Professional clubs, particularly those at the top, have increased their revenue at an astonishing rate. In June 2014 Deloitte announced that Premiership club revenues had broken the 3bn barrier, a doubling over a period of just seven years. The trend in top line growth is only likely to continue, after the latest deal for Premiership TV rights announced earlier this year saw a 71 per cent increase in the amount paid.
However, the large sums flowing into the football sector are no guarantee of financial stability. Many professional clubs operate on a loss-making basis which few normal commercial businesses would regard as sustainable, and it seems like every season brings a new tale of a club going to the wall financially. The sad tale of lower league Hereford United, which was wound up at the end of 2014, is a recent example. Even a club like Manchester United, one of the biggest financial players, is heavily burdened by debt and recorded a loss in the year to 30 June 2013 (before its failure to qualify for the lucrative Champions League).
This article considers some of the unusual characteristics of football clubs as commercial enterprises, in contrast with the more familiar operations of businesses outside the game.
Normally a company board of directors will have a fairly clear understanding that their goal is to maximise value for shareholders, although there may be disagreements over how best to achieve this. In a football club, however, the equation is not as straightforward at least as far as supporters are concerned. Whilst fans may have little or no corporate decision-making power, they are vocal. A board which runs a profitable business but with no on-field success is likely to be subjected to far greater fan criticism than one which takes a company to the brink of administration by overspending, but delivers promotion.
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Shareholders are in a similar position. There is a lingering perception that it is inappropriate for owners to generate revenue from their investment in a club, and that it should be run in a manner similar to a not-for-profit organisation.
Perhaps strangely given its reputation, football is, to a degree, a regulated industry. As Leeds United (whose owner Massimo Cellino was recently disqualified by the Football League) have found, there is not an unfettered ability to become an owner or director of an English professional club. There is also a danger of taking on too much debt in a bid to buy success. Although negotiations are ongoing, if QPR are relegated from the Premiership this year they could be expelled from the Football League altogether for breach of the Financial Fair Play rules.
Although football clubs are generally viewed as part of traditional English culture, they are increasingly seen as trophy assets by overseas investors. This is not just at the high end of the Premiership either. In recent years, Leeds United, Watford, and Leyton Orient have all been taken over by Italian acquirers. In a similar way to the London property market, the influx of foreign capital and the perceived desirability of a class of asset drives prices up.
One of the most valuable assets a football club has is its player registrations. However, unlike capital assets in other businesses, the value of these can shift dramatically in a relatively short period of time, based on form, injury etc. A skilful negotiator can also dramatically increase their value in transfer negotiations.
It is also perhaps surprising that, given the importance of these assets, in many cases contractual arrangements between club and player will be relatively light. In order to get contracts registered with the Football League or Premiership, they have to comply with certain standard requirements. Therefore, normal practice is to take the relevant standard form meeting these requirements, and adjust it to deal with points including salary, appearance fees, relegation release clauses etc.
Particularly in the Football League, many player contracts are very short compared to what executive level employees on similar money at large scale corporates would receive, and certainly weighted more favourably for the employee. It is hard to imagine a restrictive covenant ever making its way into a professional footballers contract.
David Webster is a partner at Russell-Cooke.