This article was originally published in September 2020.

(Oliver is joint-owner of Maidstone Utd FC, Director of Brive Rugby Club in French Top 14 and recent Board Member of The National League.)

Right now there is a heated debate on social media about the ill-health of many football clubs in the English Football League (EFL). Historic old clubs like Bolton Wanderers and Bury, Notts County and Charlton Athletic, Blackpool and Oldham Athletic, to name but a few, have all had serious financial difficulties and are either still at metaphorical death’s door or have only recently been rescued. It seems to be a never-ending cycle of business fragility in the football world. Is it the clubs’ fault ? Dodgy owners ? The League’s fault ? The FA’s failures ? Why should clubs be so different from other businesses ? What could and should be done to improve the stability of the clubs and make their bankruptcy and disappearance less of a regular occurrence.

Before trying to answer these questions I should add that not all clubs in huge difficulties go under. It is one of the paradoxes of the valuation of football club businesses that for every club owner who finds him or herself deep in debt and about to go under there seems to be another fool with less brain than money ready to bale them out. Take the case of Port Vale, who were being driven into the abyss by a reckless owner. Carol and Kevin Shanahan, lifelong fans who had made good in business locally, recently decided to buy control of the business even though they admit to having paid way over the odds. Had the business been any other ‘normal’ one there is no way it would have been sold on for an inflated price (about £4M reportedly). So what is it that makes football clubs more desirable, more valuable than ordinary goods and services businesses ? Is it possible to construct an economic model to analyse this ‘premium value’ more closely ? This is what I shall look at in this article.

I should declare an interest here as one of the fools. I am joint-owner of a professional football club business, in Maidstone, Kent. Our club, Maidstone United, went into liquidation in 1992. This was after a previous owner sold its run-down stadium, which required significant renovation works in order to be fit for use in the Football League, with a view to developing a spanking new sport, retail and leisure complex, including a new stadium, on an out-of-town site near an M20 motorway junction. Unfortunately he sold the stadium and its adjoining land before securing planning permission for the new stadium. This permission was never forthcoming and so the club went out of business. It took 20 years for a ‘phoenix club’, started up again by a keen supporter, to claw itself back up the pyramid to the Isthmian League, close to the level of football played prior to the 1992 liquidation event. When my associate and I appeared on the scene in 2010 the financial situation was dire. The new owner had spent considerable sums of money, some of his and plenty of other people’s, on players but in the meantime the club still had no stadium. The cart was way out in front of the horse. Matches were played on rented grounds closeby. Supporters had dwindled down to a few hundred. The club was losing £150K per annum, debt was nearly £400K and the only tangible asset was a piece of scrub land on a long-lease which had potential to be developed as a football stadium for the club. However this land was mortgaged up to the hilt to a loan company who would have seized it at the first opportunity following a missed repayment date. 

Without going into all the details we decided it was a worthwhile project to try and buy the club. We felt it had potential and that a town of the size of Maidstone should be able to sustain a professional football club. We decided to try and create a sustainable model based on installing a 3G artificial pitch. As I write this the jury is still out on the success or otherwise of our financial investment in the club. Like a real estate acquisition you only really know if the deal was good, bad or ugly upon exit. But the interesting questions for us and for other football club owners are “why on earth would we buy such a failing business ?” and “on what basis did we calculate the price to pay for it?” Imagine a ball-bearing or soap manufacturing business or an estate agency and we would have run a mile. So what makes football club values different and can we analyse how different?

There are a number of factors which lead to football club businesses being valued higher than ordinary businesses. One could in theory run a regression analysis and calculate the effect of each variable but don’t worry, I’m not going to attempt that, although I would be delighted if somebody picked up the mantle and did it for me.

Firstly football club businesses are effectively monopolies. There is only one club in town, metaphorically speaking, and there is no substitute for their product. It’s no use telling a Manchester United supporter after three miserable defeats in a row to cheer up and go and support a good team like City, not unless you want your teeth rearranging that is. So to the customer, which in most cases is also the fan, the only recourse he has when the product is not up to scratch is to complain vociferously and in extreme cases protest outside the stadium and throw eggs at the Directors, In other words he can make noise and take demonstrative action to change the product but he can’t easily do without it. So the business has additional value as a monopoly.

Secondly the business has exceptionally passionate customers. Running a football club sometimes feels like you have hundreds of customers looking in at the window and taking an interest in everything you do, even in the National League. These customers, if treated well and managed efficiently, will spend as much of their disposable income as they can on your product in preference to any other non-essential product. This gives the business a huge edge in planning its sales and marketing. For example you can rarely overdo a marketing campaign because the potential customers are all such keen fans of the business. The worse that can happen is they don’t open all your emails and ignore some of the video clips on your Twitter feed.

Next we have the fact that football club businesses offer a more glamourous edge to prospective owners than the ball-bearing factory we mentioned earlier. It’s the ‘glamour value’. Press and general public are more likely to take an interest in a £2m turnover football club than any similar sized ordinary product business. And going back to the point about monopoly above, there is only one club in town. If you happen to have made it big in ball-bearings and are looking to ‘give something back’, the town’s football club is a unique opportunity. As in the case of Carol and Kevin whom I mentioned above, there may only be one opportunity in a life-time to take control of it. This adds huge value.

In addition to glamour value we can also identify something we can call ‘hero value’. Some owners will find it ‘valuable’ to be the saviours of a club and its community activities and enjoy recognition for being a white knight. This might arise post middle age after a business life accumulating money but not doing very much good with it.

A further consideration in valuing football club businesses is the increasing prospect of extraordinary income streams. The fact is that television, general media rights and sponsorship have all gone through the roof at the top level and some of this has trickled down through the leagues. This is a massive carrot for some prospective owners. As pressure grows on The Premier League to increase its support for lower league and grass-roots football, a windfall increase in financial distributions cannot be ruled out.

Another huge carrot is the potential for transfer fees for players. These transfer fees still offer windfall income for clubs. However in the case of academy talent they are less likely than they were previously for EFL clubs because an agreement (EPPP) was signed between them and The Premier League whereby limited fixed fees are payable for young EFL players ‘poached’ from EFL clubs. Game-changing young player transfer fees are also highly unlikely for smaller pro or semi-pro clubs because the top young players are usually already scouted into bigger clubs’ academies. However an exceptional player does occasionally emerge from nowhere having been missed by the bigger clubs or simply because he has developed late. So transfer fees are part of the ‘premium value’ equation.

Then there is the prospect of windfall income from a cup run. Three years ago Sutton Utd of the National League (Division 5 of the pyramid) made an estimated £1 million, mainly from TV and prize money, for reaching the fourth round of the FA Cup, meeting Arsenal, Leeds and Wimbledon in the process. All smaller clubs’ fans dream of the road to Wembley and their owners know this road could be paved with gold.

Next the most important and controversial ‘premium value’ windfall in English football: the bonus for promotion to The Premier League. The value of TV and commercial rights is now so huge that Championship clubs will often take massive financial risk in order to get promoted. As an example take AFC Bournemouth in Season 2016-17 in the Premier League. Their reported turnover was £139 million. Of this amount £124 million came from Premier League TV and commercial rights. That’s 90% of turnover. Staggering. By comparison the money is considerably lower in the Championship. In 2015-16 season club turnovers were between £10 – 40 million and total losses in the division were over £200 million. These losses, which are increasing every season, are underwritten by ambitious (or foolish) owners trying to grab the Premier League carrot. 

Then there is the prospect of political gain from acquiring a club in difficulty. A purchaser with, say, a massive real estate development project in the locality, which needs planning and investment support, may do himself huge favours with local authority and other influential people if he rescues and nourishes the town’s football club and ensures it remains alive for the local community. 

Last but not least a football club may own tangible assets such as a well-located stadium or training ground. To a speculator-owner this could be a mouth-watering reason for attributing ‘premium value’ to a purchase if these assets are under-valued as football-related facilities.

All of these possible windfalls are speculative but the possibility of their existence drives value up to some degree. They can lead owners to take enormous risks in over-paying for the assets and taking on excessive debt. They drive reckless expenditure on player and manager salaries, scouting systems, fitness and coaching structures, etc. All of these factors taken together increase the likelihood of the club failing.

The problem isn’t that clubs budget for losses and owners subsidise these. That’s fine as long as deficits are securely guaranteed and the long-term survival of the club is not threatened. Owners can destroy or severely damage a club by subsidising expenditure for a short period and then withdrawing support, leaving a club with debts it cannot repay and contractual obligations it cannot meet.

However where this financial support is structured durably for the long-term it can offer wonderful adventures to supporters and lift whole communities.

Clubs who have operated subsidy models where owner subsidy accounts for maybe 100% or more of turnover include Forest Green (owned by eco-tycoon Dale Vince), Ebbsfleet Utd (owned by a Kuweiti company) and Salford City (part-owned by some of the Manchester Utd stars of the 90’s, such as Neville, Butt, Giggs and Beckham).

So perhaps we can guestimate that ‘premium value’, as a factor of purchase price, is up to about 100% more than the value the club would have as an ordinary business. In terms of operational revenues the ‘premium value’ is the same, in other words an owner might subsidise the business annually up to about 100% of turnover. But I’ll need the regression analysis people to help me get any more analytical than this.

This just leaves me to consider one additional question: if we accept the premise that irresponsible owners can put football clubs at risk through financial mismanagement (over-loading the club with debt, committing to excessive contracts, overpaying ‘premium value’ etc.) and that football clubs are so much more important to their communities than most ordinary businesses, (if we don’t accept that we might as well forget it and just leave the clubs prosper or fail as with any other business) what could be done to prevent failing owners from failing their clubs and destroying community assets?

Firstly football administrators have to prevent the worst of owners from getting control of clubs. The FA do not control this in the top four divisions, the leagues do. The ‘fit and proper persons’ rules should be tightened and extended to stop anybody who has either ever had a criminal conviction or who has ever been bankrupt from owning a club. No second chance should be given when football clubs are at risk. Any purchaser who buys without passing this test will see the club removed from the league and relegated two divisions. Any owner selling will know that selling to an ‘unfit person’ will reduce his club’s value to two divisions below. The club would suffer through relegation but less than it would through bankruptcy. The prospect of its relegation would be a major disincentive to any unscrupulous new owners. Obviously there is much more detail than this to agree on but you get my point. We cannot treat football clubs like any other business.

Secondly tougher controls on clubs’ budgets should be brought in. Where declared budgets for the season ahead show significant levels of owner subsidy in order to cover contractual obligations such as player salaries, this should have to be guaranteed annually with proper security, such as bank guarantees or cash deposits. Other budgeted income and expenditure must be empirically verifiable and correspond to the previous season’s figures or i twill require guaranteeing as well. The levels of security could be relaxed after, say, three years of unchanged ownership without incidents. This analysis of budgets by the league, with strict enforceability of guarantees where necessary, works quite well in French Top 14 rugby.

This brings me on to a final suggestion, also used in Top 14 rugby : salary caps. The purpose of these is not to prevent the richer clubs from flexing their cheque books but simply to level up the competition, prevent excessive salary inflation in Leagues 1 and 2 and National League and prevent any club spending way in excess of the top salary levels in order to obtain a quick promotion. In the case of Bury this seems to have happened and as I write this the club’s future is in real doubt, the season after a promotion. When this proposal has previously been debated at National League level it was suggested that something close to the average of the three highest spending clubs in the league could be the chosen cap level. This is about right. It is not a perfect solution to the problems outlined here and the proper policing of this and other measures would cost significant sums but it is a solution which would help prevent more clubs getting into financial difficulty and possibly going out of business to the detriment of fans and their local communities. And this, after all, is the question.