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Everton’s financial strategy paying dividends

February 18, 2017

the esk

This article first appeared on The Blue Room on 11th February 2017.

For many fans, trading players for profit seems to be frowned upon, or at least considered a questionable strategy for football clubs to engage in. The idea of being a selling club has long been dismissed by fans as a sign of inherent financial weakness.

However, the harsh reality is that without player trading profits, the economics of football would be very different for most clubs including the largest in the Premier League.

moshiri-kenwright

Comparison of player trading profits and aggregate profit/loss for leading Premier League clubs 2009 to most recent accounts.

Club Player trading profits£ Aggregate profit/ losses (including player trading profits)£
Chelsea 242 million -120 million
Manchester United 137 million 109 million
Manchester City 66 million -555 million
Arsenal 336 million 185 million
Liverpool 111 million -225 million
Tottenham Hotspur 241 million 115 million
Everton 99 million -116 million

 

So as you can see from the above, player trading forms a very important part of even the most successful Premier League clubs’ financial strategy.

The principle sources of income for Premier League football clubs in order of relative importance are broadcasting revenues, commercial revenues and match day income. It is from these three sources that clubs hope to make an operating profit, not only to meet financial regulations but also to be sustainable from a shareholder perspective.

However even when profitable at the operating level, clubs can return a loss through the addition of player amortisation, tax, interest costs and what’s known as exceptional items (one off costs such as management compensation).

Player amortisation is often overlooked by fans, and its worthy of a quick explanation. When a club buys a player, the cost of that player is spread over the length of the contract. It does not appear as a one off cost in the year of the transfer.

So, if a club buys a player for £20 million and offers the player a 4 year contract, in the accounts there’s a charge of £5 million each year in respect of the transfer – this is what is known as player amortisation.

The interesting bit is what happens when the same player is sold. Let’s say that after 2 years the player is sold for £30 million to a rival. When this happens the following occurs (for ease we’ll assume both transfers have happened on the same day – in practice they might not, but then the values are just adjusted on a monthly basis).

At the time of the sale, the player’s book value has fallen from the original £20 million (the purchase price) to just £10 million because in accounting terms he’s had two years of depreciation (amortisation). Thus the profit to the club is £20 million (£30m-£10m) and will appear in the accounts as such.

This is really important, for clubs in two separate circumstances – if a club is loss making either at the operating level or because of high amortisation costs or exceptional items, the player trading gain assists in covering those losses and equally if a team is trying to expand quicker than its non-broadcasting revenues and profits permit player trading can meet the shortfall.

The club that perhaps more than any other that has made use of this strategy is Chelsea who typically have covered losses beyond what is allowed by regulators through player trading profits, although it should be noted that Everton have made use of this strategy also.

There’s essentially two sources of player trading profits, the established player who becomes a genuine superstar – Suarez or Gareth Bale for example who produce a huge one-off profit when sold to Europe’s largest clubs, or a more reliable and thought out strategy that involves developing players either youngsters placed out on loan, or squad players who perhaps don’t meet the standards for regular first XI football in the biggest clubs but can do a job lower down the league or in the Championship for example.

For this to become a reliable form of income though it requires considerable thought and investment not only in non-first team players, but in scouting, recruitment and training staff.

Strategy at Everton
With the recruitment of Steve Walsh, and additions of Laurence Stewart and Martyn Glover, I believe this is a deliberate strategy by Everton, not only to develop a small number of players who may play first XI football for Everton, but to develop players who can be sold successfully to other clubs at a profit. The first real evidence of that has been seen this recent transfer window with successful sales (or future sales) of several non-core players and the loaning out of a large group of youngsters, not all of which will make the grade at Everton but may be sold for profit at a later date.

With the likelihood of Everton’s wage bill increasing significantly in the next few windows whilst non-broadcasting revenues remain broadly flat, player trading profits represent the only compliant manner of increasing wages. Additionally, those profits will also meet the losses associated with higher player amortisation costs as the value of our squad rises. However, given the upward curve of our profile and expectations that no longer means selling one of our star players to satisfy this requirement, it can be achieved by selling non-core and younger developing players.

This is a significant development and strategy for the club until such a time as the new stadium is built and out commercial revenues start comparing more favourably than currently with the teams above us.

In order to keep the likes of Lukaku and Barkley, plus future talent like Davies and Lookman, and recruit further established players we’re going to see a lot of transfer activity in the levels below and on the edges of the first team – the activity will include the extended lending of non-core players and the sale at the appropriate time.

Fortunately, (or perhaps by design) we have a manager only interested in playing the best at his disposal, and I for one, am convinced that part of the attraction of having Koeman as manager at Everton was his ruthlessness and decisiveness in sorting players in terms of those he wants to keep and those the wishes to let go. The result is not only a squad that knows it must be at its best to stay but a strategy that helps generate profits to cover future investment in an improved squad.

At the end of most windows there’s usually an aggregate figure banded about, shown as a sign of the excessive amounts of money in football today. Whilst it’s true that there’s more money than ever before, it’s also a fact that there has to be transfer activity, not only for squad development and refreshment purposes but for very real financial reasons – even the clubs with huge revenues need to sell players constantly to assist their regulatory and fiduciary obligations. The downside of course, is that player trading is an expensive form of profit making – a lot of money leaves the game through agent and player fees and legal costs for example, but that’s another discussion.

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