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Financial Distress in Football: What’s the State of the Beautiful Game?

Financial Distress in Football: What’s the State of the Beautiful Game?
Jul 04, 2024 Rory Traynor Updated On: July 4, 2024

With the Euros well and truly underway we are taking a look at the financial state of football in England. Much like the Three Lions performances on the pitch, the finances of clubs across the top flight of football is stuttering at best and far under peoples’ expectations.

Recent reports by the government and economic experts paint a grim picture of the financial state of football and a rising risk of clubs failing on mass.

Yet at the same time we hear about expanding TV deals, growing viewership, and record breaking transfer windows.

So how can this discrepancy be? And, are the problems really as bad as some would have us believe?

The Premier League: A global powerhouse

The Premier League is widely considered to be the best football league in the world, due to the quality of football across all twenty teams and the competitiveness of the title race and each individual game.

It is the most successful football league by almost all measurable metrics, easily out earning its major rivals and holding a fanbase of billions of people, making it one of our greatest cultural exports.

It can be argued that it is the most successful league of any sport in the world. It holds easily the largest viewership, with a potential audience of around 4 billion people, and is only out earned by the NFL, MLB, & NBA respectively.

The main reason for this is the domestic TV rights (in the USA) for these three leagues are incredibly high due to both their position in the world’s largest economy and the significantly higher ad time that they offer broadcasters.

This success comes with unsurprisingly high revenues. The league’s current TV rights cycle runs from 2022 – 25.

  • Domestic TV rights generate £5 billion in this time
  • International TV rights generate £5.05 billion in this time

The league has already agreed a domestic deal for the next for cycle which will run from 2025 – 2029 and is worth £6.7 billion. The eventual international deal will likely exceed this figure.

How is this money shared?

The domestic tv rights revenue is split with the league’s club on a 50:25:25 basis. Where:

  • 50% is shared equally between the clubs
  • 25% is shared via merit payments based on league position
  • 25% is shared via a facilities fee for televised matches

International TV rights revenue share works on a partial even share and partial league position merit share. It is structured in such a way that the top finishing team could only ever earn 180% of what the lowest finishing team does. There are no facilities fees for international revenue share.

Whilst the league does not publish exactly how much each team makes from TV rights money it does publish its formula.

Using this we can estimate that each club receives:

  • £31 million from domestic equal share
  • £63 million from international equal share
  • £1.69 million per league position (starting at £1.69 million for 20th rising by £1.69 million by each position to a maximum of £33.76 million for 1st) from domestic tv rights
  • £478k per league position (£478k for 20th rising to £9.56 for 1st) from international tv rights
  • £1.2 million in facilities fees for every televised match they appear in domestically
  • £6 million in central payments

To give this context, it is estimated that Manchester City earned £172 million from the Premier League for their 1st place finish in the 2022-23 season.

There is further TV revenue for domestic and international cup competitions.

Each club then earns revenue from ticket sales, merchandising, player sales, and other business activity.

Significantly, the additional revenue provided by high finishes, good cup runs or achieving European football presents a financial incentive that has led more than one board of directors to make foolhardy or quixotic gambles that led to the ruination of their clubs.

What are club finances like?

There have been two recent studies into the financial state of English football: the government’s ‘A sustainable future – reforming club football governance’ and ‘ Still ill? Evaluating the financial sustainability of football’ by Dr Christina Philippou and Kieran Maguire.

These paint a stark picture of the top five leagues of English football. Significantly, they found that the majority of premier league clubs are technically insolvent, indeed most clubs in the top five flights of English football are. The government’s research into football clubs’ operational cash flow found that 45% of Premier League clubs operated with a negative cashflow (in the championship this was a shocking 95% of clubs).

Almost all clubs, especially the ones operating on a negative operational cashflow, are effectively reliant on cash injections from their owners to stay afloat. Whilst many view owners of football clubs as bottomless wells of cash this is not the case in most instances and should the owners find themselves unable to bail out their club then it would become almost instantly insolvent.

For the 22/23 season the premier league clubs reported an aggregate pre-tax loss, for the fifth consecutive season, of £685 million with only four clubs reporting a pre-tax profit (Man City,  Brighton & Hove Albion, AFC Bournemouth, & Brentford).

Net debt rose by £473 million to £3.1 billion in the 22/23 season, though this figure is driven by clubs borrowing to fund integral infrastructure projects.

How did we get here?

Football clubs present a strange proposition to anyone trying to discern their purpose. Are they a business venture, a billionaire’s vanity project, an important cultural institution, or do they exist solely to compete?

The truth is probably a combination of the three.

The focus of clubs has been on football and achievement ahead of profit, with almost fans expecting and demanding owners who are willing to plough funds into their club but almost none demanding they run the club in a financially responsible manner.

This has been facilitated by the rise of the billionaire owner. The archetype of which, in many ways, was Roman Abramovich. When he took control of Chelsea he began to sink sums of cash previously unseen into the club, happily outbidding any rival transfer bids and offering wages way above the market. This translated almost instantly into success on the field.

It was not just the club’s star that rose, Abramovich became hugely famous with his name synonymous to Chelsea’s success and fans of all rival clubs envying his ownership.

And so, he made football clubs the must have prestige item of the world’s richest.

The billionaires who sought to own their own football clubs were aware of this and most were happy to take on an asset that would ultimately lose them money. With many winning over the fans by making huge investments upon their purchase of the club.

With the Premier League’s position as the world’s leading league and the opportunity to compete with the world’s most historic clubs it was the most desirable league for club ownership.

This wave of cash entering the league alongside the willingness to spend it has seen the costs of running a football team skyrocket since the league’s inception in 1992.

Here within lies the problem.

The average wage of a Premiership footballer has increased by 3,600% and the average transfer fee has increased by 2,000%. Whilst the infrastructure needed to train and maintain a squad and a club’s future has become increasingly complex and expensive.

Despite the record breaking TV deals, very few clubs have the reach or status to generate the revenue needed to maintain these costs. Conversely, if they wish to compete or even remain in the league they must spend big.

As more money flowed into the English top flight it started to pull away from its competitor leagues and stands firmly ahead in its spending power, and cost of competing. With Premiership clubs spending £1.9 billion in the 2022 summer transfer window. To give this context, this is only slightly less than Serie A, La Liga, Bundesliga, and Ligue 1 combined.

But it would perhaps be unfair to blame this solely on the owners of football teams; after all, which fan does not want their club to bring in the best players and play entertaining football.

Certainly the government thinks so.They have portioned the lion’s share of the blame with the FA.

Accusing them of a lack of leadership and direction in the manner they have overseen the rise of English football. Their report essentially finds the FA as unfit custodians of English football and in need of external regulation.

Saying ‘There exists fundamental problems of perverse incentives, poor governance and defective industry self-regulation’ and that ‘The government believes reform is needed and that government intervention is needed to effect this reform’

Whilst the FA did introduce rule around club finances (with the Profit and Sustainability Regulations aka Financial Fair Play) they still allow clubs to run at a significant loss, contain significant loopholes, and have not been adhered to.

Where does the League go from here?

The government has agreed to an independent governing body whose purpose is to safeguard the English football pyramid and health of the various leagues.

Whilst they feel an independent regulator is needed their report advises the industry still has the responsibility to get ‘its own house in order’.

It is likely that last seasons points deductions against Everton and Notts Forest, as well as Manchester City’s looming hearing, were prompted by these findings.

The regulator’s core focus will be on financial regulation and improving financial resilience.

Clubs will have to:

  • Demonstrate good business practices
  • Have appropriate financial resources or ‘buffers’ to meet cash flow and financial shocks
  • Protect the core assets of the club from harm – e.g. stadiums

There will also be increased scrutiny of any new owners with a fitness test for all owners and directors, approval of financial plans for the club, as well as checks on the sources of funds.

What this regulator will eventually look like exactly remains to be seen but the hope is that it will bring stability to our league as well as reducing costs and make it easier for smaller clubs to compete.

Worried your clients are financially struggling?

It’s not just our nation’s football teams that are suffering, last year saw a thirty year high in company insolvencies. With an even higher amount predicted for this year there has never been more risk facing businesses in the UK.

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