Column

“I Give Them Whatever I Have”

A look at Everton's profitability and sustainability position with the pending sale to Tottenham Hotspur of Richarlison and the other players who have come off the books in the past financial year

Yes, it really is the seventh summer transfer window of Farhad Moshiri's tenure at Everton. Whether he remains to see an eighth is, of course, subject to much speculation as briefings and rumours of takeover prospects circulate in the media.

After Moshiri's introduction to Goodison Park against Chelsea in the FA Cup 6th Round in March 2016, amid the euphoria of a Lukaku inspired victory, Moshiri famously said (relating to funding Everton) “I give them whatever I have.”

The question today is whether he has reached the limit of his funding. Of course, some factors could never have been reasonably predicted, Covid, the Russian invasion of Ukraine and the impact on his own finances as a result, plus the withdrawal of Everton's largest financial partner USM would never have featured in any scenario planning.

Nevertheless, the appalling management of the club in the 6½ years, certainly from a regulatory point of view, but also possibly from an affordability or desire perspective, must feature strongly in any analysis of where we are financially.

The growth in direct costs relating to player acquisitions and player wages can be seen in these two lines from the accounts:

£'000s	31-May-16	31-May-17	31-May-18	30-Jun-19	30-Jun-20	30-Jun-21	*30-Jun-22
Wages	83,985	104,655	145,500	160,000	164,800	182,570	156,000
Amortisation	22,398	37,298	66,933	95,100	99,200	81,243	75,000
Total	106,383	141,953	212,433	255,100	264,000	263,813	231,000

projected figures for 2021-22

The business model of the biggest clubs

The largest, most successful Premier League clubs run a different business model to the fourteen competing clubs.

Outside the Top 6, revenue streams are viewed as Premier League broadcasting revenues, matchday income and commercial income. Whilst the Premier League broadcasting revenues include a significant amount of revenue generated from overseas broadcasters they are negotiated collectively, not by the clubs themselves. Thus in the main, outside the Top 6, clubs focus on generating revenues domestically (even if many shirt sponsors, particularly gambling companies, operate overseas).

The Top 6 have an entirely different model. Yes, they have the same income sources as the other clubs. But the key differentiator is that they have other income sources as well. In a sense, they are multi-franchise operations having Premier League generated revenues, European football generated revenues and international sponsor & commercial arrangements, international geographically, by sector and company.

The Top 6 essentially operate a predominantly B2B (business to business) business model — their commercial success comes from wider exposure, but also a greater understanding of who their real customers are (hint, it's not the ordinary fans, it is their corporate attendees and sponsorship partners).

Everton, through the funds provided by Moshiri and in the early days player sales, built a cost base which required the business model of the Top 6 — ie, required regular European football and the exposure that brings.

As a result of the failure to qualify for European competition, and the below-budget revenues from inferior on-field performance, contributes heavily to Everton's financial difficulties.

The next table shows how personnel costs have enormously outstripped increase in revenues:

£'000s	31-May-16	31-May-17	31-May-18	30-Jun-19	30-Jun-20	30-Jun-21	*30-Jun-22
Turnover	121,541	171,330	189,200	187,700	185,900	193,143	178,600
Wage/amort	106,383	141,953	212,433	255,100	264,000	263,813	231,000
% of turnover	87.5	82.9	112.3	135.9	142.0	136.6	129.3

projected figures for 2021-22

Poor recruitment, resulting player-value writedowns, exceptional costs associated with manager and coaching squad changes all add to the accumulated losses.

It is fair to say that Covid has obviously contributed to Everton's losses, with crystalised losses relating to Covid standing at £82.1 million for the two years to 30 June 2021.

Equally, it should be recognised that, up to the year ending June 2021, the costs incurred with the new stadium at Bramley-Moore Dock were expensed to the Profit & Loss account.

Regardless, the figures do not make good reading.

£'000s	31-May-16	31-May-17	31-May-18	30-Jun-19	30-Jun-20	30-Jun-21	30-Jun-22
P&L a/c	-24,348	30,660	-13,021	-111,868	-139,800	-120,934	-78,100

projected figures for 2021-22

So what does all this mean for profitability and sustainability rules, and our ability to spend?

For the current financial year (ending 30 June 2022), the years under scrutiny are 2021-22 (T), the mean (average) of 2020-21 & 2019-20 (T-1 & T-2) and the year 2018-19 (T-3).

The maximum permitted losses over this period are £105 million. There are some permitted allowances, including tax, expenditure on women's, youth and community football plus exceptionally losses directly related to Covid.

£'000s	30 June 2019	Mean 2020 & 2021	30 June 2022	Total
Profit & Loss	-111,868	-130,350	-78,200	-320,418
Deductions*	15,000	15,000	15,000	45,000
Covid		81,200		81,200
				-194,218

estimates — assuming no further player trading before 30 June 2022

Because the accounts do not itemise expenditure on women's, youth and community expenditure, it's impossible to give the figure presented to the Premier League, but the £15 million per year is a reasonable estimate.

The accounts show crystalised losses of £81.2 million directly related to Covid. The club however have reported uncrystalised losses of £175 million with the potential to reach £250 million.

Using the lower figure, and deducting the excess over and above the crystalised £81.2 million, it is possible to see that the club squeezes in under the £105 million limit for 2021-22. It also explains the lack of transfer activity last summer and the sale of Digne in the January window.

Projecting into 2022-23

It's likely that any transfer activity this summer window will be after 1 July.

Several matters to consider going into 2022-23. Firstly, the 2018-19 financial results drop out of the equation. If Everton's losses for 2022-23 are less than £112 million, then our position improves.

What are the factors that will change the P&L account in 2022-23?

The release of Sigurdsson, Tosun and Delph (among others) significantly reduces the wage and amortisation costs. A reasonable estimate would be a £30 million saving.

The sale of Richarlison or Calvert-Lewin will generate significant profits. Calvert-Lewin has virtually no book value, so if sold his transfer value shows almost entirely as profit. Richarlison has a book value of approximately £14 million, so whatever transfer fee minus his book value shows as profit in the forthcoming financial year

USM-related revenues not replaced this forthcoming year will reduce turnover. USM's contribution is estimated at £20 million per annum.

Player purchases will add to the wage bill and amoritisation costs.

Our net profitability and sustainability position improves significantly this coming year. From a calculated position currently of -£194 million (before uncrystalised losses), I estimate that the net position (subject to player sales/purchases above) falls below the £105 million figure (before uncrystalised losses) by a significant amount, perhaps to around £90 million.

That gives scope for some transfer activity including player purchases this summer.

Affordability

Can Everton afford to purchase players? Moshiri has continued his commitment to funding losses and the construction costs of the new stadium at Bramley-Moore Dock.

Realistically though, given he is looking to dispose of his majority position (either wholly or at least significantly), will he continue that commitment? First and foremost, any further capital injections must go to the construction of the stadium. Secondly, any continued negative cash flow and possible debt reduction would be next to be funded — remember, we had £130 million of external debt as of June 2021.

Some funds would be available from player sales, but that will depend on who is sold and at what price.

Despite the improvement in our regulatory position, I believe we can only buy as a result of significant sales — either one or both of our prize assets.

The takeover?

As suggested by the improvement in our regulatory position, an incoming owner would have some limited room to inject capital (over and above what is needed for the new stadium) for player purchases — but that is limited and would likely be subject to Premier League agreement.

Alternatively a new investor could take up the role designated previously for USM and fund the club through sponsorship revenue rather than capital injections.

The sponsorship revenues could replace the previous USM sponsorship of Finch Farm, training kits, women's and perimeter advertising. It could also include the naming rights of for the new stadium.

An adequately funded investor (by 'adequate', I mean having very deep pockets and owning brands to be used for sponsorship) could re-inflate the club and provide significant funding through revenue not capital.

Conclusion

If this seems an unusually up-beat assessment of Everton's potential position, remember it is largely predicated on previous poor results falling out of the calculations, it requires the sale of our major playing assets and it requires the takeover of the club by a significantly well-funded individual or group that not only has the financial means but has the brand purchasing capacity to fund Everton's recruitment programme through sponsorship revenues (as well as buying Moshiri out, funding the new stadium, and paying off debt).

Moshiri appears to have given us all he had. Incredibly, it might just be that we can win the lottery twice. However, to save us repeating Viv Nicholson-like mistakes for a second time, any new owner must have complete control, a clear strategy, a commitment to removing those responsible for the appalling position we find ourselves, a brand new board and executive team, trust in the new football operations, proper fan engagement, and a commitment to invest in people as well as the new stadium to bring about success.

Anything less, and we will not compete.

Reader Comments (12)

Note: the following content is not moderated or vetted by the site owners at the time of submission. Comments are the responsibility of the poster. Disclaimer

About these ads

---

, placement: 'Below Article Thumbnails', target_type: 'mix' });