UEFA first implemented the Financial Fair Play (FFP) regulations in the 2011-2012 season. The aim of FFP was to ensure that clubs participating in European competitions operated within their means. It was UEFA’s response to curbing the routine losses posted by participants. They feared that a bubble was growing around the footballing world which, if they failed to intervene, would burst and the fabric of the footballing world would come crashing down.
The Financial Fair Play regulations contain a number of provisions which clubs have to comply with. As a result of these regulations football clubs have had to come up with more creative ways of conducting their transfer business. Two requirements are particularly pertinent here:
- The break-even requirement - places a threshold on the level of loss a club can make over three years
- The Overdue payments requirement - Clubs cannot fall behind on making payments to other clubs, their employees and to the relevant taxing authorities
If you want to know more about FFP and how the regulations work you can do so here:
There are a number of ways clubs can limit their exposure to the above requirements :
The Loan System:
The loan system can be easily manipulated by crafty club owners to circumvent the limitations placed on them by Financial Fair Play. Loaning players reduces expenditure significantly. The club does not have to pay any amortization costs as there is no transfer fee involved and they often don’t have to finance the player’s entire salary. However there are other ways of using the loan system to circumvent FFP.
Obligatory Purchase Clauses:
The idea of an “obligatory purchase clause” (OPCs) is a relatively new phenomenon. Before FFP we heard of clubs having “an option to buy” which they could decide to exercise or not, depending on the performance of the loaned player. With an OPC the transfer must go through regardless of performances. A loan deal with an OPC is, for all intents and purposes, a delayed transfer. These OPCs mean clubs can get the use of a player for the current season but delay paying transfer fee until the next.
How does this help? To illustrate let’s look at the sale of Negredo to Valencia. Valencia is a club that until recently routinely operated on losses. They were completed debt ridden. The club has since been taken over by the Peter Lim and is now backed by significant spending power. Valencia will be aiming for European qualification next year and as such their books must be in order. As we have seen FFP not only monitors losses made by clubs but also their ability to make timely payments to other clubs. Valencia may have felt that signing Negredo this year would have impacted on one of these requirements and have therefore negotiated a deal with an OPC. This enables them to secure a key signing for the foreseeable future and still comply with the requirements of Financial Fair Play.
Two year loan deals:
Liverpool’s signing of Manquillo is unusual to say the least. It is a two year loan deal with both clubs having a number of options to sever the deal or make it permanent along the way. While this loan is likely about monitoring the player and seeing how he adapts, some clubs may be able to strike similar deals. This would allow the club to delay the payment of a transfer fee for two full years thus keeping amortization fees, and potentially wages, out of their accounts.
Frank Lampard to Man City - A special case:
I’ll begin this section by stating that Lampard’s transfer to Manchester City is completely above board. They are paying his wages for the entire period and are not using it as a way to get around the financial restrictions of FFP (although it has helped them fulfil their home-grown quota.)
Frank Lampard signed for New York City on a fee transfer over the summer. New York City is a new football club created by the owners of Manchester City and the New York Yankees. He has since been loaned to Manchester City until January. The owners Manchester City have made a habit of purchasing or creating their own football teams all around the world. While this isn’t against FFP regulations the potential for abuse is massive.
The countries in which these other football clubs are situated don’t have the same stringent break-even requirements that teams participating in UEFA competition do. This means they can afford to post massive losses and have the owners inject as much equity as is needed to cover it. The affiliated clubs could purchase foreign talent and then either loan the player to Manchester City, or let him go on a free transfer a year later thus completely eradicating any amortization fees, a significant cost for most premier league clubs. UEFA will have to monitor such developments closely to maintain parity amongst competing teams.
Transfer Strategy:
Chelsea:
Chelsea has come up with their very own method of avoiding FFP sanctions. It involves stockpiling some of the biggest young talents in the game, loaning them out to increase their values and then selling them on a higher price. In doing so the club can post significant profits on sale. As FFP’s “monitoring period” looks at profits/losses over three years Chelsea only need to sell two or three highly rated youth products every three years thus making FFP compliance significantly easier. Here is a breakdown of Lukaku’s and De Bruyne’s profit on sale and the resulting change in net profit as a result of each deal :
Things get trickier when, like in Luiz’s case, a player signs a new contract with their club. As a player’s cost is written off over the life of their contract, when they sign a new contract with their club the unamortized part of their initial transfer fee (the net present value) is written off over a longer period of time. This means we have to recalculate the amortization fee.
Luiz was purchased from Benifica on a 5 ½ year deal in Jan 2011. This means his yearly amortization fee was around £4.8 million. In the summer of 2012 he signed a new five year deal with Chelsea. This means that 1 ½ years of amortization had already been accounted for which equalled to £ 7.17 million. This left an unamortized amount of £19.13 million, also known as Luiz’s net present value. This figure must now be amortized over five years giving us a new yearly amortization fee of approximately £3.83 million.
When Luiz was sold to PSG he had accumulated amortization of £14.83 million, meaning his net present value was equal to only £11.47 million. In order to determine how much the accounts of Chelsea Football club have improved we must take into account: wages no longer paid, amortization fee no longer paid and profit on sale which can be seen below.
As you can see Chelsea posted an incredible improvement in net profit of £ 46,249,090 due to the sale of David Luiz. This, along with the fact that Chelsea moved on some high earners, allowed them to purchase players like Costa, Fabregas and Filipe.
Selling a star player every three years:
This strategy is unlikely to be popular with fans but could be hugely beneficial. As I mentioned, the profit posted on a player sale remains relevant for Financial Fair Play purposes for three seasons. After this the FFP “monitoring period” no longer includes the year in which the sale was made. Selling a player for a large profit on sale means the club can add a huge amount to amortization fees and to wages without falling foul of the break-even requirement.
To illustrate this point we will look at the transfer activity of Liverpool football club.
As you can see Liverpool has spent over £117 million on players this season. Despite a net spend of £34.5 million they will post an increase in profit of £50,906,667 as a result of transfer activity. The reason for this is the way purchased players are accounted for (explained below) is not the same as those who are sold. The profit on sale for Luis Suarez was £62.95 million. Liverpool should be able to spend freely over the next three years without having to worry too much about FFP (although their spending will be limited by their cash and cash equivalents.) In three years’ time Liverpool will no longer have this massive profit on sale in their break-even calculation. If they were to sell another star player after that period it would allow them to spend freely once again for another three year period.
Contractual Methods:
Offering new contracts :
Something as simple as a club offering their most expensive signings new long term deals will help them with Financial Fair Play compliance. This is due to the way football players are accounted for. Let’s look at the example of Di Maria who signed for Manchester United for a record fee of £59.7 million.
Players add to the expenditure of a club in two ways:
- Amortization Fees: The Transfer Fee of a player is amortized over the life of their contract. In order to calculate a player’s amortization fee we simply divide the transfer fee by the contract length.
- Wages: the club pays the player a yearly salary which is also entered into the profit and loss account
Knowing this we can calculate Di Maria’s amortization fee. We divide the transfer fee by the rumoured 5 year contract (59.7/5) and we get a yearly amortization fee of £11,940,000. This amount is also taken away from the transfer fee each year (giving us the net present value of the player.)
When a player signs a new contract we must recalculate the amortization fee. This is because we are now able to spread the remaining transfer fee, or net present value, out over a longer period. Let’s assume Di Maria signs a new 5 year deal exactly 2 years into his current contract. Accumulated amortization is £23.88 million giving us a net present value of £35.82 million.
This £35.82 million must now be divided by the new 5 year deal to get the player’s new amortization fee, which is £7.6 million. We have reduced our amortization costs by £4.4 million which is equivalent to the yearly salary of a player earning £83,000 per week.
Long-term deals and structuring contracts:
The longer the contract you offer a player the less their amortization costs will be. If we offer a £30 million player a three year contract we would be paying an amortization fee of £10 million a year. Offer that same player an initial 5 year deal and we only pay £6 million.
Clubs can use a combination of the above to strategies to significantly reduce a player’s amortization fee. This strategy would work especially well for a club who has just sold a star player and has therefore posted a massive profit on sale. FFP looks at the profit/loss made by a club over a three year period. As we explained above this means that a large profit on sale will only be taken into account for that three year monitoring period. The club can offer the players they bring in to replace their departed star series of contracts in such a way as to minimise their amortization fees after the three year period.
Let’s look at the spending Tottenham in the 2013/2014 season. Tottenham spent £112 million in an attempt to replace Gareth Bale after his move to Real Madrid. If they had offered every player a three year contract with an option of a fourth the yearly amortization fees for the entire window would have been £37.3million. After two years the club can offer all the players new three year deals. The option of a fourth year above is merely an insurance policy that gives the club an extra year to negotiate a new contract.
Such a strategy would reduce amortization costs as follows:
Such a strategy would reduce amortization costs as follows:
Yearly amortization before new contracts = £37.3 million
After 2 years accumulated amortization = £74.6 million
Net Present Value (Transfer Fees – Acc Amortization) = £37.4 million
Divide this by new three year contracts for all players = £12.5million.
After 2 years accumulated amortization = £74.6 million
Net Present Value (Transfer Fees – Acc Amortization) = £37.4 million
Divide this by new three year contracts for all players = £12.5million.
Obviously this example is an exaggeration. A number of players won’t work out and others will want exorbitant wage rises. However it does show the value of a well thought out contract strategy. This reduction in amortization costs is so significant it would allow a club purchase a player for £58 million on a four year deal and pay that player £200k per week (provided they remained FFP compliant and had ample cash reserves.
Conclusion :
The introduction of FFP has resulted in transfer activity becoming more complicated and nuanced. It has made clubs become craftier in their dealings, pushing transfers back using the loan system or cutting amortization costs as much as possible. This trend will continue and clubs will no doubt come up with ways not described above to avoid sanction.
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