The Business of Football - Everton explain where the money goes

This is superb - a really useful resource to help explain the concept of an income statement and cash flow too.

In this transparent article, the CEO of Everton Football Club explains precisely “where the money goes”, in response to many questions he gets from a key stakeholder group - the fans!

Lots of scope for using this as a starter resource to get students to consider how Everton could improve its financial performance. What choices are available? How might they effect performance on the pitch? How does Everton compare with other Premier League clubs in their approach?

Update:

Jordan Florit from King Edward’s Southampton has penned this analysis of Everton’s financial position in response to the CEO’s interview:

Three Ways Everton could overcome their financial position

Back in the summer, Everton made the headlines for a failure to spend yet again: in fact, since signing Jonny Heitinga for £6.2m in the 2009 summer transfer window, Everton are yet to spend over £1.5m in combined transfer fees. Well, that was the case until they signed Manchester United’s Darron Gibson on January 13th, conveniently hours before Everton’s official site released a blog written by their chief executive Robert Elstone, detailing the club’s finances in the five seasons preceding the 2011/12 campaign.

Yet, their transfer activity so far this season, which consists of James McFadden and Marcus Hahnemann on free transfers, Denis Stracqualursi, Royston Drenthe and Landon Donovan on loan and their only bought player, the aforementioned Darron Gibson, is far flung from the Everton we saw in the second half of last decade. When Wayne Rooney left Everton for Manchester United for £25m in 2004, Moyes went on to smash Everton’s transfer record 4 times in 4 years and spend over £40m on James Beattie, Andrew Johnson, Yakubu and Fellaini. Moyes’ ability to spend led to Champions League qualification in 2005, and UEFA Cup runs in the 07/08 season and 08/09 season, as well as an F.A. Cup Final appearance in 2009, finishing runners up to Chelsea.

However, a deadline day sale of Mikel Arteta to Arsenal for £10m and a series of comments from players and David Moyes alike, which suggested there still wasn’t money to spend, resulted in protests from a section of Everton fans not happy with the club’s progress under Bill Kenwright, nor the money available for new signings. The unrest began during preseason and having heard a telling interview from Sylvain Distin to BBC Radio Merseyside, where he stated that they have “a small squad” that is wary of injuries being able to threaten their campaign and if so they’ll “have to deal with it,” a phrase again echoed by Tim Cahill, questions started being fired from frans at the powers who be at Goodison Park, prompting last week’s in-depth blog on their finances.

With Everton’s borrowing having risen from £22m to £45m from 2006-2011, an increase of 104.5%, and player wages increasing by £20m over the same 5-year period, despite an actual 4% drop in the proportion of revenue spent on player wages, it is clear that money for investment in the playing squad isn’t going to be readily available any time soon unless Everton adopt a sell to buy approach; one made difficult by the fact Everton have the third highest average squad age in the Premier League, something Elstone denies in his blog: “his is not an ageing, threadbare squad.” Therefore, possible ways of raising finance, but ultimately staying competitive, must be sourced.

1. The Asian Market

The Asian market is something Everton have flirted with before, on and off the pitch, and it was only a series of serious injuries that prevented it from being a successful venture when it came to the playing side of their relationship with Asia. After relative success in the 2002 World Cup, Everton secured a loan deal for Chinese international Li Tie, and having played 31 of Everton’s Premier League games in a season in which they finished 7th, David Moyes chose to sign the defensive midfielder permanently. He signed for an undisclosed fee, thought to be in the range of £500k-£1.5m; however, much of this fee was paid for through sponsorship. Kejian, a Chinese Telecommunications company, teamed up with ACIG Media and construction firm Xing He to help finance the transfer, leaving Everton to pay little, if any, of the amount paid for his services.

In return, then chief executive at Everton, Michael Dunford said that, “there will be young players coming across to Everton on a regular basis, and some of our Academy coaching staff will be visiting to China to assist with their youth development programme. The companies involved want to see more Chinese players come over to this country [to play.]” From deals such as these, China get to see their best players compete on the best stage of domestic football in the world and in return, not only do Everton get much of the fee paid for by sponsors, they gain recognition and revenue from the market they attract, thus fan base they develop, in Asia too. This is due to the interest the player brings with him from his home country.

The potential income from young growing markets, such as the footballing one in Asia, is one that will be pivotal in the success of clubs in the future. The move for Li Tie also saw Everton benefit financially off the pitch: from 2002-2004, the same company which helped buy the midfielder, Kejian, became the shirt sponsors of Everton in a deal worth £1m-a-year to The Toffees and as an advertising slot to the 93 million people who watch the Premier League in China every week, for Kejian. With the Asian market for players growing stronger with each year, as proven by the rising numbers playing in the top European leagues such as Keisuke Honda of CSKA Moscow, Shinji Kagawa at Borussia Dortmund and Yuto Nagatomo at Inter Milan, a dip back into the market may well strengthen the playing side as much as it would the financial. Southampton F.C have already moved into the Asian market this window, signing Japanese international Tadanari Lee and West Ham look to follow suit with a move for his Japanese strike partner Ryoichi Maeda. Arsenal manager Arsene Wenger, who signed 19-year old Japanese forward Ryo Miyaichi last year, said of the Asian market, “Two aspects of the development of the game; one will come from the States, the second big part I’m convinced will be Asia,” said the former boss of Japanese side Nagoya Grampus Eight, “In these two countries and continents they have an aptitude to have a team attitude and a hardworking attitude and I think once they get the education they will produce good players.”

2. The American Market

Secondly, as alluded to by Wenger in the above quote, is the potential of the market for growth, as well as that of players, in the United States. With the quality of football continuously improving in America, more and more players are making the move out and at a young age, rather than in and during their twilight years. Clint Dempsey, Maurice Edu and Jermaine Jones are all enjoying successful careers as Americans in the top flights of Europe; however, at Everton there is a small contingent of Yanks in Tim Howard, Marcus Hahnemann and the loan return of Landon Donovan and other MLS players have had their names linked with moves to the Premier League this window: Break Shea, who is currently training at Arsenal, has been linked with a permanent move to The Emirates and Bolton are lining up Tim Ream as a replacement for Gary Cahill.

With soccer growing more popular with each passing campaign - undoubtedly aided by David Beckham’s multi-million pound move to LA Galaxy in 2007 and the constant stream of ex-Premier League players such as Robbie Keane, Juan Pablo Angel and Abel Xavier - attracting a fan base in the United States of America could bode well for Everton’s bank balance. The relationship they already have with the captain of the country’s national football team should stand them in good stead and with Tim Howard an evergreen in the Everton team over the past five years, attracting players shouldn’t be a problem. The financial benefits of operating in the American market for football has already been highlighted by Barcelona: in 2005, former Barcelona vice-president Soriano, held talks with MLS officials, including Arsenal’s CEO, Ivan Gazidis about the possibility of franchising Barcelona in the MLS for brand and marketing purposes. Despite a deal being signed that ensured Barcelona would tour the MLS for commercial benefit, the proposal to have a Barcelona franchise in the MLS didn’t gather weight. However, Soriano believes that one day European teams will be operating in foreign leagues: “Nowadays we have no idea whether within 20 years there will be a Manchester United vs Arsenal match played in the Chinese junior league.”

3. Continue to harvest the Football League

In Tim Cahill, Leighton Baines and Phil Jagielka, Everton have three staple players that learned their trade in the Championship and then were bought by David Moyes to improve as players at Goodison Park. Tim Cahill was snapped up for a nominal - considering his talents would see him on the 50-man shortlist for the Ballon d’Or just two years later - fee of £1.5m. Leighton Baines and Phil Jagielka both enjoyed a season of top-flight football, following promotions with their respective clubs – Wigan and Sheffield United – before David Moyes signed them for £4m and £5m each. Since signing for Everton, both players have represented England at full international level. With the Football League still providing players that earn it the title bargain basement, continuing to plunder the lower-leagued clubs for their best talent, is one way Everton can invest, but invest cheaply.

It doesn’t even have to be the Championship though: Chris Smalling made the jump from the 7th tier of the English footballing pyramid to the top in one leap when he signed for Fulham in 2008 and Paul Lambert has proved players in League One can play for a team in the top 10 of the Premier League, with back to back promotions from the third tier of English football. Grant Holt, who has now played in League One, the Championship and the Premier League in three consecutive seasons, has scored 7 Premier League goals this season and Anthony Pilkington, who was playing in League One last season, has scored 5.

Written by Jordan Florit for www.maycauseoffence.com/

For more articles visit my website or my Twitter @JordanFlorit