UNDERSTANDING FFP: The Esk examines what Financial Fair Play means for Everton's transfer strategy.

By The Esk

It’s approaching the end of the season and for most fans the close season stretches ahead with a minimum of 2 months without competitive football.

The void can be filled somewhat by the goings on in the transfer window, and as all Evertonians are hoping we will strike early, bring in some key targets and remove those player’s surplus to requirements, out of contract and even those no longer wishing to be part of the Moshiri/Koeman project.

Transfer activity is not only determined by how much cash the club has available to spend but regulated by Premier League rules on increases in wages, and now as we re-enter European competition, Financial Fair Play regulations by everyone’s friends UEFA.

Therefore, I thought it useful to cover the various regulations relating to spending and profitability.

Let’s start with the Premier League regulations.

There’s two main regulations, Short Term Cost Control (STCC) designed to hold back the increase in player wages, and Profitability and Sustainability regulations providing a cap on the maximum losses permitted by a Premier League Club.

Short Term Cost Control:

Rules E.18, E.19 and E.20 cover the STCC. Essentially they permit clubs to increase wages year on year by a maximum of £7m p.a. covering the three seasons 2016/17 through to 2018/19. There is however scope to increase wages using “club own revenue uplift”

Club own revenue uplift (CORU) includes all increases in revenues other than broadcasting revenue, so includes match day, commercial/sponsorship and importantly player trading profits.

For Everton, this means the following increase in permitted wages:

Season 2016/17 £91 million plus CORU
Season 2017/18 £98 million plus CORU
Season 2018/19 £105 million plus CORU
     

 

So, what does that mean in terms of increase in wages for next season? We’re going to have several improved contracts, Davies and Coleman for example. We have contract offers out to Lukaku and Barkley (assuming both stay) and I’m sure there’ll be other players rewarded for their efforts this season.

In terms of reducing player costs, we are clearly going to be selling several players, and not renewing contracts for some.

We’ve also then got to look at incoming players – this summer is widely expected to be our most active for many a year.

Finally, we need to look at the level of CORU – i.e. how much does our non-broadcasting revenues increase by? Match day revenues will be flat, commercial revenues may see a small increase and we’re bound to see increases in sponsorship revenues firstly from USM’s sponsorship of Finch Farm but also the new shirt sponsorship deal.

I would therefore estimate CORU to be in the region of £10 million before player trading profits.

Looking at outgoing players there’s wage savings and potential transfer profits from the following players:

  • Likely/confirmed departures: Deulofeu, McGeady, Cleverly, Kone, Stekelenburg, Niasse, Valencia, McAleny and Garbutt.
  • Possible departures: Mirallas, McCarthy, Funes Mori, Barry, Lukaku & Barkley

The scope therefore for wage savings transferred to new recruits is huge – I’d estimate a range of between £15 million and £30 million depending upon who leaves.

In terms of profits on outgoing players, again the figures seem to be ridiculously high, but the range would be from £45 million to £175 million depending upon who exactly leaves the club.

Therefore, the scope for meeting new player wage demands is huge, and cannot realistically be considered a barrier to transfer activity this summer.

Total wages can within regulations increase to £108 million plus any required surplus from the player trading account. Contrast this with staffing costs of £84 million in the last published accounts.

Profit and Sustainability Rules

With regards to Profitability and Sustainability, I don’t see there being any issue despite recording two successive losses of £4.6m and £24.3m as we should have a profitable year to May 2017 with the receipts from the Stones sale plus the enormous increase in broadcasting revenues for this season.

This leads nicely onto the UEFA regulations, now quite well known Financial Fair Play. Financial Fair Play looks at the profitability of clubs in European competitions.

Financial Fair Play Rules.

Essentially FPP limits the permitted losses of clubs by assessing clubs against break-even requirements. The break-even requirements require clubs to balance their spending with their revenues (excluding infra-structure, stadium and academy spending). Thus, it restricts the ability of a club to rely upon debt as a means of financing normal activities.

UEFA use an “independent” body known as the Club Financial Control Body (CFCB) which looks at the previous 3 year’s financial accounts.

The regulations permit each club participating in European competition to spend up to €5m more than they earn per assessment period (year). However, this limit can be increased to €30m if the excess is covered entirely by a “direct contribution/payment from the club owner(s) or a related party.

As with the Premier League rules, the two successive years of losses will not create difficulties (even though they aggregated at €35.1m) because of the return to profitability in financial year 2016/17.

Sponsorship and FFP

The issue of sponsorship, and the use of related companies to provide sponsorship to cover losses within clubs has long been a contentious subject within UEFA.

In relation to Everton and the sponsorship of Finch Farm by USM, both Moshiri’s and Usmanov’s involvement may come under scrutiny. However, neither should represent a threat or a problem. The first issue would be the fair value of the sponsorship deal, and the likely figure of £5m per year (not confirmed by the club but assumed to be the approximate value) would pass the fair value test.

Usmanov’s controlling interest in USM and 30.04% stake in Arsenal may raise an eyebrow or two in Nyon (UEFA’s headquarters) but is not believed to represent any problem.

Conclusion:

It’s difficult to see a scenario where either the Premier League’s STCC rules or UEFA’s FPP rules will significantly impact Everton’s recruitment drive this summer. Much of this of course is driven by the requirement (for footballing reasons) to make large changes to the squad.

Assuming the outgoing numbers are realistic (in terms of number of players, value of contracts and transfer values), even taking the lower figures, when included with the increase in non-broadcasting revenues and potential player trading profits, there’s room for salary increases from recruiting of anywhere from £32m upwards to over £50 million p.a.

There is no foreseeable financial reason why salary demands of incoming players should present a regulatory or commercial obstacle. The limitation (if any) can only be our ambition, our ability to close deals or the player’s desire to join Everton.

1 COMMENT

  1. Brilliant. Most interesting article on evertons situation for the coming year that I have read.
    Thanks ESK you never let us down.
    Please keep these coming, loved the business matters podcast. Keeps fans in the light regarding the clubs finances and crucially their chances in the transfer market. This summer could be really exciting.

    EFC forever.

LEAVE A REPLY

Please enter your comment!
Please enter your name here