I received the following question from Dr. Scoot.
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.
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)
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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