Yes, it really is the seventh summer transfer window of Farhad Moshiri’s tenure at Everton. Whether he remains to see an eighth is, of course, subject to much speculation as briefings and rumours of takeover prospects circulate in the media.

After Moshiri’s introduction to Goodison Park against Chelsea in the FA Cup 6th Round in March 2016, amid the euphoria of a Lukaku inspired victory, Moshiri famously said (relating to funding Everton) “I give them whatever I have.”

The question today is whether he has reached the limit of his funding. Of course, some factors could never have been reasonably predicted, Covid, the Russian invasion of Ukraine and the impact on his own finances as a result, plus the withdrawal of Everton’s largest financial partner USM would never have featured in any scenario planning.

Nevertheless, the appalling management of the club in the six and a half years, certainly from a regulatory point of view, but also possibly from an affordability or desire perspective must feature strongly in any analysis of where we are financially.

The growth in direct costs relating to player acquisitions and player wages can be seen in these two lines from the accounts:

*projected figures for 2021/22

The business model of the biggest clubs

The largest, most successful Premier League clubs run a different business model to the fourteen competing clubs.

Outside the top six, revenue streams are viewed as Premier League broadcasting revenues, matchday income and commercial income. Whilst the Premier League broadcasting revenues include a significant amount of revenue generated from overseas broadcasters they are negotiated collectively, not by the clubs themselves. Thus in the main, outside the top six, clubs focus on generating revenues domestically (even if many shirt sponsors, particularly gambling companies, operate overseas).

The top six have an entirely different model. Yes, they have the same income sources as the other clubs. But the key differentiator is that they have other income sources as well. In a sense they are multi-franchise operations having Premier League generated revenues, European football generated revenues and international sponsor & commercial arrangements, international geographically, by sector and company.

The big six essentially operate a predominantly B2B (business to business) business model – their commercial success comes from wider exposure, but also a greater understanding of who their real customers are (hint, it’s not the ordinary fans, it is their corporate attendees and sponsorship partners).

Everton, through the funds provided by Moshiri and in the early days player sales, built a cost base which required the business model of the big six – ie required regular European football and the exposure that brings.

As a result of the failure to qualify for European competition, and the below budget revenues from inferior on field performance contributes heavily to Everton’s financial difficulties.

The next table shows how personnel costs have enormously outstripped increase in revenues

*projected figures for 2021/22

Poor recruitment, resulting player value writedowns, exceptional costs associated with manager and coaching squad changes all add to the accumulated losses.

It is fair to say that Covid has obviously contributed to Everton’s losses with crystalised losses relating to Covid standing at £82.1 million for the two years to 30 June 2021.

Equally, it should be recognised that up to the year ending June 2021, the costs incurred with Bramley-Moore were expensed to the Profit & Loss account.

Regardless, the figures do not make good reading.

*projected figures for 2021/22

So what does all this mean for profitability and sustainability rules, and our ability to spend?

For the current financial year (ending 30 June 2022) the years under scrutiny are 2021/22 (T), the mean (average) of 2020/21 & 2019/20 (T-1 & T-2) and the year 2018/19 (T-3).

The maximum permitted losses over this period is £105 million. There are some permitted allowances, including tax, expenditure on womens, youth and community football plus exceptionally losses directly related to Covid.

*estimates – assuming 1 player sold before 30 June 2022

Because the accounts do not itemise expenditure on women’s, youth and community expenditure it’s impossible to give the figure presented to the Premier League, but the £15 million per year is a reasonable estimate.

The accounts show crystalised losses of £81.2 million directly related to Covid. The club however have reported uncrystalised losses of £175 million with the potential to reach £250 million.

Using the lower figure, and deducting the excess over and above the crystalised £81.2 million, it is possible to see that the club squeezes in under the £105 million limit for 2021/22. It also explains the lack of transfer activity last summer and the sale of Digne in the January window.

Projecting into 2022/23

It’s likely that any transfer activity this summer window will be from 1st July.

Several matters to consider going into 2022/23. Firstly, the 2018/19 financial results drop out of the equation. If Everton’s losses for 2022/23 are less than £112 million then our position improves.

What are the factors that will change the P&L account in 2022/23?

• The release of Sigurdsson, Tosun and Delph (among others) significantly reduce the wage and amortisation costs. A reasonable estimate would be a £30 million saving
• The sale of Richarlison or Calvert-Lewin will generate significant profits. Calvert-Lewin has virtually no book value, so if sold his transfer value shows almost entirely as profit. Richarlison has a book value of approximately £14 million, so whatever transfer fee minus his book value shows as profit in the forthcoming financial year
• USM related revenues not replaced this forthcoming year will reduce turnover. USM’s contribution is estimated at £20 million per annum
• Player purchases will add to the wage bill and amoritsation costs

Our net profitability and sustainability position improves significantly this coming year. From a calculated position currently of -£194 million (before uncrystalised losses) I estimate that the net position (subject to player sales/purchases above) falls below the £105 million figure (before uncrystalised losses) by a significant amount, perhaps to around £90 million.

That gives scope for some transfer activity including player purchases this summer.

Affordability

Can Everton afford to purchase players? Moshiri has continued his commitment to funding losses and the construction costs of Bramley-Moore.

Realistically though, given he is looking to dispose of his majority position (either wholly or at least significantly) will he continue that commitment? First and foremost any further capital injections must go to the construction of the stadium. Secondly any continued negative cash flow and possible debt reduction would be next to be funded – remember we had £130 million of external debt as of June 2021.

Some funds would be available from player sales, but that will depend on who is sold and at what price.

Despite the improvement in our regulatory position, I believe we can only buy as a result of significant sales – either one or both of our prize assets.

The takeover?

As suggested by the improvement in our regulatory positition an incoming owner would have some limited room to inject capital (over and above what is needed for Bramley-Moore) for player purchases – but that is limited and would be likely to be subject to Premier League agreement.

Alternatively a new investor could take up the role designated previously for USM and fund the club through sponsorship revenue rather than capital injections.

The sponsorship revenues could replace the previous USM sponsorship of Finch Farm, training kits, womens and perimeter advertising. It could also include the naming rights of Bramley-Moore.

An adequately funded investor (by adequate I mean having very deep pockets & owning brands to be used for sponsorship) could re-inflate the club and provide significant funding through revenue not capital.

Conclusion

If this seems an unusually up-beat assessment of Everton’s potential position, remember it is largely predicated on previous poor results falling out of the calculations, it requires the sale of our major playing assets and it requires the takeover of the club by a significantly well funded individual or group that not only has the financial means but has the brand purchasing capacity to fund Everton’s recruitment programme through sponsorship revenues (as well as buying Moshiri out, funding the stadium and paying off debt).

Moshiri appears to have given us all he had. Incredibly, it might just be that we can win the lottery twice. However to save us repeating Viv Nicholson-like mistakes for a second time, any new owner must have complete control, a clear strategy, a commitment to removing those responsible for the appalling position we find ourselves, a brand new board and executive team, trust in the new football operations, proper fan engagement and a commitment to invest in people as well as the stadium to bring about success.

Anything less, and we will not compete.