English football has seen a significant rise in the number of football clubs being purchased over the last 5 years, and, with the recent success of clubs following a takeover, such as Newcastle United there seems to be no slowing down of this trend. The recent White Paper has accelerated reform to club football governance, which has revamped the purchase processes. But what sets acquiring a football club apart from regular corporate transactions?
This article delves into the some of the aspects of corporate transactions that needs to be considered throughout various stages of the deal.
Identifying a prospective club
To the average fan this may be considered the easiest step of all; simply select a club in England and contact the shareholders with your offer. Contrary to this belief, there is significant amount of work required to even get to this stage. Despite operating like any other business—clubs face unique scrutiny from fans, media, and governing bodies. Football clubs are more than just businesses; they are embodiments of community identity and heritage. Consequently, any change in ownership can evoke strong sentiments and rightly requires careful management of fan engagement.
To add to the complexities, the position of the club within the English football pyramid determines several factors such as the club’s infrastructure, revenues, liabilities, and the regulations it must adhere to. As a rule the closer the club is to the Premier League, the more revenue, but not necessarily profit it will generate and the higher the regulatory and financial standards that will apply to it. However, with the possibility of promotion and relegation, that position can easily change without the right plan in place.
Furthermore, fan ownership groups and community organisations and who owns the ground can often play a major part and must be given proper consideration when selecting a club. A handful of clubs across the UK are owned by fan-ownership groups, including AFC Wimbledon, Exeter City, and Bury AFC.
The offer
This stage includes the first of many traditional M&A processes. There are two types of purchase: the purchase of shares or the purchase of assets. To achieve either purchase, there are two routes that can be taken:
- A conventional sale between a buyer and a seller; or
- An auction-style sale where multiple buyers submit their bid.
The auction style sale, most recently used by Manchester United and Chelsea, can often generate a higher sale price through competitive tension provided the market demand is significant. This process can be highly publicised, which can have its advantages and disadvantages, however, this option may not be desirable.
A non-auction sale normally provides for a period of exclusivity between the respective buyer and the seller where the negotiation can take place with added comfort of no competitive bids afforded to the buyer.
Regardless of which option is taken, the sale process can take up to six to twelve months.
The offer will be subject to further due diligence, as mentioned below, and the offer price can fluctuate or become the main obstacle to concluding a deal following the due diligence process.
Due diligence
Part of the process of identifying the chosen football club will arise from some public due diligence analysis considering aspects such as the club’s league position, its supporters, the geographic location, its sporting capabilities, the potential for expansion and development of the ground/stadium before entering the formal due diligence phase. Just like with any other business, the due diligence process will require a deeper dive into the inner workings of the football club together with the football specific enquiries.
These include preliminary assessments which are crucial in forming the basis of the Heads of Terms. The formal due diligence process will require expert advisors to scrutinise various aspects such as financials, tax, employees, commercial contracts, governance structures and football specific matters. Due diligence ensures an informed decision-making process.
Corporate transactions in football demand a nuanced approach, navigating fan sentiments, the regulatory landscapes, and unique revenue models. As the game evolves, so must the strategies driving football club acquisitions, balancing tradition with modernity for sustained success.
Regulatory scrutiny and governance
The football industry operates within a tightly regulated framework governed by a quasi-legal system that is formed through international and national governing bodies, including FIFA, UEFA, the FA, and through individual league organisers such as the Premier League and the English Football League.
Depending on the league of the club, and whether they are involved in European competitions, prospective owners must navigate complex ownership eligibility criteria, financial fair play regulations, and club governance standards from the outset of the proposed transaction and beyond.
Compliance with these regulations is essential for obtaining league approval and ensuring the club’s continued participation in competitions. Additionally, the regulatory scrutiny extends to matters such as player contracts, youth development, and stadium safety, adding layers of complexity to the acquisition process especially when having to consider these throughout the due diligence phase.
Financial considerations and revenue streams
Unlike many traditional businesses, football clubs derive revenue from a diverse array of sources, each intricately linked to on-field performance and fan engagement. These revenue streams include broadcasting rights, match day ticket sales, merchandise, sponsorship deals, and player transfers.
Consequently, the financial viability of a football club is closely tied to its sporting success and ability to attract and retain players and fans. Prospective buyers must conduct extensive due diligence to assess revenue potential, financial sustainability, and the club’s competitive position within the footballing ecosystem before committing the purchase of the club.
Other considerations include:
- Prospective buyers should investigate the club’s position regarding incoming and outgoing transfer fees, including any significant outstanding instalment payments on historic transfers.
- Commercial operations must be considered including a review of sponsorship and partnership agreements; is the club committed to any unprofitable or unlimited liability agreements both with regard to rights and length of term.
- Match day operations – how does the operation for match day hospitality effect the financial position of the club? Is there a third-party supplier agreement to run the match operation?
- Ticketing and club shop operations – are these owned and ran by the club?
- Verifying stadium and training facility ownership is crucial during due diligence, considering factors such as land ownership, terms of use, obstacles for redevelopment, and the potential use of ownership interests for debt financing.
- Is there an academy in place?
- Has the club entered any agreements with Agents relating to the services provided that binds the club to future payments?
- Does the club have adequate insurance policies in place?
There is a considerable amount of work that is required just to get to this stage, many a prospective deal will collapse because of what is discovered in the due diligence phase. The buyer seeking comfort in understanding what exactly it is purchasing, whereas the seller can use this as an opportunity to provide transparency on any issues which many prevent future issues arising once the deal has completed.
Blaser Mills can assist with this process and provide analysis on what is market standard vs any unexpected obstacles that may arise during the Due Diligence phase. Please feel free to reach out to see how we can assist you.
Keep an eye out for part two of this series where we delve into the intricacies of the sale documentation, the owners and directors test, and the impact of the new independent football regulator.