Minority Report 2019-20 - Talking Finance (3)

With respect, you do not know what financial risk Charlton and Luton are taking. Neither do you know the playing outcome for the season until May 2020. Just like many you are happy to conclude that the long term plan is unsuccessful based upon short term outcomes.

Assuming that you know about business, you will know that companies are a separate legal entity to the owners (shareholders) and directors. In that case, you will know only too well that the owners do not benefit from the decisions that they take concerning player sales and player wages. Indeed, this article is about EFL rules, and the club has an obligation to adhere to those rules. The only decisions that the directors are liable for in this article is how they plan for the financial shock that relegation imposes upon clubs, and I have no idea how Charlton and Luton are planning for the financial shock that they will face if they are relegated.

Frankly, all that you have done in your reply is point into the distance and say there must be a better way, just look at them. If I remember correctly, the last time we were relegated, Bolton were the team that people pointed at in the same gesture. I have read your stuff and frankly, you can do better than that. You now have the information that you need to reply constructively. Why not try it.

 

Sorry, I am unclear why you think that our club could afford player pay cost of £7m in League 1. That implies a turnover of over £10m and we know from our last published accounts that our turnover would be just £8m.

 

I thought sponsorship money could be added to the pot. An obvious way for our billionaire board to show their true colours

 

The attempt to patronise people who disagree with you doesn’t wash with me. I have seen your interpretation of information. That’s all it is. I had hoped that you were more robust in your analysis to fall back on the ridiculous it’s either this way or we are like Bolton argument. Frankly that isn’t true. I know that Luton’s wage bill over the last few years has been consistently lower than ours so I would expect this to remain the case.

There are many different ways to run a football club. We have abandoned any focus on sporting outcome and are solely in existence to generate income for an investment company. That’s the reality of our situation. League position or ‘success’ are irrelevant to that model. Clubs that have a view on a sporting outcome rather than merely producing marketable players operate differently. We are pretty much the only club in the entire football league operating in the way we do so of course there are viable alternatives.

I was fine with Crynes version of the plan which allowed for other consideration alongside financial stability. It was logical and made sense. It literally was our only option to compete at Championship level. The current owners have abandoned this plan and any form of pragmatic attempt to attain sporting success. For clarity by success I mean avoiding relegation not chucking daft money around

 

That is quite true, and many Championship clubs are doing exactly that. They are charging related companies far more than the market rate for sponsoring the club shirts. Through that mechanism, they are transferring losses from one company (the football club) to another company that they own. In essence, there is little difference between one method of donation and another. Our current owner said from day 1 that they would not do that. That the club must stand on its own feet.

I am unclear why you would think that a foreign owner, one with no prior connection to either the town or its football club, would want to come to the town and throw his money away. Many seem to regard their position as a disregard for the fans. Indeed, many have said that they are money grabbing, in spite of never having taken a dividend. Many seem to regard it as a right that the fans of the club are subsidised by the owner. That the owner should spend £millions in order to make up for the fact that they have spent £300. I can only think that reports of their wealth, and reports that other owners were willing to do so has conditioned fans to think that way. But why should they willingly do so without having a single motive other than making us happier.

They are here to make money. They are here to make the club worth more than what they paid for it. They will sell the club when they have done that, and when they receive an offer that gives them a profit. That is what venture capitalists do. However, if the club is worth more than they paid for it, that suggests that it is a better club than it was when they arrived. They have a long term plan to achieve that. How about we give them more than 18 months.

 

I think the hope on the horizon based on RR write up, is if you sign young players on long contracts, when you are re promoted you can keep them because they are still young enough to improve and add value.
So in theory a 21 year old today who gets relegated and comes back up hasn't cost a lot in them 2 years and have 2 years left so 1 extra year in Championship worth good money would only be 23/24, we get established enabling us to reinvest again but with a bit more money to start the cycle again(but hopefully with a step up in quality).

All ifs buts and maybes but there is some logic in it, if it works.

 

Then the imposition of a contract reflecting relegation would meet the reduction to meet SCMP. An idea you float in your earlier text.

I realise your view is that there is no other approach than that adopted by the current owners. I think your views are very well supported by the evidence you present but there are alternatives that exist.

The one thing neither of us know is what is in the best long term interest of the club we support. Time will tell us the answer.

 

Which is great if he can sell them whilst in Championship and sells them in next 12 months anything other than that makes it a huge gamble that could hugely backfire on him.

 

I am not patronising you. I am treating you with respect and I am attempting to explain to you why I hold the opinions I do.

Luton's wage bill was lower than ours in the summary that I produce in Taking Finance (2), but their Accounts covered a period when they were in League 2 and we were in the Championship. SCMP limits pay to 55% of Turnover in that league and they had no option but to comply. Neither of us knows their current policy, nor how they plan to cope with the shock of relegation, if it happens. Neither do you know that we are the only club in the whole Football League that operates this way. Indeed the SCMP rules that dominate the way the lower 2 leagues run, enforces that financial discipline on all clubs in the bottom 2 leagues.

Crynes version of the plan meant that he had to loan the club more than £6m. He also donated the club £1.5m over the years in order to cheat SCMP. And yet he still got criticised when he took the decision to sell all those players when we were 7th in the Championship. In the end, the fans will always criticise any decision that is based upon financial prudence rather than on league position. That is why I would never want to be in charge at my football club. I am just too thin skinned. The owner should always make the right decision for the long term security of the football club. You as a fan do not agree with that priority, and I can understand that, but it does not make his decision wrong, just because the fans disagree. I had hoped that putting as much financial information into the hands of the fans as I could collect would convince them that decisions are taken for sound reasons, even when the fans disagree with them. I am still hopeful, and that is why I continue to explain the reasoning.

 

Nobody thinks that. But the owners have been here now for two years so should be held accountable for failing to increase advertising and commercial revenue wouldn't you agree?

The next company accounts are going to be very interesting to see if these avenues have increased by much as a benefit of having multi national board members that should have contacts all over the world, compared to what we made by having a local owner.

 

I still feel glum.

 

What you are talking about is shirt sponsorship.

When a brand agrees a shirt sponsorship deal, what are they buying. In order to answer that question, I am going to use Liverpool as my example. It is not particularly relevant to us, but it will serve as a contrast. So when Standard Life buys the right to put their name on the shirt, what are they buying. Well, first of all, they are buying exposure. All Liverpool games are on TV, not just in the UK, but throughout the world, not just in the Premier League but in the European Cup as well. Those competitions have a huge world wide audience of young people. Those are just the sort of people who are beginning to think about savings and potentially retirement. Just the sort of people who Standard Life are primarily interested in. Advertising in football, and principally advertising on the shirt of a club with a lot of airtime is just what they want because it is a good way to reach their target market.

Secondly, advertisers want to be associated with winners. Being associated with a winner has a knock on effect. People a much more likely to figure that your brand is one to go with if they associate it with a team that has won the European Cup, than if it had finished in the bottom half of League 2 for example.

Thirdly, Sponsorship is the way that many owners chose to subsidise the football club that they own. They are aware that there is not much synergy, that there is not much commercial logic to the deal, but nevertheless, they do it because it tells the world that they own the football club and that they have arrived on the world stage. They are important and the world should take note.

So that is three reasons to engage in a big shirt sponsorship deal. Which of those reasons applies to us? Well, we are not in the Premier League, and like it or not, the Championship just does not have the same exposure world wide. We are not a winner, and why would any brand want to associate itself with a loser. Our owners are not running brands that would benefit from wider exposure, and they are not vain enough to want to announce their arrival by putting their names of their brand on the front of a shirt. They do not want to be involved in subsidising one of their businesses by transferring its losses to another of their businesses.

When those three avenues are ruled out, what appeal does our football club have for a world wide brand. None. At which point you will no doubt tell me that our owners said that there are world wide opportunities for sponsorship, and I am sure that our owners would readily accept that they said that, but we have a chicken and egg situation here. What comes first, success on the field then selling our brand worldwide or selling our brand worldwide and then success on the field. I guess you know what I think before I go any further.

 

A couple of points.

Sponsorship. What a company is buying is brand awareness, or, its offsetting against profit. The biggest flag for me is the commercial arrangements entered into since the owners took over.

We've seen at other cubs where foreign owners become involved that overseas commercial interventions are highly common. And this is the route they could have followed if their connections were strong and their business connections robust. It would have been a fantastically easy way of creating synergy with overseas markets and therefore generating interest and revenues with those overseas markets. With the ifollow platform, you can generate connection to the club and show live football pretty cost effectively.

I'll cite Indonesia as an example. There are millions of football fans in Indonesia. Many stay up til 3 am and huddle around a TV to watch football. Not just Premiership. But championship too. They are obsessed. Its a frighteningly poor country largely, but, there are people willing to spend to see their team and if structured properly, you could find a point of interest, an investor and sponsor and you'd essentially buy a few hundred thousand fans overnight.

That takes effort. Not huge cost. But effort. I'm not sure we've undertaken much effort at all and what I did expect when these owners took over was more effort. When CK Becketts deal lapsed and having gained promotion, that was an opportunity to make a step change. We got more of the same. Yes its the "best ever" sponsor deal... but I'm sure we're still one of the poorest clubs when it comes to commercial revenue.

For every pound of commercial revenue they generate, that goes straight into the budget. And for years, its a stable revenue with the length of terms generally agreed, so you can budget long term deals with more security.

The other thing I want to mention is the long term aspect. I've seen no evidence to date that they are here for the long term. Looking at whats happened, they inherited a debt free club that was in the black and that allows dividends. They have an offshore vehicle nobody can see the structure of. Several people have tried to trace their roots and wealth and aside from Chien Lees having a stake in the very early days of 7 Days Inn (the first IPO raised £320m and he only had a stake (not listed what %) in it), and nobody has found billions. Then we have the strange websites, vanishing addresses, odd out of sequence imagery on their sites and claims that as you dig have more of an illusion of truth than 100% fact (Nice training ground project).

If they can sell a few players for a few million every year and take healthy management charges and eventually repay the purchase price (something I think is very poor form indeed if they did) and then get their hands on the ground and flip it in around 3-4 years... I think you then have your model.

 

You clearly know more about the potential for sponsorship growth in the far east than I do. However, I would question whether any investment in the particular market you have quoted would ever give us the returns that you claim. Even your text seems to contain some doubts.

I am one of those who searched for evidence of the wealth of the new owners, and like yourself, I failed to find any. I looked on Google Earth (street view) and was similarly unimpressed. It may even be smoke and mirrors as you suggest. However, I will continue to keep my eye on all the information available at Companies House, and I will certainly report anything that I see that I am unhappy with, though for our next set of accounts, we will qualify as a small company, and our accounts will contain less information as a result. Until then, I will continue to give the owners the benefit of any doubt. After all, they did pass the fit and proper tests applied by the EFL and they did satisfy Patrick Cryne, who had our best interests at heart when he sold out to them.

I have fewer worries than you have expressed, partly because they have not yet broken any promises. They told us that they were here as part of a long term plan and they told us that they were here to improve the club rather than throw money at it. For that strategy, the ownership do not need to be billionaires. They simply need a good long-term plan. We will find out about that, all in good time. Until then, all we have got is patience, because the last time I looked there were not many billionaires interested in investing in Barnsley. That is essentially my problem with this "throw away" attitude that many fans seem to have. We can always get rid of this lot if we put enough pressure on them, because the next lot are bound to be better. That line of logic has little to recommend it. The overwhelming evidence is exactly the opposite.

 

Red Rain as someone who has a good eye looking over accounts you may wish to look at the shirt sponsor’s filed accounts.

 

It looks like they just bought that company to prevent anyone else acquiring the name doesn't it. Either they are trading through a different company name or they are trading through a partnership, in which case there is no way of looking at their accounts.

 

I've not cited specific returns on overseas sponsorship and game streaming, but the scope is there. And if we can tap into some of these football crazy markets just a tiny bit, there is more scope for revenue generation than bums on seats at Oakwell. You can generate millions of people watching worldwide, while just a few thousand more at Oakwell without significant cost to increase that number more.

To do so. You need effort. And in their own words, they mentioned a more global approach, more foreign fans watching and connecting, increasing revenues accordingly. For me, that's the most disappointing thing. There is no evidence that i'm aware of that shows any sort of push into overseas markets to generate extra revenue. We've seen the Times Square freeby… which they milked quite a bit, so I'd very much expect them to do the same with any other global push.

I could understand a slight delay in pushing such a thing when we got relegated. I could understand maybe to a lesser extent not pushing such a thing when we were in league 1 (though winning every other game on average) but I couldn't quite understand why not through a promotion.

So to date, I don't think we'll have seen any significant uplift in streaming revenues or commercialisation. And that's where the more robust growth should be coming from. Player sale revenues aren't guaranteed and we've seen us having to write off a fair few long term deals at our cost. I'd be very surprised if that's not the case with this intake of 10 who cant all play at the same time as the rest of the squad.

I also take a different view on their ownership. Fit and proper people tests are beyond a joke. Bury's last two owners are a prime example. Boltons owners another. Look through the EFL, Championship in particular and look at some of the actions and antics and misdemeanours and it just highlight this test isn't robust or accurate in any way at all.

I also recall Kraft telling a select committee, they would continue to make chocolate at Bournville, they wouldn't change the formula of Dairy Milk and no jobs would be lost. Post takeover those promises faded and weren't upheld. I also recall a networking event with a VC who bought Little Chef (with others' money) and then coaxed Heston Blummenthal to film a programme highlighting the turnaround. Despite numerous promises to Heston, I can share from first hand that the intent wasn't to change, but to generate more awareness to then be able to flip it quickly off the back of publicity. So I would never take any verbal assurance from any person from anywhere in the world at face value.

 

All fair comments, and all beyond my knowledge and experience.

 

It's not really a question of what "we give them". The owners are here for whatever duration they choose, and all we can do as fans is decide whether we wish to continue to pay to watch the offering they put out. For some that is non-negotiable. Others are either more fickle, or more discerning, depending on your point of view! I think people know where I stand. I can't see a way we avoid relegation with the squad as it stands. It lacks depth and it lacks experience, even though the efforts of the players and both head coaches can't be faulted so far. I see little prospect of the owners authorising the investment which would be required for survival in January - in fact it looks likelier to me that players of the calibre of Woodrow, Mowatt and possibly Collins might depart. The owners have stated they will not deflect from their vision. So if my fears are right, and we are lucky to bounce straight back up again next season, it will have taken nearly three years to land back where we started with them. And we are not getting any younger!

The Talking Finance articles are well-written and I have no doubt they are correct from an accounting and regulatory point of view. But allowing oneself to be hemmed in by the Weberian logic that they present is something of a council of despair. Most of us would consider ourselves bound by the rules and would be cautious in nature. That's why we are civil servants, administrators or, some would say "bean counters". Entrepreneurs often appear to flirt with the boundaries of the rules and also with the concept of financial gravity. This results in some going bust - often more than once - and others soaring. I suppose Wolves are the par excellence of that idea in football. I'm not advocating we should follow their lead - it's too high-risk. But surely there is some sort of middle way? I find the outlook of the current ownership with the supposed wealth at their disposal disappointing, to say the least. Allied to Red Rain's purview ("the iron cage"?) it's positively depressing!

As I say, all we can do is determine our own response to events. Too late for this season for those signed up, but I know where I'm heading next year. But hey! December 2016 and all that! (A bit harder to do in the Championship though?)

 

Fantastic topic all this. As usual the mixture of business and sport is as confusing as it is maddening.
The Nice model has now started to concern me. I think they told the fans they were here for the long term etc etc. However they weren't ....but that is not what bothers me (although it was not the truth). Im sure i read somewhere that they bought the french club by financing a loan, which was then paid back by generating player sales and only then sold the club.
So no long term plan, only stripping assets from the club for profit, admittedly the club may now be in a better financial position.
Are we, as fans happy with this model....is this the way clubs like ours have to operate?
Financially we are probably better than 90% of the teams in this division but predictably the short term effect is that we will be in the bottom 10% of teams as a league position, come the end of the season.
Oh and is there any evidence where or how the consortium amalgamated the monies to purchase our club? Should i/we be concerned if it was via a loan?