The Value of Sporting Due Diligence in Club Acquisitions
There is a direct correlation between success on the field and financial performance, so those wanting to invest in clubs must assess sporting operations in tandem with the balance sheet to measure potential.
Football clubs in both England and Italy were sold for record fees in 2022, showing that the beautiful game continues to draw investors. And with clubs across the “Big 5” leagues and beyond attracting unprecedented interest, potential buyers need to be dynamic and smart to find value in a busy market.
Buying a football club is no ordinary transaction. Every fan knows that success on the field is about more than just dollars and cents. And so, investors need to understand where and how to look at their target to ensure they’re paying the right price for a club with the potential to match their ambition.
That means complementing financial and commercial analysis with detailed sporting due diligence that can help reveal a club’s potential where it matters most: on the pitch.
Past performance is no guarantee of future results
It’s not just league position that is influenced by results: financial performance is also inextricably tied to the team’s fortunes. The last major acquisition in the Premier League, in May 2022, saw Chelsea transferred to new owners for a record fee of £2.5 billion-plus future spending commitments.
For clubs like Chelsea, Champions League football contributes a significant proportion of revenues – with broadcast fees for the competition worth £70m million, or 16% of the club’s total revenues in 2021 – and so securing qualification is hugely important. In any transaction, investors must ask if the asset’s sporting infrastructure is capable of supporting the assumptions in valuations and financial forecasts.
It’s critical, then, that investors are as conversant with the sporting operations of a club as they are with its finances.
An eight-point plan for sporting glory
To support investors in European football, Sportsology has developed a due diligence process with eight essential areas of focus:
- Structure: How is the club’s sporting operation organized and staffed, and how does that compare to its peers? Detailed understanding of the sporting structures of a club can provide vital insight into potential future development and investment needs.
- People: Players might win matches, but it’s the leaders behind the scenes who create the conditions for them to be successful. So it’s important to carry out an evaluation of the key decision-makers and leaders in the sporting organization.
- Performance: League position and size of trophy cabinet are not the only measures of a club’s strength and ability to maximize the use of its resources. Investors must look at metrics that highlight efficiency and sustainability—benchmarking league performance against wage bill, revenue, and net transfer spend to understand actual versus expected performance.
- Players: A thorough understanding of both the depth and breadth of the existing squad, including its contextual quality and development needs, is critical to understanding the strength of the team and anticipating future investment. Using tools such as depth charts, objective player ratings, contribution models, and contractual analysis, investors can come to a clear understanding of present status and future need.
- Transfer needs: The transfer market is inflated and can quickly become a significant and sometimes unforeseen cost center. Understanding future spending requirements and projecting needs in the first 18 to 24 months of ownership is therefore fundamental to assessing the go-forward investment required to ensure the squad is competitive.
- Spending efficiency: Wage bill spend is an area where sophisticated investors can quickly create efficiencies. To achieve this, it’s critical to understand spend in the context of player utilization and performance to build a picture of how efficiently resources are being used and where there is room to bring greater efficiency and improvement.
- Player development: This is a key strategic pillar for investors and owners who want to generate significant ROI from player trading and create cost savings in the transfer market. Clubs that have successful academies not only deliver a pipeline of talent to the team but also make a significant financial contribution. La Fábrica, Real Madrid’s fabled youth structure, has brought in transfer fees of €330 million
in the past decade. It, therefore, makes footballing and financial sense to understand an academy’s historical contribution to a club and its potential to be further developed as an additional revenue stream.
- The competition: Any assessment of a club’s strengths and weaknesses is of limited use unless understood in the context of the competition. Benchmarking information against market trends and specific competitors is thus crucial. This is best done not in isolation but by infusing it across all elements of the broader report.
A blueprint for success
Developing such detailed insight into a club’s sporting operations is vital to informing the decision-making process prior to investment. It can not only provide intelligence for financial forecasting, but also critical context of the asset in its market and competitive landscape.
And if the bid is successful, the buyer can hit the ground running with a deep understanding of the club’s sporting operations and a blueprint for action in the first 100 days of ownership and beyond.
By Chris Mann