For some time there has been a recognition that Everton have had to consider carefully the Premier League Profit & Sustainability rules (usually incorrectly referred to as FFP), particularly the maximum permitted losses of £105 million over a rolling three year period.

I suspect because there was little prospect towards the latter days of Silva’s time in charge, of immediate European qualification, little attention was placed upon how Everton’s financial performance might stack up against UEFA’s very different Financial Fair Play rules.

However, given those prospects have improved somewhat under Ancelotti, it’s worth examining how UEFA rules may impact Everton as against just the Premier League regulations. It’s also worth looking at the importance of European qualification.

I’ll begin with UEFA’s reasoning for Financial Fair Play to exist (for the purposes of this I will ignore the more political reasons relating to advantaging the largest European clubs)

Financial Fair Play (FFP) exists with two primary objectives in mind:

• To create an obligation for clubs to “balance the books” over a period of time
• To create an obligation for clubs to meet all transfer, employee and social and tax authorities’ payment commitments

Clearly for Everton it is the former rather than the latter that gives rise to concern.

FFP is monitored by a separate body to UEFA, the Club Financial Control Body (CFCB). The CFCB consists of two chambers, one which is investigatory and the other adjudicatory.

The CFCB has wide ranging powers, but importantly can operate with a large degree of discretion in executing such.

Investigatory powers

The main consideration for Everton is the “Break even requirement” (Article 58).

In the broadest of terms, clubs are expected to break even over a 3 year monitoring period. There is a permitted “acceptable deviation” of €5 million. However, that can increase to €30 million if covered entirely by equity participants (shareholders) and/or other related parties.

The monitoring period differs depending upon the financial performance of the club. It includes historical data and projections for future performance. The standard monitoring period is the year in which the club is competing in UEFA competition (assuming we qualify next season that would be 2020/2021) know as “T”; the previous year (this season 2019/2020) “T-1” and the preceding year (2018/19 – the year of the latest accounts) known as “T-2”.

Thus in the first instance the CFCB would look at last year, this year, and next year in checking for compliance or breach of FFP.

If a breach was apparent or likely then CFCB move the 3 year monitoring period a year forward – in Everton’s case they would look at T-1 (2019/20), T (2020/201) T+1 (2021/22).

For completeness, there can be a breach based on six different criteria – (i) going concern (ii) negative equity (iii) break even result (iv) unsustainable debt for T-1 (v) unsustainable debt for T and (vi) player transfer balances outstanding greater than €100 million.

For Everton, criteria (iii) would be the likely concern.

Break even

The break even figure is calculated by looking at the balance between income and expenditure.

Income for these purposes include gate receipts, sponsorship/advertising, broadcast rights, commercial activities, UEFA revenue, other operating income and finally player trading profits.

The notable exceptions in terms of income are profits through the disposal of fixed assets – for example the sale of a club’s stadium, and any income transactions with related parties that are deemed to be above fair value. The club, in the first instance, determines that fair value.

Expenses include wages, other operating costs, amortisation costs, non-stadium finance costs and dividend payments.

Several items are not included in the expenses including youth development costs, community development costs, women’s football activities and finally the costs which are directly attributable to stadium construction or modification and or leasehold improvements.

Discretion

As mentioned earlier, the CFCB has considerable discretion when examining the potential for a breach. Among other considerations, they can look at the quantum of losses (clearly the greater the losses the greater the implications in a negative sense) but also the trend (reducing losses would be viewed more positively).

The CFCB can also request a long term business plan which would look at the projected financial performance and future financing for up to T+4 – in Everton’s case, that would be projecting forward to 2024/2025.

Additionally for example, factors such as the size of the playing squad can be a factor. Marcel Brands’ optimal 23 member squad falls within the 25 member limit within the rules.

Within the investigatory chamber, the chief investigator can dismiss the case, agree with the defendant a settlement, impose disciplinary measures limited to a warning, a reprimand, issue a fine limited to €200,000 or refer the case to the adjudicatory chamber.

The settlement can include withholding UEFA prize monies, restrict registration of new players in UEFA competitions and/or place a limit on the number of players or the aggregate wages of the players registered for UEFA competitions.

Adjudicatory chamber

The adjudicatory chamber receives evidence from the chief investigator and asks initially for a written submission from the defendant. At the discretion of the Chair or at the request of the defendant an oral hearing may be arranged.

Once all the evidence is presented and all deliberations are heard the adjudicatory chamber reaches a decision by simple majority, subject to a quorum of three.

The disciplinary measures consist of the following:

The chamber has the right to suspend the disciplinary actions subject to the conditions they place on the defendant and compliance thereof.

The defendant has the right of appeal. In this event, the decision can only be appealed before the Court of Arbitration for Sport (CAS).

So, how likely are Everton to be in breach of the break even requirement?

Assuming Everton were to qualify for the Europa League, then the period that would be subject to investigation would be this current financial year (2019/2020) and the following two years 2020/2021 and 2021/2022.

It’s obviously an imprecise science to project accurately what future profitability will be when a key component will be player trading.

However, based on what is known about likely turnover, costs and player trading so far this year (2019/20), (turnover £220 million, costs £340 million) plus player trading profit (est £60 million) shows a loss of £60 million before adjusting for youth, community, women’s and any financing costs and any no-capitalised costs also associated with Bramley-Moore.

It is difficult to see in this year, for the purposes of FFP calculations, a loss smaller than £20 million (€23 million) for 2019/20.

In the following two years income would rise due to participation in Europe (assuming qualification), but a sufficient reduction in expenses is unlikely to see the club complying with the break-even requirement under the FFP regulations, without a significant contribution from player trading (as is the case for this year 2019/20) but also that being repeated each year.

In the absence of a huge and (less than obvious) increase in income, whatever losses the business makes over the next three years, and they seem inevitable, the shortfall will have to be made up in player trading profits.

Both Ancelotti and Brands have a significant task ahead of them, namely to reduce the squad size, improve the quality of the squad, keep cost increases on wages and amortisation at a minimum whilst selling sufficiently valuable players to meet the projected calculated losses.

It might be that Everton can trade on the discretion built into Financial Fair Play to present a 4 or 5 year business plan that satisfies the CFCB. Perversely, whilst it’s obvious that we need European football to advance as a club, in qualifying for European football we make the financial constraints in which we find ourselves even tighter.

Winning trophies & success in Europe would help

There is, of course, another solution and that’s to progress further in the Europa League – finalists can budget for £35-40 million in revenue. Even better is qualification for Champions League. Qualification at Group stages would solve our immediate compliance issues.

So perhaps, whilst we must plan financially for not qualifying for such, the easier way of solving our problems is to become much more successful much more quickly than planned.

At least with Ancelotti on board, we have some semblance of hope on that count.