What are the true costs behind a football transfer? How are clubs able to finance their transfer activity? Here’s a glimpse into the heavyweight board-room decisions impacting the legacy of football clubs.
Transfer fees are paid in instalments
When the media quote a transfer fee e.g. £60m, often the buying club will not transfer the full £60m on the day of the transfer. This reported transfer fee is often different to the amounts paid to the selling club.
Chelsea “pay” £60m for a striker. The transfer fee agreement may state:
- £30m up front
- £5m on the 1st anniversary of the transfer
- £5m on the 2nd anniversary of the transfer
- £10m if the player wins the Premier League & UEFA Champions League
- £10m if the player scores 50 goals for Chelsea
This is fairly common practice
So if the player doesn’t win the Premier League/UCL and fails to score 50 goals, Chelsea will only pay an overall £40m to the selling club. That’s a £20m variance to the reported transfer fee of £60m.
Usually, a player’s salary over the length of a contract will be the most expensive element to the club.
In 2019, the average Premier League player salary exceeded £3m (R63.5m) per year (Global Sports Salary Survey). This translates to roughly £61k (R1.3m) per week. This figure has risen by ~£10k (R200k) in 2 years.
However, an elite Premier League player could be earning up to £13m (R275m) per year (pre tax) or ~£250k (R5.3m) per week. Over a 5 year contract, this particular player’s wages will cost the club £65m (R1.4bn). For context, the Paul Pogba’s reported transfer fee to Man Utd was £89m (R1.9bn). Wages are significant.
Back to our example:
So, the transfer fee for Chelsea’s new striker is £60m
His wages are £65m over his 5 year contract
The total cost to Chelsea is £125m (R2.65bn)
Below is an annual breakdown of this cost
Cost to the club:
Annual Total Cost = amortised transfer fee (transfer fee ÷ contract length) + annual salary
- £60m fee + 5 yr. contract = £12m per year (amortised transfer fee) –
- £250k p/w contract = £13m annual salary
- £12m + £13m = £25m (R530m) annual total cost
There’s an item which can end up being a significant cost to the club across a number of players – agent fees
The art of the football deal has a certain allure about it, sightings of players disembarking private jets in Barcelona, rumours of secret medical tests being passed and talk of ink drying on contracts seconds before the transfer window closes. Agents such as Jorge Mendes & Mina Raiola have become household names in their own right. Even club directors make headlines where every move is dissected, analysed and critiqued – think Don Raúl Sanllehí. Just how big is the agent business? Massive.
Premier League clubs spent £263m on intermediary and agents’ fees between February 1, 2019, and January 31, 2020. Premier League winners Liverpool paid the most to agents for a third successive year. Liverpool spent £30.3m on intermediaries (£44m the previous year). They are followed closely by Manchester City (£29m), Manchester United (£27.6m) and Chelsea (£26.2m).
But who actually pays the agent’s fees? The immediate response is “the player” – although in practise this doesn’t happen very often. The tax implications involved often means the club often ends up paying the agent for player services and club services. If a player is paid £4m a year & scores a 5% agent fee – that results in a £200k fee. Since it’s split between the work he does for the club (2.5%) and the work he does representing the player (2.5%) – this now becomes £100k + £100k. The player will pay tax on the £100k which reduces his tax bill.
Agents are often tied up in heavy conflicts of interest as they can represent the buying club on one deal and still be negotiating against the buying club on a different deal. In the Lukaku transfer to Man United, Mino Raiola was acting for Lukaku in contract negotiations with Man United, while also having a separate agreement with Man United to act on its behalf in the transfer negotiations with Everton. Double and triple representation agreements are common. As a rule, the player in a conflicted situation does not pay the agent’s fee although Her Majesty’s Revenue and Customs (HMRC) still makes sure to tax the player a percentage as a “benefit in kind”. The taxman always wins.
Apart from the complex web of conflicts inherent to agent representation there’s always the underlying incentive for agents to push for a player to transfer from his club every few years and score a juicy agent fee – even if it may not be in the players best interest. Of course, sometimes it’s the player with commitment issues who drifts from club to club. Take Nicolas Anelka who ended up playing at 12 different clubs (Uruguay striker Sebastian Abreu played for 27 clubs). Similar to transfer fees, agent fees are also amortized over the remaining period of the player’s contract. Here’s the IFRS treatment (PwC).
When you wrap up transfer costs, wages & agent fees these become eye-watering numbers & I’m sure you’re thinking – where does all this money come from? There are 3 main revenue generating channels:
1. Broadcasting Revenue
- TV rights deals e.g. BT & Sky
2. Commercial Revenue
- Marketing & sponsorships with other brands
3. Matchday Revenue
- Ticket sales, food & hospitality
1. Broadcasting Revenue
A TV channel must buy the right to broadcast a match from the football league. These rights are sold domestically & abroad
A new Premier League club can expect ~£100m in broadcasting revenue
- £57m domestically
- £43m abroad
Bigger clubs earn more
Here is the 2018/19 Premier League payments to clubs with each column explained below:
UK broadcast revenues
- 50% equally shared;
- 25% shared based on how often a club’s matches are broadcast in the UK (known as “Facility Fees”);
- 25% shared based on where a club finish in the league table (known as “Merit Payments”)
Central Commercial revenues: Equally shared by clubs International broadcasting revenues: Equally shared by clubs
2. Commercial Revenue
What do Arsenal, Real Madrid & AC Milan all have in common?
They all have “Fly Emirates” as their global sponsor
Emirates spends 35% of its advertising budget in football Shirt sales are another huge source of income for clubs. Juventus sold 520,000 Ronaldo shirts in only the first 24 hours of him signing with the club. This equates to $60m in sales. However, clubs will only get 10-15% of shirt sales. So $6m-9m for Juve.
3. Matchday Revenue
Ticket sales, merchandise, food & drinks
Bigger clubs generate more of this income than smaller clubs due to stadium capacity & ticket prices
Stadium capacity = 60,000
Avg ticket price = £85
Stadium capacity = 38,000
Avg ticket price = £25
Here’s a breakdown of Chelsea’s accounts for the year to 30th June 2018
- Revenue = £448m
- Wage bill = £246m (55% of turnover)
- Pre tax profit = £30m
- Broadcasting = £204m (45%)
- Matchday = £74m (16%)
- Commercial = £170m (39%)
- Record spending by clubs of $7.35bn
- 18,042 international transfers
- 80% of all spending on transfer fees came from 100 clubs
- England had the largest negative net balance of -$549.9m
(FIFA- Global Transfer Market Report)
Football operates no differently to the largest well oiled global corporate machines. Some clubs have modest financial capabilities whereas others are able to throw hundreds of millions for a player to join their teams. With big data, advanced analytics & aggressive scouting – extracting “alpha” from Moneyball strategies is proving to become increasingly difficult.
To consistently perform well at the highest level against heavy hitting teams, year after year, with limited budget firepower is a near impossible task. Unfortunately, without market interventions such as salary caps or a draft system (like in the NBA) it’s unlikely that smaller clubs will ever catch up to the giants…
…. unless a Sheikh or a Russian oligarch buys the club