Here in England, we still do not know how, or if, the 2019-20 Premier League season will be allowed to finish. But it already feels safe enough to predict with some confidence that the 2020-21 financial year will be a bloodbath for English top-tier clubs.
This is only partly because of the likely ongoing coronavirus-related disruption that risks depressing revenue streams across the board, from broadcasting rights to replica shirts, ticket sales to perimeter advertising. Just as serious will be the knock-on effect on bottom-line profitability of the deflationary cycle that is about to overtake the transfer market.
I am not sure that the realisation has yet dawned of quite how dramatic the fallout from this might be.
The reason for this is the asymmetrical way in which transfer dealings are handled in club accounts. As I have written before, this has had the effect of turbocharging European club profits during the boom years, even though most big clubs have consistently spent more on players than they have recouped. In the likely absence of such player-trading profits in future, the operating losses that clubs look set to rack up would drop straight through to the bottom line. It could even be that UEFA’s financial fair play (FFP) regulations will have to be loosened up, temporarily abandoned or, conceivably, ditched altogether.
The way it has worked up until now is as follows.
When they buy players – or, in accountant-speak, “intangible assets” – clubs are allowed to spread – “amortise” – the cost over the length of those players’ contracts. This is very often over four or five years at top-tier clubs, sometimes even longer.
When clubs sell players, however, the system is different.
Basically, whatever the difference between the agreed fee and the amount at which the player concerned is written into the selling club’s books (typically, what they originally paid for him minus accumulated amortisation) is taken immediately, there and then, as profit. Under this system, home-grown players are assigned a value of zero, irrespective of what the mercato speculates that they might be worth.
Once this is understood, you do not need to be a financial whizz-kid to understand the distorting effect it can – or could, in pre-virus days – have on profitability.
The rules make it theoretically possible for a club to sign five players for €20 million each, €100 million in total, offload one, also for €20 million, and yet register an impact of more or less zero on net profit. This example makes two assumptions: 1. that the five incoming players are given five-year contracts; 2. that the outgoing player is home-grown.
In those conditions, the €100 million spent would translate in the profit and loss account to €20 million of cost in each of the next five years. The €20 million received, by contrast, would go direct to net profit. In the year of these six imaginary deals therefore, while the club might be €80 million out of pocket, the net impact on the bottom-line would be around zero.
In the real world, the impact of this magical realism – until now – has been to make it quite difficult for any Premier League club not to book a profit on transfer dealings. Dusting off back issues of Deloitte’s Annual Review of Football Finance, I found that in 2009-10 eighteen Premier League clubs made a net profit on transfers, the highest being £38 million. In 2010-11, this rose to nineteen, with a highest of £43 million; 2011-12 – eighteen and £65 million; 2012-13 – eighteen and £47 million; 2013-14 – seventeen and £104 million; 2014-15 – twenty and £54 million; 2015-16 – nineteen and £49 million; and 2016-17 – twenty and £69 million. You get the idea.
In that last year – 2016-17, indeed, the 20 Premier League clubs reported an aggregate profit on player sales of something like £560 million. And yet the net cash impact of their transfer activity appears to have been an aggregate spend of approximately £753 million.
In the impending COVID-19 re-set, this turbocharge will largely sputter out. Yes, the Manchester Citys of this world, whose owners are so wealthy that even the new recession will have relatively small impact, will still buy the players they want. But if no-one is bidding against them, they will not need to offer silly prices.
Yes, too, the sale of home-grown players such as Harry Kane still offers the clubs that developed them a sure-fire profit – and with operating income dwindling, it may now be even more tempting to cash in. But, again, buyers, facing little competition, and with income pressures of their own, will not offer silly prices.
With prices certain to fall, selling clubs will struggle to show a profit on any non-home-grown player whose book value has not been cut by two, three, even four years’ worth of amortisation. Some may choose to bite the bullet by proactively writing down the book value of their entire squad. I would expect quite a few to do this if authorities announce that FFP rules will not apply for a limited period of a season or two.
But, with wages also almost certain to fall, yet the players’ union strong, it seems to me almost inevitable that players with relatively long, lucrative contracts will turn down potential moves, putting another brake on the market and frustrating efforts to bring down costs.
The quandary over how to finish the interrupted season that ought now to be nearing its triumphant conclusion is proving thorny enough. But, trust me, this is just the warm-up. Normality as we thought we knew it in professional football is an awfully long way away.
David Owen worked for 20 years for the Financial Times in the United States, Canada, France and the UK. He ended his FT career as sports editor after the 2006 World Cup and is now freelancing, including covering the 2008 Beijing Olympics, the 2010 World Cup and London 2012. Owen’s Twitter feed can be accessed at www.twitter.com/dodo938.