Club their failure to qualify for the Champions League jeopardised their future. Sporting failure can mean business Armageddon and the sporting margins are tiny.
Banks are no longer interested in lending football clubs money – it is quite simply toxic at all levels. That is evidenced by Co-op Banks’ willingness to write off £16m out of Sheffield Wednesday’s bank debt of £23m; they simply gave it up as a bad job.
7. Will FIFA’s Financial Fair Play rules help?
Yes, anything that seeks to encourage financial probity in football is to be welcomed. However, what is really needed is an enforceable cap on players’ wages. Try telling Wayne Rooney that…
Who is going to be the first to make such a bold – but essential – step?