Profit and Sustainability – The Rules & Everton’s Position

Following on from Carlo Ancelotti's comments regarding spending, Paul takes a more detailed look at Everton's financial position, what it means for compliance and importantly transfers this summer

Paul The Esk 14/05/2021 21comments  |  Jump to last

In answering a question regarding summer transfer activity, Carlo Ancelotti spoke at a media briefing on Wednesday 12 May regarding Everton’s finances in the context of the Premier League profitability and sustainability rules.

This has been interpreted as Everton (i) not having issues with profitability and sustainability; and (ii) Everton are still pursuing punishment for the six.

Let’s deal with the latter point first. Ancelotti and Everton are absolutely right to push for the harshest punishment for this flagrant act of bad faith by the six. If Uefa’s treatment of the six seems lenient (punishment reduced by co-operation in not confirming membership of the Super League), that should not be viewed as a benchmark by which the Premier League should set its punishment. Clear breach of rule B.15 in acting in bad faith must carry the strongest of penalties, impacting the clubs sporting status (my personal belief is relegation; others suggest points’ deduction) not just a financial penalty met by the owners.

The profitability and sustainability point though is worthy of examination. English is not Ancelotti’s first language and although he speaks eloquently, with passion and humour, there are occasions his words are open to interpretation. His words could be interpreted as an admission or forecast that we may have compliance issues with profit and sustainability, they were not a denial. One interpretation is that he is comparing the possible severity of our potential to break rules with that of the clear rule-breaking of the six. Quite rightly he is making the case that the six have much larger, more significant cases to answer for than Everton potentially have.

Our ability to deal in the summer transfer window is unlikely to be contingent on profit and sustainability compliance for a number of reasons. Firstly the Premier League would have to bring a case, adjudicate and propose a punishment. This would be subject to arbitration and appeal if necessary (regarding any potential penalty). Secondly the window runs from 9 June to 31 August 2021. Our financial year end is 30 June 2021. Transfer activity beyond 30 June would fall into the financial period 2021-22, not the period contained within the current profitability and sustainability period. Whilst Everton will have had to provide projections for the following year, clearly they do not fall within this period, nor is there an absolute obligation to comply with the projections.

So what are the profitability and sustainability rules?

Commonly but incorrectly referred to as FFP (Financial Fair Play) they are the rules contained in Section E of the Premier League Handbook, rules E.45 to E.53.

Essentially they limit the permitted losses of a football club to £105 million over a three year period. This is not the aggregate of the net losses shown in the accounts. Several costs are permitted to be deducted from the statutory accounts:

  • Depreciation and/or impairment of tangible fixed assets & amortisation of goodwill (not players’ registrations)
  • Women’s football
  • Youth development
  • Community development
  • Covid costs for 2019-20 and 2020-21 – lost revenues and exceptional costs directly attributable to the pandemic

The rules are usually viewed over three years but because of the impact of Covid-19, the current regulations look at the aggregate of the average calculated figure for this season 2020-21 (projected) and last season 2019-20 plus the preceding two years 2018-19 and 2017-18.

Everton’s position

Thus for Everton (included projected figures for 2020/21) before allowances the figures are:

£’000
2017-18 -13,070
2018-19 -111,800
2019-20 -139,900
2020/21 (projected) -175,800
Average for 2019-21 -157850
Projected Total -282,720

I have projected losses of £175.8 million for this (2020-21) financial year (not including the potential for £61 million of costs relating to Bramley-Moore to be capitalised – more below). I have calculated increases in wages and amortisation reflecting last summer’s purchases and a full year of Ancelotti’s wages, almost zero match day revenue and flat commercial revenues. I have not assumed a further write down of player book values as per previous year.

Estimated Allowances (including average for 2019-20 and projected 2020-21):

*estimated £’000
Depreciation 17,500
Women’s Football 18,000
Youth development 18,000
Community development 6,000
Covid Costs 50,000
Total Estimated Allowances 109,500

I have calculated estimated costs for women’s football, youth development and community development. I calculated an additional £33 million of costs directly attributable to Covid-19 to give an average of £50 million for the two years 2019-20 and 2020-21

So based on the projections and estimates above, Everton would have aggregate losses after allowances of £173.2 million. However there is the prospect of capitalising the costs of Bramley-Moore which in these calculations amount to £61 million reducing the loss figure to £112 million.

Given these figures are heavily dependent on estimates, there is sufficient margin for error to suggest that the profitability and sustainability position of the club could potentially squeeze inside the £105 million figure.

If it does not then the apparent leniency towards the six and the fears the Premier League come down hard on Everton are perhaps over-played. It would be “funny” as Ancelotti stated in the light of the treatment of the six.

If the Premier League were to signal their intent to pursue the club on a profitability and sustainability breach then there are further remedies open to the club before the end of the financial year. With the window opening on June 9th, Everton have three weeks to sell players at a profit (notwithstanding Ancelotti’s remarks). In that instance, the sale of Moise Kean would be the obvious and most palatable disposal, despite his enormous potential.

Summer transfer activity

It is clear to all Evertonians that the first team squad is still in need of considerable recruitment and strengthening whilst Brands will be charged with removing as many of those no longer desired as possible.

The situation is helped by a number of players carrying considerable costs reaching the end of their contracts, Bolasie, Walcott, and Besic being the most expensive in terms of wages and amortisation. Despite being on loan we have carried Bolasie’s and Walcott’s amortisation costs and no doubt a considerable part of their wages too.

The players whose contracts expire in 2022 also require careful consideration with potential extensions for James, Sigurdsson and Coleman. Bernard, Delph, Kenny and Tosun (injured) must remain high on the list to be sold, but as we know, contracts signed some years previously are unlikely to be matched in current market conditions making the moving of the players extremely difficult.

Of the most sellable (and potentially profitable) players Moise Kean remains the obvious choice financially and perhaps by the wishes of the player. If he is sold, the timing of the sale (ie, before or after 30 June) will give a clear indication of our financial position vis-a-vis profitability and sustainability with the profits being booked this financial year in a sale prior to 30 June.

Moshiri has proved remarkably resilient, resourceful and committed in providing his managers with the funds to buy players regardless of the enormous imbalance between costs and income. Given the continued losses of the club and the continued negative cash flow it seems inevitable that if he is to provide Ancelotti with what he requires he will have to provide further funding. One of the unresolved issues is how that sits with future lenders for the new stadium at Bramley-Moore Dock. Without doubt they will be urging (just as Arsenal’s lenders did 15 years ago) restraint. Restraint does not seem to be a Moshiri characteristic, so yet again it will be an interesting summer for Everton on and off the pitch.

In the meantime, the six should not escape punishment, and football fans around the world should contribute to the fan-led reviews wherever possible or contact their clubs and local politicians where appropriate. It is our opportunity to influence the future regulation and governance of football.

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Reader Comments (21)

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Brian Wilkinson
1 Posted 14/05/2021 at 22:10:31
Yet again, another brilliant article. Thanks, Paul, love reading your posts.
Paul [The Esk]
2 Posted 14/05/2021 at 22:11:43
Thank you, Brian.
Paul Hewitt
3 Posted 14/05/2021 at 22:18:42
Have we ever been in more of a financial mess?
Kieran Kinsella
4 Posted 14/05/2021 at 22:25:10
Paul,

Thanks for doing the detective work. In a nutshell, it seems as if we have a manageable situation for this year at least.

Paul [The Esk]
5 Posted 14/05/2021 at 22:27:13
No, Paul, we haven't. The pandemic hasn't helped, obviously, but, even without that, we have wasted so much money and spend too much relative to our income.

The club claim it is a function of being at the early stage of the investment cycle. I understand that argument but we are 5 years in...

Thomas Richards
6 Posted 14/05/2021 at 22:32:57
Paul,

What, if any, is the governance on people outside the club injecting funding?

Paul Hewitt
7 Posted 14/05/2021 at 22:33:54
Moshiri has been a disaster for this club. I wish he'd never bought us. Say what you want about Bill Kenwright. But he worked within his means.
Paul [The Esk]
8 Posted 15/05/2021 at 00:16:08
Thomas, #6, there is no restriction on how much capital goes into a club but there is a restriction on how it is spent. That restriction or limit is determined by how much income the club generates. The gap between income and expenditure has a limit (𧴡 million over 3 years).

When a club buys a player, it increases its costs. If it doesn't increase its income, then profits are reduced or losses increase. That is what FFP is all about, in Europe and here in the Premier League: limiting losses.

Pete Williams
9 Posted 15/05/2021 at 09:54:34
Thanks Paul for a very informative and interesting piece. Hopefully we will squeeze under the limit, sell MK in time or just get a slap on the wrist. However, it makes me wonder how Moshiri got so wealthy when he seems to be so bad at managing his investments in Everton. Just too optimistic I guess.

One point you haven't mentioned is our PL prize money. Will that come off the £112m estimated losses? Or is that a post June income?

Alan J Thompson
10 Posted 15/05/2021 at 11:23:00
Paul Hewitt(#7): "Worked within his means"?
What means were they given he publicly stated that he had to put a consortium together to buy the club which many will argue was repaid from the club's income, borrowed money from his "financial genius" friend, mortgaged his house and set up loans from organizations in the British Virgin Islands. I won't bother with Willi Steele and co or the one bedroomed unemployed who were supposedly interested in relieving him of this burden, the City sheiks or the "ring fencing" of funds for a new ground. But please, don't put Mr Moshiri in the same bracket.
Chris Williams
11 Posted 15/05/2021 at 12:34:23
Paul,

Under the latest share restructuring, Feb/March time, FM converted loans to capital investment, and there were another 33000+ shares created, as yet unallocated. At latest price of £3k that makes the opportunity of £100m, further capital injection. I'm assuming these will be taken up at some stage.

What impact has this made on your calculations?

Thomas Richards
12 Posted 15/05/2021 at 12:51:21
Thanks Paul
Paul [The Esk]
13 Posted 15/05/2021 at 15:13:59
#9 Pete, yes, my figures include this year's broadcast payments received up to 30 June.
Paul [The Esk]
14 Posted 15/05/2021 at 15:16:07
#11 Chris, if Moshiri subscribed with cash for those shares, yes, it would give us another 𧴜 million but it would not alter the profit and loss account at all (which is what the regulations are based on).
Chris Williams
15 Posted 15/05/2021 at 16:05:22
Cheers Paul,

I'm optimistic because Farhad Moshiri is clearly serious about all this. I'm getting some encouraging signs about the direction of the club in all its facets. In many ways, the men's football side is the bit that lags behind.

Sponsorships and partnerships are being announced fairly regularly, and presumably they all carry some sort of additional income, so hopefully that will play into the P&L at some stage too, to whatever degree.

There was a report a couple of months ago about a deal with one of Usmanov's companies about a fairly substantial naming rights deal over 10 years. Okay, it was in the Mail, and not picked up by anyone else, so dubious provenance, but it will be coming along.

Do you recall if the 㿊M he paid for exclusivity has yet been accounted for?

Paul [The Esk]
16 Posted 15/05/2021 at 16:36:43
#15 Chris, the 㿊 million appeared in last years figures (2019-20).
Chris Williams
17 Posted 15/05/2021 at 16:41:24
Thanks for that, Paul.
Brian Wilkinson
18 Posted 15/05/2021 at 22:16:08
Hi again, Paul, so with the failed Super League breakaway, that clearly broke the rules, it is looking like they will get off with a slapped hand and a small fine.

So let us just say, Everton managed to get the squad numbers down; let us say Everton went all out to bring in say 4 world class players, maybe more and went way over their FFP limits, but at the same time have built a top quality side, a transfer ban would not be much of a worry, if we already have those players in.

Also a risk of a 12-month ban from Europe; again, we can take a hit for a 1-year ban, possible points deduction; again, with top top quality players, we should be able to make those points back up.

For the sake of a year, could this be a way of Everton playing the big boys at their own game? Assembling a top-quality team, then waiting 12 months for the cream to rise to the top?

What implications could hit us long term? Would it just be short-term? Does chancing our arm now have a bigger picture for the future that would benefit Everton in the years to come?

Moshiri clearly has the money, so buying the very best should have us challenging like Man City have done recently.

Can you give fellow Evertonians an idea of the pros and cons?

Don Alexander
19 Posted 15/05/2021 at 22:44:49
I try to understand Paul's articles and feel a little wiser on finance afterwards, so thank you, Paul. I increasingly feel depressed as well.

That said, the Moshiri regime has in my opinion only succeeded in boxing itself right into a corner nobody wants to be in, despite the expenditure, promises and "project".

There are no easy (or easily affordable) answers it seems, but Moshiri can only retain any measure of respectability to fans, players, agents, and football in general if he this summer enables Ancelotti & Brands to sign some (four or five?) proper players, and better than the good Allan, Doucouré, Godfrey, James quartet they've most recently acquired.

If he can't or won't, just what is the point of employing Signor Ancelotti?

Laurie Hartley
20 Posted 16/05/2021 at 02:25:14
Thanks, Paul, for another terrific insight into the financial affairs of the club. I thought your opinion was fair and balanced. For my part, I am in full agreement with your views on our owner. Farhad Moshiri has nerves of steel - we only have to look at your numbers to see this.

This is why Don # 19, he has already won my respect. Yes, he has made a few gaffs but, looking at the big picture, he has shown a remarkable commitment to our club. Those losses make me shudder but my gut feeling is that he reckons he is going to get that money back in spades. I couldn't do it - but that is one of the reasons I am not a billionaire.

As far as recruitment goes, I will be happy if he signs a right back, right winger (Adama Traore) and gives King a new contract.

One thing I am very sure of: Carlo Ancelloti will be our manager for the long run because I reckon Moshiri trusts him.

Brian Wilkinson
21 Posted 16/05/2021 at 13:04:56
I agree, Laurie, I think the first step is any player whose contract ends in the summer, ship out; any coming up to their final year, do not extend it. It will cost us in the long run. I am talking about players we have tried and tested over the years, the likes of King and Rodriguez are an exception.

A few might think Sigurdsson could get an extension when his contract runs out next summer; he will be a year older and, apart from the occasional flashes of quality, there are better players out there for the longer term.

The old guards that have survived through four Managers, who come in when the likes of James, Allan, Doucouré and the like are missing, are just not good enough.

Once we start to get these players out of the door and start replacing not just certain areas in the starting 11 but also quality back up from the bench and beyond, then we will start making progress.

This summer will be a start, I am sure we will bring signings in, but we have to start clearing the decks and getting a few players off the books.


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