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Financial Fair Play and the summer window: austerity or growth?


By Dan Chapman

 

As previously reported by Full Contact, the Financial Fair Play rules loom large in professional football. Will or should this impact thinking in the coming transfer window and those to follow?

Different rules will apply to each division but the executive management in all clubs will need to be mindful in their negotiations this summer and beyond.

Championship clubs face the greatest dilemma.

Financial Fair Play in the Championship is presently without bite but its teeth are cutting through. Sanctions will apply from the 2013/14 season. Annual accounts for that season are to be submitted by 1 December 2014 and sanctions may be applied in relation to those accounts.

What must clubs avoid in those 2014 accounts? Losses outside of the acceptable deviation.

Acceptable deviation for the 2013/14 season will probably be in the region of £10 million where there is equity investment to offset a substantial part of those losses or losses and £3-4 million for those clubs without such equity support.

By 2015/16 it is intended that the gap between those clubs with equity backing and those without be closed so that those with backing may make losses of up to £5million, provided they receive equity investment of up to £3million in the given season and the rest are to be permitted losses of up to £2million.

Sanctions will depend upon what clubs achieve in the season during which they breached the regulations and range from a transfer embargo to a requirement to pay a Fair Play Tax of up to 100% in respect of elements of the loss suffered or investment received that exceeded the Fair Play parameters. Promotion could become very expensive and missing it could fix the club’s playing staff and stifle its ambition for years. Suffer relegation and a club will face compliance with the Salary Cost Management Protocol, with the sanction of transfer embargo for breach.

Clubs that suffer relegation from the Premier League or don’t quite make the grade despite substantial investment now more than ever may face a downward financial spiral. Expensive playing staff who cannot be offloaded (there are bound to be less takers with Financial Fair Play on the horizon) and a transfer embargo are a recipe for troubled times which do not an attractive investment make. Who would back a loss making business that they can do nothing to positively influence?

This transfer window could see clubs compound the problems that Financial Fair Play might already have in store for them.

So how to approach this transfer window?

Immediate growth?

Look to secure your promotion winning squad this summer and make hay while the sun shines and external investment is available. The gulf between Premier League and Football League looks set to widen so is it better to be in than out? What risk is acceptable in seeking Premier League status?

Austerity?

Plan for the impending regulatory sanctions by careful negotiation of player contracts. During this summer’s negotiations the executive management of clubs will have to seek a balance between keeping or attracting those players who will meet the club’s playing ambition whilst avoiding a liability burden that may result in breach of the financial fair play rules if the squad doesn’t achieve.

What of investment?

This window might be the last one in which Championship Clubs will receive substantial outside investment in their playing squad. One last shot before the door closes. It is difficult to foresee white knights, red knights, blue knights or any other kind of knight riding to the rescue of ailing clubs in the current and future climate. Look at the effect of the transfer embargo on the interest in Rangers FC.

What consequence of impecunity?

The visible part of a football club is about its fans, community and the playing squad and there is something different about them but they are operated through structures where the rules of corporate responsibility do and should apply. They contract with small businesses and consumers and failure to manage them properly is dangerous for those to whom the club has financial commitments, to the club itself but also to those who manage it.

Executive management who commit a club to unsustainable expense in the transfer window may not only face the future wrath of the fans (for example when transfer embargoes prevent alteration of the playing squad), further sanction for the club (arising for example out of breaches of the football creditor rules) and the possible failure of the club but there can be personal consequence to corporate failure (see for example the fate of the former Luton Town FC Board at http://www.bis.gov.uk/insolvency/news/news-stories/2011/Sep/Former-directors-of-Luton-Town-banned) and there is no special case to be made for the management of football clubs.

The key to navigating the entry into the era of Financial Fair Play is to plan for it by reviewing income streams and expenses top to bottom, ensuring that any investment relied upon is backed by enforceable commitment (football clubs should not trade at the whim of a benefactor) and to set the club’s playing ambition and transfer strategy accordingly. Then, of course, you have to explain it to the fans.

The Full Contact team includes solicitor and Licensed Insolvency Practitioner Adam McCaw, who regularly advises sporting businesses on financial, restructuring and turnaround options, and this article was produced in conjunction with Adam.

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Dan's avatar

About Dan
The spearhead and Senior Partner of Full Contact, Dan is an experienced solicitor and advocate, with a specialist background in employment law and sports.


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