A lot of football clubs are being bought and sold at the moment. Inter Milan has a new majority shareholder, AC Milan a new minority shareholder, FC Getafe in Spain is for sale, FC Lens in France… In Belgium three clubs from the highest league got new owners and this in a period of only three months.
It is clear that the buying and selling of football clubs has become big business. Whilst in the past there were little candidates to buy football clubs, the shares of football clubs seem to have become more liquid than ever before.
In this article we will elaborate on the reasons why this context has changed. Next to that, we will discuss the various sports-related points of attention, which should be taken into account when doing a due diligence of a football club. Our experience teaches us that investors know very well the business and legal aspects of a due diligence but that they often lack football know-how to put the right value on the club they wish to buy.
Who is buying football clubs?
In general, a distinction can be made between different categories of owners: the wealthy football passionate, the investors and the agents.
The wealthy football passionate
In the past owners of football clubs were in general wealthy people with a passion for football. This category of owners (which still exists) was investing in football clubs because they just liked football and are passionate about it. They accepted the fact that having the football club was a loss making business/hobby. Having a football club is for some of these owners an expensive status symbol, similar as having an expensive yacht.
Example: Roman Abramovic
This category of owners has found its way to football more recently. This category believes that football clubs do not necessarily need to lose money and could even be sold with a profit. They like to consider the football business like any other business and try to make the most money out of it.
Example: Value8 (Dutch investment fund)
One of the main income sources for football agents has always been the ownership of (part or whole of) the economic rights of football players. Economic rights represent a part of the transfer fee of the player when the player is being transferred from one club to another. An important aspect to be successful when buying and selling economic rights of certain players is control over the club of these players. If you do not control the club, you risk to lose control over your investment (i.e. the economic rights). Therefore agents (certainly in South America) bought clubs so that they have 100% control. First of all, as an agent of the player and secondly as the club owner.
Example: Doyen (owned by one of the biggest football agents, Jorge Mendes)
Why has the business of football clubs become increasingly interesting?
The reasons why more and more people are investing in football clubs are multiple:
Football has become globally accessible
Further to the general globalization of business, also the football business has been globalized. Now in even the smallest village in Asia or Africa, fans can watch football on TV, on the internet and even on their mobile phones or iPads.
This also means that when you become the owner of a high-level football club, you are not only the proud owner and passionate fan of that club but as an owner you get a lot of visibility and attention worldwide. This allows you as an owner to build a global network and brand through football.
Value increase of tv-rights
One of the consequences of the fact that football has become globally accessible is the value increase of the TV-rights. The more people have access to football on TV, the more the TV-rights are worth.
Another reason for the value increase is the professionalization of the business around TV-rights. Football clubs and football leagues have invested enormously to increase the attractiveness of their leagues in this respect. This has as a consequence that the football business has grown significantly and that the business model of a football club has become less risky.
More transparent and stringent financial rules
Football clubs have been loss making for a long time. Unlike any other business, it seemed that football clubs could not go bankrupt and that special privileges (such as tax benefits) were granted to clubs to ensure their survival. Football clubs were spending money that they did not have and even when they were in a situation of serious debt they were increasing their budget. This is no longer the case.
Nowadays football federations and football leagues are imposing strict rules on clubs as far as spending is concerned. The so-called Financial Fair Play rules have had a huge impact in this respect and are considered to be very strict. Also the implementation of a licensing system (further to which clubs need to show their financial health as a condition to be entitled to get a license to be able to play in a certain league) has had an important impact on the financial health of football clubs.
Next to this, football clubs also faced corruption problems such as match fixing and money laundering. Also in this respect clubs are getting more and more investigated. Although not yet perfect, we expect that these investigations will only increase. This will only be beneficial for the transparent clubs in the sector.
Ban Third Party Ownership
FIFA has banned Third Party Ownership since 1 April 2015. This means that third parties (i.e. parties other than a club) can no longer participate in transfer proceedings. As mentioned before, this was one of the main income sources for the football agents.
To circumvent these regulations the agents are now buying football clubs worldwide. This is one of the main reasons that mainly smaller clubs have become more interesting for certain buyers. They are not interested in the business as such of the football club but rather a platform to circumvent TPO.
What are the (sports) points of attention when buying a football club?
The business and legal due diligence of a football club is not different than the due diligence of other companies. The atypical and specific facts of a due diligence of a football club are mostly sports related and require a certain football know-how and background.
Football has (like any other business) specific elements which should be taken into account and which could have a substantial impact on the price of a club. Below we briefly mention the most important points in this respect:
Salary vs. Income/Budget
Certain clubs in European football have financial problems. One of the main reasons of these financial problems is the fact that the total salary expenses are much too high. If the salary is higher than the income of a club, there is obviously a problem. In general, you could say that if the salary vs. budget ratio is about 50% to 60% the club is doing very well in this respect.
Although there is now a ban on TPO (as explained above), a lot of clubs still have existing contracts regarding economic rights with third parties. This is a very important aspect when trying to put a value on the club. The percentages of economic rights that these third parties parties may hold are in some cases higher than 50%. This also means that when the club transfers a player, the club is only entitled to 50% of the transfer fee. This is often overlooked.
Pledges on economic rights
In certain countries banks have granted loans to clubs. As security for these loans a pledge on economic rights may have been taken. This is an important aspect for the risk assessment of such club.
Competition formula + track record
It is important to completely understand the competition formula. In certain leagues only the bottom 2 clubs relegate but in other clubs only the bottom club. It should be clear what the chances are of relegation, promotion, European League,…
To be able to fully assess the risk of relegation and the chances of promotion, the history of the results of the club over a minimum of 5 years should be sufficient to provide a good overview in this respect.
Nowadays the formula to distribute the TV-rights income between the various clubs has been an important driver to put a value on a certain club. It should be clear (i) to how much the club will be entitled, (ii) the exact criteria in this respect are important, and (iii) the expected evolution of the TV-rights in the future.
TV-rights are important but the management and the business model of a football club should not be too dependent of the TV-rights income. Certain research claims that about 1/3 of the revenue should come from TV-rights, 1/3 from merchandising and 1/3 from ticketing. For smaller clubs, this may, however, not be too realistic.
Football is passion and passion is probably one of the main reasons why clubs make wrong decisions. A well-run football club makes a distinction between the investors/shareholders and the sports decisions. As soon as the owners of the club are being involved in the transfer decision process emotions may take over. This is to be avoided. First of all because emotions mostly do not lead to better decisions and second of all, the owners are no specialists of the transfer market.
If the split ownership and transfer decision process is not present in a certain club this may well mean that there is a substantial margin of improvement possible in this respect. Although the owners should be able to overlook the sports decision process, they should better not be able to decide themselves on the sports related aspects of this process.
This is only one example of how an organisational structure could have an impact on the value of the club. In the end football clubs require short decision processes. The longer the decision chain, the more difficult it is to take decisions. Also for people working together with the club, it should be clear who is responsible within the club for certain decisions. Therefore there should be a clear and direct line between the sports directors and the CEO or president (if the operational decision maker). If not, transfers may collapse.
Buy-out, relegation and unilateral option clauses
A very simple but often overlooked aspect is the existence of buy-out clauses, relegation clauses and unilateral option clauses in contracts.
Buy-out clauses entitle the players to leave the club at a fixed amount, and this notwithstanding the fact that the market value may be higher than this fixed amount. A player with a market value € 10 million could only be worth € 5 million in case the player has a buy-out clause of € 5 million.
A relegation clause is a clause, which provides that the player may go for free or for a limited amount when the club is relegated. This is obviously important when assessing the risk of relegation (and its financial consequences).
Certain players also negotiate an option to extend the contract. Often such extension triggers an increase of the salary or a loyalty fee. Although not substantial, such clauses may be important to assess the exact salary expenses over the years.
An often overlooked aspect is the need for local anchoring of football clubs. Certain (mostly small) football clubs have a close link to the local community and even include in their articles of association that the new owners should safeguard this link to the local community. This will guarantee a better access to the local media, to the fans and to local sponsors.
The level and quality of the youth academy may have a substantial impact on the price of a club. A well-run academy with a lot of top talents will generate value over the years. It is therefore important to have a good view on the level of the academy, the talents of the academy and the risk of losing the talents when they turn 16.
It is rather surprising but sometimes it is not being checked whether the vehicle that is being bought in the process of buying a club effectively owns the registration with the federation. Nevertheless, without registration, there is no football club. Therefore this an essential point which should definitely be checked as well.
Football clubs attract investors for various reasons. When candidates are considering an investment in a football club, several sports points should be looked at during the due diligence of a club in order to be able to determine the right value of the club.