The Process Of Buying A Football Club
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?
The following information has been put together by Blaser Mills Law and delves into some of the different aspects that need to be considered throughout the various stages in the process of purchasing a 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.
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:
1. A conventional sale between a buyer and a seller; or
2. 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
- Prospective buyers should investigate the club’s position regarding incoming and outgoing transfer fees, including any significant outstanding instalment payments on historic transfers.
- 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.
We will now look at what it takes to get the purchase over the line. How a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) is different in a football club sale to a standard corporate transaction, what the applicable football regulations should be considered and how the newly introduced independent football regulator may impact future transactions.
Agreeing the SPA or APA
This step is standard in most conventional corporate transactions. Depending on the type of transaction that has been agreed, will determine the type of agreement that requires drafting.
Up to this point, the buyer will have relied on the seller’s disclosure of information (through due diligence) to determine the purchase price and terms of the agreement. However, the buyer will be able to further protect its investment by inserting adequate protections into the sale documentation such as indemnities, guarantees, and warranties to seek recourse from the seller.
Warranties are assurances provided by the seller to the buyer and serve to provide contractual liability to the buyer of the accuracy and completeness of the information provided by the seller and their advisors. This can also be used as a remedy if any information is later found to be inaccurate, typically through compensation or indemnification from the seller for the resulting losses. Warranties should encompass various football-specific aspects, including the club’s operations, financial status, contracts, and safeguards against any historical regulatory compliance issues, plus cover any issues unearthed by the due diligence.
Owners and Directors Test
Once the transaction is all but completed, all new owners and directors must be approved by the governing body of the respective league of the club, therefore the agreement should always be subject to this approval. The test differs slightly between the Premier League, English Football League and National League but the process remains largely the same. Any person who owns more than 10% of shares in the club must be listed as part of the application. The club will submit the application to the respective body who will then review the application and decide whether to approve or reject it. There are grounds for rejection where an applicant is subject to any of the Disqualifying Events listed below.
The following criteria constitute a Disqualifying Events:
- Exerting influence over another league club’s management or holding a stake exceeding 10%.
- Disqualification from serving as a company director.
- Holding an unspent criminal conviction resulting in a prison sentence of 12 months or more, or any conviction for dishonesty.
- Bankruptcy status or involvement with a club during an insolvency event.
- Listing on the sex offenders’ register.
- Disqualification or suspension by a sports governing body or professional organisation.
- Violation of football betting rules.
- The Premier League further broadened the scope of Disqualifying Events, now encompassing individuals subject to: government sanctions, implicated in human rights abuses, or involved in offences related to violence, corruption, fraud, tax evasion, or hate crimes.
The New Independent Football Regulator
The government’s White Paper proposes an independent football regulator (IFR) to oversee the major governance issues that are currently in place, including reforms for financial fair play, club ownership transparency, fan engagement, and competitive balance. It aims to enhance transparency, ensure financial stability, and promote fairness across football. Some of the key aspects target a reform relating to the purchase of football clubs in the UK. The IFR seeks to include increased scrutiny of potential buyers, stricter financial regulations, and potential shifts in investor profiles towards long-term sustainability.
The IFR will introduce new regulations and processes that clubs in the top 5 leagues in England will have to adhere to, many of which will impact a prospective buyer or could diminish the value of the club as it currently stands, they include the following:
1. A New Owners’ and Directors’ Tests: Prospective and incumbent club owners and directors will undergo fit to serve, source of wealth, and financial planning tests to ensure suitability and protect fans from irresponsible ownership.
2. Financial Regulation: Enhanced regulations are to be introduced with the aim of improving clubs’ financial resilience, with the IFR overseeing financial plans and intervening when necessary.
3. Fan Engagement and Heritage: Clubs will need to regularly engage with fans and comply with heritage protections, including seeking fan and FA approval for significant changes like altering crests, shirt colours, or club names.
4. Stadium Sale or Relocation: Clubs must seek approval for stadium sales or relocations, considering the financial and heritage preservation implications. There are number of previous examples, including most recently Derby County, where the owners unilaterally sold all or part of the stadium in order to raise capital for the club, a new authorisation process by the IFR will be implemented to prevent this in future without approval.
5. Breakaway League Prevention: English clubs will be prevented from joining unlicensed or breakaway leagues like the European Super League as was attempted by the Premier League’s top 6 teams in April 2021.
6. Broadcast Revenue Distribution: The IFR will have powers to intervene in broadcast revenue distribution to address financial sustainability issues across the pyramid if it cannot be agreed by the top 5 leagues in the first instance. This is part of a further review of the drip-feed funding (that is currently in place) beyond the Football League.
Although implementing the White Paper’s proposals could face challenges such as resistance from stakeholders, legal hurdles, enforcement difficulties, unintended consequences, balancing different interests, and global coordination. Considerations of these new regulations should be taken into account throughout the process of purchasing a football club as it is likely they will shape the future of English Football.
In summary, acquiring a football club in England presents a multifaceted journey, intertwining business acumen with the rich tapestry of fan engagement, regulatory compliance, and certain financial intricacies unique to the football industry.
Each phase of the purchase of a football club, requires careful consideration and expertise. As the landscape of English football continues to evolve through the new Independent Football Regulator, successful club acquisitions require an understanding of the game’s complexities and a steadfast commitment to upholding its heritage, whilst mapping out a course towards sustainable growth and success.
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