Everton finances

Why having a DoF, sitting on the Everton board, has never been so important as now

At the last General Meeting of Everton shareholders at the beginning of January, Professor Tom Cannon objected to the inclusion of Marcel Brands on the Everton Board, claiming it was “inappropriate for the Director of Football to be on the board”.

Marcel Brands

Well, with the greatest of respect to the Professor, the requirement for a DoF to sit on Everton’s board has never been greater. I say that as a reflection of the current level of expertise that exists on the board and particularly, the financial circumstances Everton find themselves in, combined with the regulatory environment in which we operate.

Regulated business

Whether we like it or not, football is a regulated business.  Domestically, clubs in the top division are regulated by the Premier League and for those qualifying for European competitions by UEFA. Both sets of regulations aim to set out, in addition to other aspects of how clubs are to be run, the financial limits in which clubs can operate.

Given the importance of financial compliance and the impact it ought to have on a club’s strategy, the financial performance should not be just the concern of shareholders (owners) and directors but also fans as this determines how competitive a club can be and the scope for challenging those above them.

Originally designed to limit losses, debt and in the case of the Premier League, being an effective wage cap, in recent years, the financial regulations are viewed by those challenging and those looking from the outside objectively, as a means of keeping those at the top of the game at the top and making the prospects of intrusion at the winners’ table much more difficult for would-be challengers.

As such, commercial performance and the trading of player assets have never been so important as now. This is particularly relevant as the focus of the regulators is on profitability much more so than affordability (affordability being viewed as balance sheet strength and the depth of owners’ pockets).

The importance of the P&L

One of the unintended (we assume) consequences of the current regulatory position is that because new capital in its traditional form of equity or debt, has a limited effect on the P&L account and is less valuable than income from a regulatory point of view, new capital is rarely invested in challengers other than at the time of a change of ownership and then only by extremely wealthy individuals (where perhaps return on equity is less important than other factors) or State owned entities for whom the levels of investment required are little more than pocket change, particularly when the soft power of such investment (sports washing) is taken into account.

Established investors now focus on injecting capital in the form of income, from connected parties, constantly challenging fair value market tests and indeed the spirit of what might be considered commercially viable sponsorship or commercial arrangements.

Everton, until very recently, due to the generosity provided by Farhad Moshiri have been an exception. Yet, as this article argues, Everton only had a very narrow window in which capital alone can be invested. Indeed, it is fair to say that 47 months after Moshiri made a 49.9% acquisition that the capital injection window is now probably firmly closed – at least in respect of resourcing the football squad. It should be noted however that capital investment in tangible assets such as the Bramley-Moore stadium can continue.

As a result, in the desperate search for income to cover losses arising from the expense of heavy (and largely unsuccessful) investment in players and wages, we like other clubs, resort to innovative and potentially challenge-able solutions such as the USM option payment for future naming rights.

So what does this have to do with a director of football?

Football clubs have three sources of income namely broadcasting/prize monies, commercial income (including sponsorships) and match day income. In the case of Everton with the exception of commercial income growth and an unlikely immediate return to European football or further “innovative” income boosts, income will remain fairly stable. This at a time when income is currently significantly below the costs of running the club and squad in its current guise.

The playing squad appear in the accounts as intangible assets, ie as a balance sheet item. However the trading of players impact the P&L account – the area that the regulators focus on, and present Everton with its current regulatory issues.

A fundamental part of the director of football’s role is to manage the squad not only in terms of first team requirements but the impact it has on the club’s financial position and therefore its ability to make necessary squad changes in a timely manner.

This is not a short term reactionary measure, it has to be a strategy developed over a number of years. Ideally the strategy should include the following elements: meeting the immediate needs of the 1st team manager, meeting the regulatory requirements in terms of cost relative to income, and most importantly long term, building a reserve of value and future profits in the squad.

The final point deserves more consideration. Essentially it means developing players from within the academy and junior teams that have a market value way beyond their development cost, and similarly for players bought from other clubs, acquiring players who are most likely to increase in value due to their age, their future development individually and the achievements of the squad as a whole going forwards.

Having a reserve of future value or profit if a player is traded is extremely important and advantageous. It provides much greater flexibility and ability to manoeuvre in future transfer windows. The greater the increase in value the less reliant a club is on having to sell their best players, nor are they likely to have an issue such as Everton in having significant deadwood to carry.

Unfortunately, Everton as a result of appalling player acquisitions in the last four years and a failure to develop sufficient genuine future Premier League players from the academy and U-23s, have little scope in this area.

“Value Added”

Using raw data provided by transfermarkt it is possible to estimate the value added to a squad over a significant period by looking at net spend and the change of  market value over a period of time. If the market value of the squad has increased significantly above the net spend then the objective has been achieved. This calculation does not fully reflect the inflationary environment within football but it demonstrates the clubs that have done well and thus have greater flexibility with those that haven’t.

Unsurprising Spurs have been most successful, Liverpool have traded and recruited well in recent years. Arsenal reflects their caution and relatively poor recruitment recently. The two Manchester clubs show no value creation, and in particular for United, some very poor recent recruitment and despite their hugely positive cash flow due to their commercial successes why player trading is much more difficult now than previously.

From 2010 to present day:

£ millions Net Spend Increase in market value of squad Value created
Tottenham Hotspur             90.17                                          660.22                570.05
Liverpool           264.00                                          821.28                556.75
Arsenal           334.60                                          415.22                   80.62
Everton           218.10                                          271.12                   53.02
Chelsea           406.72                                          457.62                   50.90
Manchester City       1,069.24                                          931.59 –              137.65
Manchester United           762.66                                          712.90 –              376.42

When one considers the potential value in players such as Richarlison, Bernard, Calvert-Lewin, Holgate and Davies for example, it shows how many poor player purchases we have made in recent years, purchases of players who are likely worth a fraction of their initial cost (and in several cases with a market value considerably below their book value).

Thus, a squad with so few players that offer value to Everton or would be purchasers, with the only “valuable” players  being the ones we wish to retain to build a competitive team, and with no wriggle room as explained in previous articles it is no surprise that Brands’ ability to deal in this window is extremely limited.

Our situation demands patience, something which I am sure Ancelotti understood before he took the position. It also requires even greater football input to the board by Marcel Brands, not less as suggested by the eminent Professor!