So you’ve spotted a large football club on it’s knees. It’s in administration with such huge debts that liquidation is inevitable. Fortunately none of the local worthies want to be the guy who puts the final nail in the coffin, so whilst they’re all standing around playing chicken, you nip in with a ridiculously low bid for the business. You pretend to have the best intentions but you slip in a clause that gives you total control in the event of liquidation. The inevitable happens, the club goes bust and you are now the proud owner of a shiny new club…except you’re not really. You don’t have much cash, you just spotted a good way of making money and persuaded some Venture Capitalists to invest. All VC’s want their money back inside 5-7 years and at a good rate of return; they took a risk so they want double their money back. You have some further problems too. The “insolvency event” means you’re down at the bottom tier of football – hardly a great income generator AND your fantastic plan to sell all the top players was scuppered by some pesky legislation called employment law. The final problem is the issue the local worthies had – the locals don’t like the guy who made the club go bust.
So you own this nice football club with big stadium and facilities, but like all big modern clubs you will have big screens and academy facilities so even doing nothing burns cash.
The problem is your plan is and was always short term so you and your investors need to get their 100% return and quickly so just how will you do that?
First up – create a myth and siege mentality. Persuade the locals that the football team and the business are somehow not linked. The BUSINESS went bust but the football team lives on. Next repeatedly suggest that anyone who tells you differently is the enemy, in fact scrap that EVERYONE is the enemy full stop and only you can save the club. Football fans love that siege mentality. From Fergie at Aberdeen to Mourinho at Real it’s a tried and tested technique. Remember – everyone is out to get YOUR club.
Now we have this in place the real business of making money can begin. You have assets and a good revenue stream, let’s make it work for you.
Sale and Leaseback
The club need to play somewhere and you’ve created a “maintaining the history” myth so you can illustrate to investors that you’re not going to play in a spare stadium the city may have. That’s a fairly secure tenancy.
Sell the ground and rent it back for 20 years. The investor will want a hefty rent however because you’ve gone bust once and if you do it again the ground may be worthless. So you manage to keep the rental level at 25% of the purchase price. But how…?
Securitise the Season Book Sales
A wheeze unsuccessfully tried by Craig Whyte at Rangers, but you never know you might find football fans stupid enough to let you do that. So the 25% rent level can be guaranteed from ticket receipts and a first charge on the season tickets income for those 20 years.
Plough Up The Training Ground
The problem is football grounds are not really worth that much. Yes in London Arsenal could get a handsome premium but many of the UK’s older clubs have grounds in former industrial areas. These brownfield sites are may only be worth £7m – £8m. That won’t be enough so what could you do? You have a spanking new training complex. Like Man City and others this was set up in modern times, close to where the players live and in a far more desirable location than your stadium. But the training ground probably specifically prohibits residential AND you’ll lose your new found goodwill if the locals discover your plan, so what to do?
BORROW a similar amount to the stadium value and simultaneously apply for residential planning consent (the lender will want to be absolutely sure you’re doing this so no sham applications you cheeky monkey you). If consent is received within 3 years of completion you hand over the training ground and the debt is expunged. During those three years you’ll have a hefty interest rate again (as much as 15%) and if planning isn’t granted you’re up shit creek as you’ll still have the principle to repay – and don’t forget you’ve just secured season books for 20 years above!!!!
As you can see all of this is about short-term cashflow but if you’re in it for the long haul you’ll want to get your assets back after all as any Leeds fan will tell you, securing a debt facility to build your team is pretty difficult if you have no assets so you would stick in a buy back option on the assets. You would want to have a buy back option on the Stadium for say the first 10 years post completion. The problem is your investors are in it to make money and they would really much prefer the revenue so it would probably be based around a starting level circa 50% more than you sold it for with a purchase formula increasing annually by 12%, thereafter reverting to Market Value but no less than circa £20 million.
But you took out loans on your training ground so that’s gone forever oh and if you’ve got car parking, well that’s a guaranteed revenue stream AND one day it’ll get residential planning easier than anything so you’ll not get that back either.
As you can see, buying one these distressed clubs (such as Portsmouth in England) may appear straight forward but the challenges of getting the money out are difficult. Craig Whyte managed it because we have a very gullible press in this country. Once bitten twice shy however and I’m sure they are on their guard. Whyte’s plan was really simple and eventually he got found out. The stuff above – a similar plan to that hatched by those who destroyed Leeds would be slightly less obvious but I just couldn’t see ANYONE getting away with it. Could You?
So if you’re thinking of buying a football club, make sure you pick a big enough one to do all of the above.