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Bobby McMahon

Bobby McMahon

You can see me on Soccer Central most Mondays and Thursdays on Rogers Sportsnet in Canada. I write a regular column for Forbes.com and Soccerly.com and frequently guest on various podcasts and radio shows.


TANGENTS

Financial Reporting A Black Hole For Many

Written by on February 3, 2012 | 13 Comments »
Posted in Chelsea, Money Game

Earlier this week the BBC ran a story announcing Chelsea’s financial results for the last financial year.

The story pretty much towed the party line with a nod to financial fair-play and it noted that financial losses for the period had shrunk from $113M last season to $108M this term. A record turnover of $356M seemed to be a big deal for Chelsea and it was given some prominence in the BBC article.

It strikes me that a record turnover combined with a loss of $108M is a bit like celebrating because your team has set a record for goals scored in a season while  ignoring the fact that for every three goals scored by your bunch they also allowed four.

There again a supporter who is not up on the intricacies of Financial Fair Play might be easy lulled into a feeling that things are not really that bad. The reason? Well the Beeb article tells us that  “the club’s accounts to June last year improved despite spending £50m to buy Fernando Torres from Liverpool.” (£50m = $80M).

The reasoning might go something like this. There is a loss of $108m but Chelsea spent $80M on Torres so if the club hadn’t bought Torres then the loss would have been only $28M – not bad really when you consider it was a loss of $113M a year ago.

Sounds good except it isn’t true. When paying a transfer fee the amount paid is spread over the length of the contract.

Torres was reputed to have signed a 5 and a half-year contract last January. Chelsea’s financial year is to June 30. What it means is that rather than an $80M Torres-hit being taken in the 2011 financials (as the article infers) the hit was more like $8M or 10% of the fee based on around 10% of his contract term being attributable to the last financial year.

What’s more the Torres transfer fee will impact the financial results for the next five seasons at a rate of around $14M annually or until the player’s contract is renegotiated, he is sold or he departs.

It was down to Chairman Bruce Buck to address the Financial Fair Play implications of the financial results. “The club is focused on complying with the requirements of Uefa’s financial fair play regulations while maintaining its ability to challenge for major trophies,” he said.  “We would expect this to be reflected in our results for the current financial year.”

Ah, next year. It has become the standard response for clubs recording unsustainable losses. The problem, of course is that when next year comes the overall financial position is not much different than the year before.

How Chelsea can achieve a record turnover, spend money that is 30% greater than they generated and tell everyone that next year will be better and seemingly get away with it without being laughed at is one of the mysteries of our time.

One year, next year will come and there will be no dodging the reality of Financial Fair Play anymore.

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13 responses to “Financial Reporting A Black Hole For Many”

  1. SF ian says:

    Except, of course, for the sneaking suspicion that clever lawyers will discover a sneaky way get around the Fair Play rules. Look at Man City’s stadium deal. Apparently that’s totally above board, and we all know that Uefa don’t really have the cojones to challenge that too strongly. how long until we see oil companies paying preposterous amounts to sponsor Chelsea, PSG, etc…

  2. Rob says:

    Yeah I was thinking the same thing and was always under the impression that a transfer fee was spread out over the course of a few years or contract. So I wasn’t really getting the optimism coming from Chelsea.

    With that said, I’m not sure I really see Uefa enforcing FFP. Just don’t see them wanting to lose guys like Abramovich…

  3. Ed Gomes says:

    Financial Fair Play is just one of those things that sounds good, yet it’s foolish to do if it’s practiced as its preached.
    Can you imagine a Champions League without the likes of Chelsea, Barca, Real, Milan, Man United, etc…
    The big teams bring in the big money, and that’s what keeps UEFA afloat. It’s billionaires toys, and I ask what’s so bad about that? You say the smaller clubs can’t compete, and I say that’s the way it’s always been. And haven’t these billionaires raised the value of storied but smaller clubs?
    For example, if Malaga in La Liga becomes a power, how exactly does that harm that league.
    You can say that it was billionaires that have made the EPL fun again with all the competition for the top 4.

    Lastly, instead of fighting the FFP rules, Abram could just provide Chelsea with a huge sponsorship deal from one of his other ventures to cover any difference.

    I’m really having a hard time understanding why people feel that FFP will be good for the sport. Parody and Cinderella stories always sounds good, but it never pays the bills.

  4. Ed Gomes – have you read the FFP regulations? What can be wrong with insisting that clubs balance their books. A read of the FFP regulations would tell you that the Abramovich ploy that you outline would not fly.
    Maybe you can explain how the Glazers have been good for Manchester United?
    Malaga – so you are quite happy that teams that build in a sustainable way are over taken by winners of the billionaires lottery.

  5. SF Ian – “Look at Man City’s stadium deal. Apparently that’s totally above board, and we all know that Uefa don’t really have the cojones to challenge that too strongly. how long until we see oil companies paying preposterous amounts to sponsor Chelsea, PSG, etc…”
    Can you provide with the source that confirms that the stadium deal has been accepted because that is news to me.
    Please, no more of the scenario of companies paying above market rate for sponsorships and all the similar ploys that are trotted out by way of conventional wisdom to beat the system. A read of the regulations will tell you that such strategies have been anticipated and can be struck down.

    One thing that seems to be forgotten about FFP – the clubs voted to bring it in. It is something the clubs wanted.

  6. john in burke says:

    hopefully ffp will keep teams from overspending and ending up like pompey, points deductions, administration, etc..

  7. Ed Gomes says:

    Bobby, can you let me know of any club tat has been built in a sustainable way?
    As per example, in Serie A teams like Sampdoria, Fiorentina, Udinese, etc… Climb to the top and cash in on Champions League money. Once that’s done, the presidents/boards pockets get filled and down they go. I haven’t seen any of them come off one of those seasons and build on it. Napoli was the closest to doing that, because they didn’t sell everybody.
    In Spain you have Valencia and Sevilla that have been able to do nothing with their Champions League money. Yes Barca and Real are worlds ahead f them, but you mean to tell me that they couldn’t be bigger competitors in the CL.
    In the EPL, how exactly would FFP help Wolves, Sunderland, etc… Man United and the like bring in a ton more than those clubs and will continue to dominate. What the current system allows is for the “big” clubs to eat mistakes, ala the Yankees in baseball. Torres doesn’t pan out, no problem we can afford the loss.

    It’s almost as if people are afraid to say that the mid and lower table clubs are just that, mid and lower table. Every once in a while someone like Fulham makes a run and excels in Europa, or by the looks of it we’ll have a huge battle for the Top 4.
    Bobby is it bad that City has caused a log jam up top. Is it bad that the usual suspects don’t have a lock on the CL?

    Liverpool can be used as an example. How far are they above the FFP rules? They had supposed horrible owners, that actually garnered them a huge jersey sponsorship. They were in a financial mess, yet new owners stepped up and spent about 189 million to get them back up. I believe that Liverpool does quite well in revenue, so how badly did they break the FFP rules?

  8. John Bladen says:

    John in Burke is correct, the goal of FFP is not to mandate some mythical level playing field enabling every club to reach the semifinals of the CL, but rather to prevent clubs from exterminating themselves with idiotic short term financial decisions.

    It’s all well and good to say “what’s wrong with a billionaire spending his money?”. The answer may seem to be “nothing”.

    But look at the history… when massive debt levels are put onto clubs, the risk is often greater for the club and supporters, and less for the owner (who simply writes down his initial investment and walks away – fairly easily if he’s a non resident). How many times to do we have to see alleged “money men” either turn out not to have had it or be unwilling to sustain long term losses (that they have in many cases created)? I can think of ten cases in the last decade, and at least half of them lead to teams dropping into a lower tier (sometimes much, much lower…)

    If you think it can’t happen to a truly major club, think again. RM’s infamous stadium deal may well have saved them… but you can only asset strip something once. Major clubs seen as “institutions” by their supporters (and bankers) may gain highly favourable terms, but eventually the piper must be paid, not to mention the taxman (football’s internal financial rules be damned).

    I don’t personally care what Abramovich does with his money, but Chelsea fans very much should. Give me the path forward for this club if Abramovich runs afoul of the government in his country (like Berezovsky, Nezvlin & Khodorkovsky have before him) next Wednesday?

    How will the club be financed? By whom?

    The same question can be asked of Man City, Man United and others. Who steps in to voluntarily lose $50-100m a year while these businesses are restructured? Can they even be stabilized before the creditors seize control? I’m not sure they can…

    There may seem no compelling need for City to have a backup plan given their owner’s interest and staggering wealth. But these kinds of things can change overnight in certain parts of the world… particularly if someone back home isn’t overly pleased with your spending habits and/or behaviour…

  9. Ed Gomes says:

    JB I understand and don’t disagree with you. It just seems to me that people are looking at this as a way to level the playing field when that’s not the case at all.
    In regards to Chelsea I was actually surprised that Abram went after Torres due to the fact that he’s helping finance the Olympic Village and now with the World Cup coming more funds will be needed.
    For me fans scream for their club to win the league and get CL play. Those same fans can’t really scream about financial troubles, due to that being the only way they can get there. I would say that FFP would actually prevent any Cinderella story, because outside the big clubs, nobody will bring in enough money to compete.
    What I mostly see is presidents screaming about financial inequality every time they screw up. They either cash in on tourney money and claim financial despair anyways, or they fail and claim financial inequality.
    There have been a ton of clubs that have gone down due to irresponsible business practices. Last time I checked the game is doing just fine. Did Leeds collapse ruin the EPL? Granted the EPL is in a nice position at this time, due to all the money they are bringing in. As for example, in Portugal it would be devastating if Benfica, Porto or Sporting were to collapse. Even with them regaining the third CL spot back, it’s imperative that Sporting gets it in order for the league to stabilize. Fair? No, but that’s the way things go. Braga made the CL and didn’t reinforce their squad. They have been very responsible in their business and have a wonderful opportunity to get a CL spot once again. The problem is that they won’t do anything again and get bounced out early and hurt the overall leagues standing/finances. Take a look at what has happened in Serie A when the Sampdorias of the world get a CL spot.
    I’ve always said what has really helped the EPL is that their Top 4 have gone deep into the CL tourney. If that were to stop, ala Man United this season, it could really hurt squads and the league.
    Take a look at Blackpool last season. A wonderful story for a little club. I really enjoyed the way they played and rooted for them, but the best thing that happened to them just might have been getting relegated. No grandiose ideas or plans, just a wonderful story for its fans. And guess what, they just might get back and do it all over again. We’ve mentioned Swansea and Norwich plenty on the site, on how they need to grow as a team not with anyone becoming a star because they will lose him.
    For me everything is intertwined. Fulham, Sunderland, Palermo, Villarreal, Braga, etc… Should be thrilled with Europa, and Cup runs and having those fans scream for the team to go after them.
    Billionaires should never affect those fans, FFP rules or not.

  10. John and John – your are spot on with your comments. Having a level playing field or parity has never been a stated objective of FFP. Rather it has been to try and move clubs away from what Sir Alan Sugar described as football’s prune business model – no matter what you stuff in one end in terms of increased revenue it comes shooting out the other in increased expenses.
    FFP in the long run helps the small clubs because it has been the likes of Chelsea and Manchester City with sugar daddy money who have inflated the market.
    If you force a club to operate based on what they legitimately bring in the inflation driver is negated. Pretty simple economics.
    Over the last number of seasons small clubs have watched as their revenue base increased but they have fallen further behind.
    Transfer fees do not hit the bottom line immediately but are amortized so Liverpool may have spent a lot of money in acquiring players but it hits their bottom line over the length of the contracts. It comes down to long-term planning and managing five or so years in advance.
    The real key to getting club finances under control is controlling wage levels. When you have Manchester City paying out more in salaries than they generate in total revenues I cannot see how anyone could see that as a good thing. City by paying ridiculous wages pushes up the costs of other teams at all levels.
    Clubs that were built in a sustainable way? Manchester United is the best example – pre-Glazer and even now they should still pass the FFP test comfortably. Arsenal is another and Liverpool did so for many, many years. German clubs have had to pass licensing tests for a long time and arguably they have the most competitive major league in Europe.

    Big clubs have some built in competitive advantages – population base, location, history, awareness. These can never be taken away.

    I would suggest that what FFP also will do is scare the quick-buck speculators away while encouraging more responsible owners to look at buying clubs.

    John W. Henry has clearly stated that without FFP he would not have bought Liverpool.

  11. John Bladen says:

    I hadn’t heard the ‘prune’ quote before, Bobby, thanks that’s a beauty…

    I haven’t done in depth reading on FFP, but from what I have read it seems to have been purposely designed to avoid the obvious problem: Excluding most or all of the ‘big’ 14/15 from CL play.

    That’s not to say that – if it is enforced to the letter – we might not have a season or two in which 2 or 3 of those clubs are economically disqualified, but unless everyone adopts the “City/RM” models there should never be a time when a strong majority of the big clubs aren’t eligible. It’s only common sense, really.

    Platini is above all a pragmatist (I just wish his determination would extend to revamping the CL payout calculations… but I doubt that’s a vote that can be won for obvious reasons)

    After skipping domestic european league viewing for several years (due to work/time commitments elsewhere), I must say I am very pleasantly surprised by the quality of football in Bundesliga the past couple of years. It may have been considered a second tier Euro league years ago, but not now…

  12. Ed Gomes says:

    Bobby I happen to be a big believer in the “free “market”, which actually goes against my football belief that historic clubs win out and get the breaks.
    I understand the concerns, and I’m sure that there were probably better historical clubs that the City owners could have bought. Fans will also go crazy when their clubs collapse, but I don’t see anyone concern about that tight now. Basically win and all is well.

    By the way, I still believe that when the new City owners showed up to see their team for the first time they were perplexed by the powder blue jerseys instead of red. I doubt they knew there were two teams in Manchester. Lol.

    Lastly on the FFP rules, it will actually help my team, Benfica. Yes they’re on debt but they bring in plenty for a club in such a small country.

  13. Ed Gomes says:

    Deloitte’s annual report “Football Money League” has been released.

    There are 6 EPL clubs in the top 20, with 4 of them in the top 10.
    I was a bit surprised by the Spurs numbers, but it goes to show at how much the race for the Top 4 on the EPL has tighten.

    1. Real Madrid, 479,5 milhões de euros
    2. Barcelona, 450,7
    3. Manchester United, 367
    4. Bayern Munique, 321,4
    5. Arsenal, 251,1
    6. Chelsea, 249,8
    7. AC Milan, 235,1
    8. Inter de Milão, 211,4
    9. Liverpool, 203,3
    10. Schalke, 202,4
    11. Tottenham, 181
    12. Manchester City, 169,6
    13. Juventus, 153,9
    14. Marselha 150,4
    15. Roma, 143,5
    16. Borussia Dortmund, 138,5
    17. Lyon, 132,8
    18. Hamburgo, 128,8
    19. Valência, 116,8
    20. Nápoles, 114,9

    This is based on generated revenue, which is significant for FFP. I was also surprised with Arsenals standing, eventhough their “stadium/jersey” deal is a poor one, in my opinion.

    Link to report:

    http://www.deloitte.com/view/en_GB/uk/industries/sportsbusinessgroup/sports/football/deloitte-football-money-league-2011/5596840c99e9d210VgnVCM2000001b56f00aRCRD.htm

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