In this the second part of the Everton ownership and leadership series, I wanted to focus on our finances but in a slightly different way than normal. I want to try and show why we have not developed to the extent the investment made in us might warrant.
I wanted to try and look at the finances through an investor’s eyes. An investor who buys half the asset initially then injects significant sums along the way before ultimately owning more than 90% of the club.
When an investor buys a business what is it he or she is buying? They are buying the assets and liabilities of the business. In non-accounting terms, the assets are the means of generating income through the provision of products and services and the liabilities are the existing, previous and sometimes future outstanding costs in creating those products or services.
Buying a business in the condition Everton were in 2015/16 it was clear that this was a business starved of capital (in absolute terms and certainly relative to its competitors) over a substantial period. As a result of the lack of investment by the previous owners this was a development opportunity – arguably the last great development opportunity of a former giant in the Premier League. It was deficient in terms of capital – £54 million in debt, a negative balance sheet, poor facilities, but also deficient in human capital on and off the pitch.
In order to make good the development opportunity, investment in the following was required.
Improve the balance sheet – reduce debt and provide working capital
Fixed assets – to realise the maximum commercial and shareholder value a move to a new stadium was a must. Further investment in training and other ancillary services likely to be essential too.
Intangible assets – the playing squad required significant investment in order to be more successful on the pitch, to generate more revenue from higher performance attainment and regular European qualification.
Football management – through a repositioning of the club, more ambitious targets, the availability of more funds and the likely recruitment of better players, investment in up-grading the football management would be viewed as essential.
To build a better academy, to create a greenhouse from which fledgling talent could be developed to first team level or sold to other clubs as a source of revenue and provide evidence of our success in developing talent thereby making recruitment for better young talent easier.
Invest in business management. Almost every new owner or investor takes the view that new direction and management is required, particularly within a development opportunity.
What has Moshiri achieved?
Most financial analysis would start with the profit and loss account. Indeed football’s financial regulation, UEFA’s Financial Fair Play and the Premier League’s Profitability and Sustainability rules look at the relationship between spending and legitimate income.
For completeness, the record to date is (including my own forecast for year ending June 2021). There are mitigating factors which we will return to.
|£’000s 2021* forecast||31-May-16||31-May-17||31-May-18||30-Jun-19||30-Jun-20||30-Jun-21|
|Profit or loss||– 24,348||30,660||– 13,021||– 111,868||– 139,800||– 86,000|
Moshiri improved the club’s balance sheet by a significant injection of cash, initially as loans but now, more recently, being converted into equity. In total, Moshiri has invested a minimum of £450 million (excluding payments relating to Bramley-Moore for current construction work) to meet losses, pay off initial debt and costs of investment in fixed and intangible assets (players).
As a result of his improving the balance sheet and committing to fund a significant proportion of the cost of Bramley Moore, he has enabled the move to a new stadium to become a reality. The caveat might be that the poor footballing performance, poor player and management selections, a later than originally intended start to the build and inflationary costs in construction impacts the development, increases the cost of funding, requires more capital from the owner or a combination of the three.
Financially (including estimates for 2021) here’s an analysis of the revenue we have generated including 2015/16 the year Moshiri arrived, the cost of generating that revenue and how it has been funded:
Costs of funding the above:
How the losses have been funded:
The increase in funding over and beyond the losses strengthen the balance sheet. Player trading significantly reduces the gap between expenditure and income. However it was one of Moshiri’s first claims on arriving at the club that he wished to retain the best talent.
In mitigation to the scale of losses, Covid-19 would be unlikely to be in anyone’s contingency plan and impacted the business significantly, resulting by my estimate aggregated costs of more than £76 million.
The final four elements of an investor’s likely strategy (invest in players, invest in team management including director of football, invest in academy staff, invest in business management) are all dependent on your and your leadership team’s ability to recruit successfully.
The greatest single weakness of Moshiri’s tenure is his ability to recruit successfully. The failure has been twofold. One is the areas in which recruitment needs to be made (both on and off the pitch) and then most obviously the selections made.
The result of poor selection is obvious. It has two impacts which become apparent over time. Poor selection leads to poor performance. Poor performance reduces revenue. Correcting poor recruitment decisions carries large costs financially and reputationally, those costs increase with each successive iteration. At the very worst poor recruitment just creates enormous liabilities which then reduce your ability to make corrections. This is the position we find ourselves in today. Hemmed in by regulation and previous losses, combined with being unable to unwind existing player liabilities easily and in extremely tough post Covid market conditions.
Why has it been executed so badly?
The mystery is why this element of the investor’s role has been executed so badly by Moshiri. Every element of the recruitment and retention process has been flawed. Football ultimately is a people’s business. You succeed or fail on the quality of your recruitment and retention. Five permanent managers, two directors of football, flawed director recruitment like Harris and the failure to significantly upgrade the board, executive management and academy leadership are evidence of this.
Whilst there has been no hesitation to fire under-performing managers and staff on the first team footballing side, there has been an entirely different approach elsewhere in the business with key board and executive positions remaining unchanged or where change has occurred, resulted with the appointment of an internal candidate or the relatively swift removal of an external candidate in Harris.
Moshiri has financial elegance, and to be fair his methods of providing capital, conversion to equity and his timings of such have been exemplary, he knows how to structure his affairs. The relationship with USM is a classic example of how to exploit a “friendly” partner and shouldn’t be overlooked.
But recruitment of staff, and indeed recruitment of partners is an enormous problem for the club. Until Moshiri starts making better recruitment decisions at the top of the business then we can’t realistically expect much to change as a club.
Competition is increasing, not decreasing
Worryingly, this corporate inertia is set against a background of other clubs attracting new investors and new boardroom talent. There is a significant shift in the ownership model and dynamics with change of ownership allowing greater competition, a new wave of capital and ideas to enter Premier League boardrooms. In the last couple of years, Manchester City have brought new investors in, Leeds United, Crystal Palace and Wolverhampton Wanderers have welcomed minority stakes. West Ham United only this week introduced a very successful investor and entrepreneur to their board , having bought a 27% stake. Aston Villa, although possibly caught in a situation similar to ourselves, have significant new investors and of course, there is the unknown potential of the Saudi fuelled Newcastle United. Clubs such Brighton & Hove Albion and Brentford have a modern, fresh, analytical style of managing their clubs – a style which is producing results significantly beyond the historic levels those clubs operated at.
All of this on top of the established six enjoying massive financial advantages through superior commercial performance but most significantly year in year European revenues.
More investment in capital and management required
If we consider Everton’s challenges as a result of the last near six years to be football development, balancing the books, i.e. getting back to a sustainable break even or better position through a more highly performing football team and the funding of the stadium, it’s clear that Moshiri from the investor’s perspective has to understand that relying on how he has managed this so far and who he chooses to execute on his behalf is not going to produce different results (unless one is relying on luck).
As a matter of priority he has to sort his recruitment strategy out, to bring the talent the business so desperately needs.
The financial results displayed above, the performance of the footballing operations, the performance of the commercial operations demonstrate the need for personnel change is absolute. In addition, in a post Covid world, our competitors are recapitalising and recruiting new talent to their boardrooms.
I spoke about how we needed changes from a governance perspective in part I, we need changes in recruitment and personnel at board and executive levels if we want to be competitive once more. The costs (competitively and financially) of getting recruitment wrong are plain to see and are wholly unsustainable.
From an investment perspective the challenges today are even greater than 2015/16, competition is greater and our ability to redevelop a second time is reduced by the poor execution at the first attempt.
Next time we’ll look at how the Director of Football model has worked or not to date and what can improve it?