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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

UEFA Financial Fair Play And Unintended Consequences

Written by on March 2, 2011 | 6 Comments »
Posted in Money Game

I received the following question from Dr. Scoot.

“What is your take on the following article  regarding the Deloitte football money league analysis that shows Arsenal as the only Premier League team turning a profit?  As an Arsenal nut, I believe that Wenger operates the team the right way trying to build from within and being financially smart with acquisitions (although I would have like to see him spend the cash on Gary Cahill or David Luiz).  Do you believe the other Premier League teams will get their financial houses in order before (if?) the UEFA regulations ever go into effect?  I hope that Barcelona’s need to borrow money keeps them from prying Cesc away from the Gunners.

First of all I have no doubt that the UEFA regulations will come into effect. The clubs have all had input into the process and although there may be individual cases of whinging the regulations will stick.

The financial reality has finally dawned and clubs know that they can no longer operate on what Sir Alan Sugar once referred to as the Prune Business Model. No matter what you put in at one end it all comes squirting out at the other.

The UEFA Financial Fair Play regulations have been attacked by some as being unfair to the have-nots and that the new system takes away the opportunity for a mega-rich white-knight to whisk away a team masquerading as a damsel in financial distress to fame, fortune and multiple Champions League titles.

There is undoubtedly a bias towards the status quo but it is only a bias not something that is set in concrete. The opportunity still exists for well-managed clubs to scale the heights in Europe but in order to do so the growth will have to be organic rather than through financial-doping.

Having said that I am not convinced that all clubs are truly aware of what it will take. We all have a proclivity to an optimism bias and so the suspicion is that the majority of clubs are projecting on best case scenarios rather than more realistic or even conservative ones.

It is also worth pointing out that the question includes a significant assumption that is not necessarily true.

“Do you believe the other Premier League teams will get their financial houses in order?”

The presumption that all Premier League clubs have to get their finances straightened out in order to comply with UEFA Fair Play regulations is only true up to a very important point.

The UEFA regulations only apply to European competition. It has nothing to do with the Premier League. Teams can still run up losses with no ramifications domestically.

The decision by Aston Villa to sign Darren Bent is a good example of the kind of thinking that may pervade the Premier League post-UEFA Fair Play.

Faced with an impending relegation battle Villa decided they needed to spend big in order to secure (as much as signing a player possibly can) their continued presence in the Premier League. At a conservative estimate presence in the Premier League is probably worth around $80-$90M annually.

Should Aston Villa qualify for the Europa League next season it might generate $10-$15M for one season – do you really think a team in Villa’s predicament would worry about not qualifying for the Europa League at the expense of risking relegation from the Premier League?

Does a man hanging from the edge of a cliff argue with a potential rescuer as to which restaurant they might eat at tonight?

And there-in rests one of the unintended consequences of UEFA Fair Play in relation to the Premier League.

The majority of clubs will give priority to Premier League safety and will ignore the ramifications of spending more than they make in the short to medium term.

For others – the status-quo teams per se – the challenge is somewhat different. As was mentioned earlier the likes of Chelsea and Manchester City will undoubtedly have their financial models showing how they will get onside of the UEFA regulations.

How aggressive or conservative their financial models are, only the clubs really know.

However, it is important to understand that UEFA Financial Fair Play is about ensuring clubs operate on a sustainable basis annually than it is about not getting into debt.

Continual losses may lead to debt being accumulated but having debt does not necessarily put clubs offside as far as UEFA are concerned. The push by UEFA is to ensure stability on a recurring annual basis.

My understanding is that there is a moving three year average of the operating results so one bad year may not necessarily destroy many years of good.

However, it seems to that the focus on annual results will soon push Champions League-type clubs into a position of planning for a surplus each year rather than just breaking even.

Essentially clubs will realize that they will need to pocket a couple of years of surplus in order to mitigate the large shortfall should the club not secure a Champions League spot.

Example One

Club planning aggressively, normally earns $40M from Champions League but in year three fails to qualify.

Year One Profit $5M, Year Two Profit $5M, Year Three loss $35M

Cumulative loss over three years $25M – may not meet UEFA Financial Fair Play regulations. (There is an initial a level of losses allowed but the intention is that it will only be allowed during a transition period)

Example Two

Club planning conservatively, normally earns $40M from Champions League but in year three fails to qualify.

Year One Profit $15M, Year Two Profit $15M, Year Three loss $25M

Cumulative profit over three years $5M – meets UEFA Financial Fair Play regulations.

Two overly simplistic examples but the bias within the UEFA Financial Fair Play Regulations is to push clubs to plan and operate in a much more fiscally responsible way.

There will be other unintended consequences of the regulations but we will keep them for another day.

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6 responses to “UEFA Financial Fair Play And Unintended Consequences”

  1. redfan says:

    One strand, and no doubt a relevant one, in what could turn out to be a good sized bowl of spaghetti. Time will tell. Did not Arsenal just post a quarterly loss? I saw a report that they were going to sell off some land around the new Emirates to offset some debts. What happens when they run out of land to sell?

  2. Redfan – a six month loss (or profit) means very little especially when the number is $4m and the revenue around $160M plus. There are normally timing issues when a relatively narrow window is used – e.g. how many home games this year so far vs. last season.

    Arsenal has not been selling land but apartments that have been developed as part of Highbury stadium. This has been ongoing since the Emirates development a while back.

    Was it not our rabid Spurs fan on Fox Soccer.com from a few years ago who predicted a financial cataclysm for Arsenal on account of the stadium development? Five years on Arsenal seemed to have managed the move quite well and Spurs are now the team facing the inevitability of developing new digs.

    When the Arsenal number is compared to Chelsea’s annual loss of $120M I think it offers a better perspective.

  3. Bryan says:

    I know I dismissed Swiss Ramble type blogs a while ago ,but I did manage to get all the way through his piece on Chelsea.(after a few attempts.)

    http://swissramble.blogspot.com/2011/02/chelseas-financial-fair-play-challenge.html?utm_source=BP_recent

    And he comes to the conclusion that they might not have the problem that everyone else seems to think they will.
    Whether or not he ,or everyone else ,is right though ,I have no idea.
    I prefer to watch the games.

  4. Russell Berrisford says:

    It wouldn’t surprise me to see the “big” clubs from various leagues put pressure on to make the fair play system applicable to all teams in the coming years.

    I don’t think that it will sit well with the likes of Real Madrid and Chelsea to find that they can be outbid by lower placed clubs who are effectively playing by different rules.

  5. Bryan – I think the Swiss Ramble is wonderfully researched and analyzed. And the blog on Chelsea is exactly what I am getting at – yes they can get there but everything has to go right and stay right and in a business that rarely if ever happens.

    Russell – I agree. France and Germany already have some solid financial regulation in place and the others (Premier League) need to follow. The other piece that underpins this is that the push towards conservatism that is built into the UEFA regulations will start to create more regular surpluses and the private owners will begin to expect some pay back.

    The major problem with Spain is Real Madrid and Barcelona don’t really care as they pocket 90% of the TV money anyway.

  6. John Bladen says:

    I am pleased that UEFA is doing “something” about this, though they can never truly save their member clubs from themselves.

    A couple of questions, Bobby:
    Did they consider the relative benefits of reducing UEFA CL payouts (or more accurately, spreading the wealth a little more evenly) instead of implementing FFP?
    The ultimate result of FFP is to impose financial penalties on clubs that overspend. Simply giving them less to spend seems like an easier solution to me. If UEFA cut the payouts for the final three rounds by 30% and put that money toward grass roots or other programs, I would argue nothing more need be done.

    In a real sense, UEFA created the present monster by conforming to the ‘big 14/15″s demands for more revenue from European play. Those clubs would not have the staggering financial advantage they have now without the inequities that were deliberately built in to the UEFA CL financial system.

    I know the clubs would (did) rebel if the lion’s share of the pot hadn’t gone to them. But aren’t the FFP rules just another road to the same destination? In the end, won’t the Big 14 just make the same threats they did before present system was devised to placate them?

    I hope FFP works. But, to take an overly simplified position simply to illustrate the point, who really loses if the 2015-2025 CL includes just 2 or 3 of Europe’s best clubs annually?

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