FFP

[paul_e]

That 23-25 figure what our spending should look like for me. That's the sort of sustainable approach we should be aiming for because our squad today compared to what we had when Emery took over is far better balanced and has much better depth.

[Percy McCarthy]

The long read:

CFO & Sports Business Advisor | Ex-Man City, City Football Group, Deloitte Sports Business Group | Football Finance | Strategy | Due Diligence | Football Regulatory FFP PSR FSR | Player Trading & Value Creation April 24, 2024

After 14 years of school, a 3 or 4 year degree, a 3 year training contract and 10 to 20 years of experience, you've realised your life-long dream and become a football club CFO.

All finance professionals face similar pressures and face tricky challenges. However, the football regulatory environment that has evolved over the last 15 years, and accelerated post-Covid, has created a complex web of regulations that, while well intentioned, create complications and confusion in Boardrooms around Europe.

Your budget process started three months ago. It’s a project that involves every business unit leader, and their teams, and covers the whole business including football, marketing, partnerships, operations, and corporate services.

You start with your key assumptions:

How successful will the team be on the pitch?
What are the inflationary cost pressures?
What renewals do the partnership team needs to achieve and what new sales are possible?
How much investment does the first team require and which players are likely to leave?
Are there any pricing adjustments for the football season?
How many non-football events are being held in the stadium?
What funds do you have for the capex programme and what work needs doing?

These questions are replicated if your organisation operates a women’s team, or a multi-club network.

At the same time you’re looking at where the current season will finish. You’re looking round corners at what risks might crystallise. Are there any opportunities? You know that each Premier League finishing position is worth £3m in broadcasting distributions and each round of the Champions League typically provides profits of around £12m. They’re the biggies.

You’re aware that you need to tell the Board where the financial results will land. Staff bonuses depend on them. You need to know whether you will comply with UEFA & the Premier League’s financial rules. Livelihoods depend on it.

The Board meeting is a couple of weeks away. It’s only three hours long and one of only four opportunities through the year for the Chief to update the Board. You know they want to talk about squad planning for next season. You do too.

New investment opportunities are proposed. Current business performance evaluated. Your section is critical but compared with which striker the team will buy for next season you're fighting an uphill battle for attention. You feel like the goalkeeper in the team. You’ve done your job well if no-one notices you’re there.

You walk into the room and you’re first to arrive. You normally are. The room is massive. Seats 20, but it’s only for the two of you. It’s currently chilly as the aircon has been running full blast. You turn it off and know it will be unbearably hot within 25 minutes. It’s a trick you use to keep meetings from overrunning.

The Chief comes in. An intimidating aura surrounds them. They're very bright and need to be. You know the topic is going to be confusing.

“Headlines?” they start while focusing on plugging their phone in. It’s only midday but you know that they've already done five hours of calls on it.

“In good shape” you reply. “Trend is positive year on year and cash is strong”.

“Excellent. In the Board meeting I’d like you to cover the forecast for the year and next year’s budget.”

“No problem.”

“And do we need to give a detailed cash update?”

“We do but it can cover it very quickly verbally.” You’re relieved but you’ve done this many times so you know what the Board expect. “But I need to update everyone on the new rules that UEFA and the Premier League have developed.”

“FFP.” They nod. “Good idea, but keep it brief. I’ve got some time now. Update me.”

“Firstly, it’s no longer FFP. UEFA call their rules ‘Club Licensing and Financial Sustainability Regulations’ or FSR and the Premier League ‘Profitability and Sustainability Regulations’ or PSR”.

You can tell you’re already losing your audience. Acronyms that wouldn’t sound out of place during the cold war will do that.

“Ah yes, the Premier League are aligning their rules with UEFA aren’t they?” It’s more of a statement than a question.

“Sort of” you reply. “We need to take a step back.”

“The pandemic caused UEFA to rethink their approach to what was then called FFP. They started a process of simplification. Their old break-even test that allowed clubs to lose €30m over three years – after allowances were made for ‘good spending’ on academies, facilities, and women’s football – have been renamed the Football Earnings Rule. And the allowance has been extended to €60m for all, and up to €90m if you meet other criteria.”

“Gotcha.” Happy they've understood it and can go back to fighting the building queue in their inbox.

“And they created another new test called the Squad Cost Rule.” You continue. “It limits clubs to spending 70% of...”

“Revenues on wages. I know. UEFA have been advocating the 70% test for years.” Interrupting your flow.

“Nope. It’s a very different calculation but confusingly the ratio is the same as the wages to revenue ratio they’ve previously talked about. This new Squad Cost Rule takes everything you spend on players – wages, agent fees, and amortisation – and divides it by your revenues and profit on player sales. This calculation must not be more than 70%.”

“Amortisation? Remind me…”

“Amortisation is the annual charge of signing a player. Say we bought a player for £70m on a 7 year contract, amortisation would be £10m per year. But…”

“Ah yes. I understand this well. What’s the but…?”

“But UEFA have decided that any player signed from 30 June 2022 must be amortised over a maximum of 5 years, so the same player would have an amortisation charge of £14m. This is problematic as accounting standards require us to charge £10m in our statutory accounts but adjust the reporting for UEFA”.

“So two different amortisations?” They're getting visibly irritated. Like you’re making it up. To be fair, it sounds like you are.

“No. Three amortisations.”

“What the fuck are you talking about?”

“The Premier League have copied UEFA’s cap at 5 years but are only applying it from 30 June 2023. Because we renew players’ contracts – the remaining cost is spread over the new contract life – we are going to end up with up to three different amortisation charges for each player.”

“Hmm. Okay, that’s the player cost part. What’s the bottom of the SRC?”

“SCR. It’s total revenues plus the profit on player sales.”

“Income from transfers?”

“No. It’s the profit generated which is sales price less the unamortised cost. So, if we sold a player for £70m, the profit would depend on how much amortisation has been charged. And remember that there are three different amortisations so there are three different profit on player sales.”

“I think I need something stronger than this coffee. Just give me a minute.” They leave to speak to their PA. We're going to need more than the 30 minutes we had allotted.

The break gives you time to reflect. You think you've covered it well so far. But you've only covered the easy bits. The challenging part is to come.

“Where are we up to?” Startles you as they burst back into the room.

“UEFA simplifying things by making one test into two.” You’re happy that someone else is now aware of the challenges you’ve had. It still feels like you’re living in the Truman Show mind.

“Ah, but the Premier League matching these rules is going to help. I’ve been told that they’re keeping the 70% rule for clubs playing in Europe but increasing it to 85% for other clubs.” They're much calmer now they think they understand.

“Yes but…”

“But. Another but?” Interrupting again.

“Yep. UEFA were mindful that if you assess the Squad Cost Rule over a season, they won’t receive those numbers until the October after the season finishes, i.e. in the middle of the Champions League group stage. A club could theoretically breach the rule to qualify for the competition and deprive someone else the spot and it would be too late to do anything. Therefore, UEFA are assessing the Squad Cost Rule over a calendar year so assessments can be made ahead of the season.”

“Do we monitor our calendar year results?” Having them engaged on the topic makes you feel more comfortable.

“No. But we’ll need to start.”

“At least the Premier League aligning will help. They’re using the calendar year too.” They look at you across the table and you lift your eyebrows.

“Nope. We need to assess that rule over a different period. Financial years.”

“So, let me check I’ve got this straight.” Standing up and taking a deep breath. “We used to have one rule that had slightly different thresholds depending on whether UEFA or the Premier League were applying it. We now have two different rules for UEFA, a rule for the Premier League which applies it over a different period, and three different amortisation number for each player?”

“Yep.” You respond. You’ve clearly explained it well.

“You’ll need to tell this to the Board. Can you do it simply?”

“Yes. But the appendices will be doing a lot of heavy lifting. The actual challenge will be trying to explain the headroom and model risks.”

“How so?”

“In the old days any additional revenue, cost saving, or profit on sale would go directly into the company’s profit and loss account which would drive our break-even assessment. Now for the Squad Cost Rule, only player costs, revenues and profit on sales are included which mean that we have to monitor that in addition to the company’s annual results.

“Every £1 of revenue allows us to spend up to 70p more on wages, agent fees, or amortisation. Wages and agent fees are simple as they’re annual costs. But as amortisation is spread over time – let’s say 5 years on average – the £1 allows us to spend up to £3.50 on transfer fees.

“When it comes to player sales, we need to be mindful of the unamortised cost of each player – as we did before – however we need to factor in the player’s wages while we’re assessing the impact of selling each player."

“What do you mean?” They ask.

“Our revenues plus profit on sales are about £500m and our player costs are £350m, so we’re bang on the 70% ratio.

“We are planning to sell the Dutch midfielder for £20m. He has an unamortised cost of £20m with 2 years left on £10m per year contract. If he is not sold we will increase our amortisation by £10m and our wages by £10m moving our ratio to 74%.

“To close that 4 percentage point gap we’d either need to cut player costs by £20m or increase revenues/profit by close to £29m.” You outline as simply as you can.

“Okay, I understand. I think we’ll need you in the room throughout the transfer window.”

“Good. That’s where I can be most helpful. We’re the lucky ones you know?”

“How is this lucky? Who could it possibly be more complicated for?”

“Imagine you’re a League 2 club about to be promoted. They have to comply with a quasi-wages to revenue limit. Next season they’ll be League 1 and have similar regulations but different limits. If they get promoted again, they need to apply the Championship’s regulations for the seasons they spent in League 2 and League 1 as if they had been in the Championship all along. So three sets of Football League regulations to be mindful of.

“They could have a Coventry City style cup run and with a bit more luck qualify for Europe. So, they’d need to be mindful of UEFA’s rules. Even better they could get promoted to the Premier League so they need to monitor those rules too.

“Plus the coming Independent Regulator. That’s six different tests and four regulators for a League 2 club to be mindful of. I’m lucky because I have 25 excellent people supporting me. They’ll have a team of between two and five.” I think I’ve finally lost them.

“Lucky indeed.” They nod. “It’s a good job you’re across this. I’m having lunch. Do you want to come? It’s too hot in here.”

Note that this is a fictional account based on the impact of the changing regulatory landscape for Premier League & Football League clubs. It draws attention to the complexity clubs are facing throughout the football pyramid. These aren't only concerns for clubs that regularly play in UEFA competitions.

About the author
Martyn is a uniquely experienced sports executive and CFO with over 20 years experience in a market leading consultancy and the leading multi-club football organisation.

He has extensive knowledge of & lived experience through:

Multi-club ownership
Football regulatory matters
Buy & sell side club acquisitions
Long range strategic planning, debt & capital raising
Stadia, training ground, and facility enhancements and business planning
Sports marketing & partnerships
Broadcast & media landscape
Player transactions & squad building
Tax planning, agent fees & image rights
Complex multi-company consolidation and financial reporting

[dave.woodhall]

I used to like football.

[tomd2103]

All courtesy of Kieran Maguire

https://x.com/KieranMaguire/status/1887763425725460495

That net spend since 1992 graphic says all you need to know about the achievements of Manchester City and Chelsea.  What is the 'Facility Fee' in the bottom graphic?  Guess it's linked to the number of games shown on TV in one of the columns before?

[Dave]

That's exactly what it is. The overall broadcasting money is split, then there are extra payments per match that is televised.

[Proposition Joe]

All courtesy of Kieran Maguire

https://x.com/KieranMaguire/status/1887763425725460495

That net spend since 1992 graphic says all you need to know about the achievements of Manchester City and Chelsea.  What is the 'Facility Fee' in the bottom graphic?  Guess it's linked to the number of games shown on TV in one of the columns before?

Look at the teams on that graph that have spent less than 1bn since 1992, and look what they have to show for it. It's probably the worst place to be. If you're not on the chart, at least you haven't burned as much money, even if you've won sod all.

[ChicagoLion]

Do we really need to quote the original post when replying?

[tomd2103]

That's exactly what it is. The overall broadcasting money is split, then there are extra payments per match that is televised.

Cheers Dave.  Interesting how that could be open to be manipulated isn't it.  I mean Spurs earnt £5m more than us simply because some people somewhere decided to put them on TV more than us. 

[garyellis]

The Premier League's rules governing sponsorship deals from the period between 2021 and 2024 are "void and unenforceable", a tribunal has ruled.
Last year, an independent arbitration panel found against aspects of the league's Associated Party Transaction regulations (APTs) after a lawsuit instigated by Manchester City.
The rules were formed by the Premier League to prevent clubs from profiting from commercial deals with companies linked to their owners that are deemed above "fair market value".
In November, the Premier League voted through amendments to the rules despite opposition from Newcastle, Nottingham Forest and Aston Villa, as well as City.

[Dante Lavelli]

So what does that all mean?

[garyellis]

So what does that all mean?

Would appear to suit our approach.
This will also put a focus on chief executive Richard Masters, who confirmed the changes in November despite being cautioned against implementing them by City and Aston Villa amongst others.

[Demitri_C]

This will massively  help newcastle  which will in essence  kill the premier league

[VillaTim]

So what does that all mean?

It means Newcastle Arabia will ultimately takeover and dominate (assuming the KSA / PIF continue to own them)

[steamer]

Just read an article on the BBC about Levy.
They show tables relating various ratios, it shows that 96% of our revenue goes on wages .
Out of the top 30 revenue generating clubs, PSG is next at 83%
It does not show the nett value of the spend, but it is a sobering thought and highlights why the need to be in the champions league and generate more money to bring down the %

[Percy McCarthy]

Just read an article on the BBC about Levy.
They show tables relating various ratios, it shows that 96% of our revenue goes on wages .
Out of the top 30 revenue generating clubs, PSG is next at 83%
It does not show the nett value of the spend, but it is a sobering thought and highlights why the need to be in the champions league and generate more money to bring down the %

Not as bad as it seems when player trading is included, plus those are the figures for last year, since when revenue will have increased by a large amount.