Minority Report 2019-20 - Talking Finance

Club Ownership, Management and Funding



I know that I have been here before, but the majority of contributors to the Bulletin Board continue to comment in ignorance. So here I go again.


Barnsley Football Club, the club that we all support and rely upon for our football fix, is owned by a Company. That company is called Barnsley Football Club (2002) Ltd. The year end of this company is 31 May, and the annual accounts of this company are published at Companies House on 28 February of the following year. Anyone can inspect these accounts free of charge via the internet.


On a day to day basis, the company is managed by the CEO (formerly called the Managing Director). The authority of the CEO is not compete. He reports to the board of directors and principally the joint Chair Persons of the board. He is further limited because he has to manage the business within an agreed policy and in accordance with the budgets, budgets that are prepared in the months before the start of every new financial year. Those budgets will rely heavily upon the estimated turnover figure for the following season, which in turn relies heavily upon which division the club will be playing in. He will delegate his authority to other managers. Thus the chief coach looks after the first team, the academy manager runs the academy, the company secretary runs the finance function etc. These managers operate in a similar way to the CEO. They all operate within their own departmental policy and budgets. The company appointed a new CEO in July (Dane Murphy, an American). The rest of the board is involved only on an ad hoc basis, although there will be periodic full board meetings to agree things like annual accounts and budgets.


Barnsley Football Club (2002) Ltd, like all companies, is owned through its share capital. It has 2,000 shares with a nominal total value of just £2 in total. There is also a share premium balance of £6,288,071, which is effectively a personal loan written off by Patrick Cryne. Although the shares have a nominal value of just £2, that is not the sum that was spent to acquire the company by its present owners. This is merely the cost of the original share capital from when the company was first formed in 2002. The company had no part in the transaction to purchase it. That transaction was between its original owner (BFC Holdings Ltd, a company that was in turn owned by Patrick Cryne) and its new owner (BFC Investment Company, a company owned by Chien Lee, Paul Conway, James Cryne, Grace Hung, Dickson Lee, Neerav Parakh and possibly Billy Bean). The exact ownership details of BFC Investment Company Ltd are not known for certain because that company is registered not in London, but in Hong Kong. I have been unable to look at the ownership structure or annual accounts of that company, but a separate return for Barnsley Football club (2002) Ltd to Companies House lists only one shareholder with a shareholding between 25% and 50% of total shares, and that shareholder is Chien Lee.


Because the company that owns the football club has a separate identity in law from the individuals that own it, any introduction of cash has to be recorded and shown in the annual accounts of the company. These cash introductions can be via Share Capital, Loan or Donation and Patrick Cryne used all three methods. When additional shares are issued, it is next to impossible to get the money out again. Investment in Share Capital is intended to be a very long term investment. A loan can be for the short term. A loan could be used to buy a player to be redeemed when the player is sold. Patrick Cryne advanced money via loans, but never got around to taking the money back when players were sold. Before the company was sold, he converted his loan into Share Premium, thereby tying it up in the club permanently. Patrick Cryne also made donations. It must be understood that donations increase company profits and reduce company losses. Increasing company profits could result in a corporation tax charge becoming due. For this reason, the donation route is not used very often. Mr Cryne did so because it allowed the club to spend more whilst in League 1 and still comply with SCMP legislation. There was no Corporation Tax charge because the company had large tax losses brought forward from previous years, and that still applies in spite of the player sales in the last 3 years. The last published annual accounts covered the last relegation season from the Championship. At the end of that season, the club has £5m at the bank, and another £5m due on instalments from transfers not paid up front. It was not in need of cash, and it is no surprise that the new owners had no need to provide further capital via any of the above routes.


There is another way that the club can introduce cash. It can borrow money from commercial lenders. In this case, the lender will require security. Something that the lender can sell if it turns out that the company cannot repay the loan at the agreed date or pay annual agreed interest calculated on the amount advanced multiplied by the agreed interest rate, as and when it falls due, or meet its other obligations. It is no different to the mortgages secured on our homes that we are all familiar with. Barnsley Football Club (2002) Ltd does not own its own ground, and consequently has few assets to act as collateral. Player’s contracts (Intangible Assets) do not qualify because players can only be sold during transfer windows, and so do not qualify as a realisable asset. Any large commercial loan would therefore have to be guaranteed by the owner(s), who would have to convince the lender that they are good for the loan sum, if the need should arise.


Some readers may regard the decision by Patrick Cryne not to purchase the whole of the ground from the Administrator back in 2002 and put it back into the company as a mistake. The ground could have been purchased for £6m, so he would have had to find another £3m, over and above what he put into buying it in partnership with Barnsley MBC. I disagree. The reason that Barnsley FC entered administration in the first place was that the previous board borrowed money that they could not afford. When taking out a loan, the company commits to pay the interest on that loan, and also to repay the loan at some proscribed future date. In order to do that, the company relies upon being able to accurately predict a future that may cover many decades. If income should fall from current predicted levels, it may affect its ability to meet its obligations. Football is notorious for its inability to predict the future, and it is getting worse as revenue from TV contracts continues to form a bigger and bigger proportion of total turnover. A bad investment in a player, bad luck with injuries and poor management can all affect results adversely, and adverse results drive away fickle fans, which also lowers turnover. Bad results can even cause a relegation and all relegations involve a drastic fall in turnover, slashing the club’s income and putting in doubt its ability to sustain interest payments and make loan repayments. Taking away the club’s only mortgageable asset has rendered any repeat of the mistake that led to Administration less likely.


However, I now find that Barclay’s Bank has taken out a charge against club assets, and have registered that charge at Companies House. It may just be a charge to secure any temporary overdraft facility, or it may indicate other larger plans. Those plans might including buying back the ground from its current owner. If the owners did that, the saving in rent (£150k per annum) would go some way towards any interest charges made by the bank. However, any repurchase of the ground, or indeed the purchase of the land formerly occupied by Grove St School, would suggest there is an intent to redevelop. The fans would like to see the West Stand replaced, but that investment does not appear to have any pay back on it. Not until crowds are considerably higher than they are currently, anyway. Paul Conway has talked about building accommodation for the academy players, which would save on lodging costs for trainees, which according to him, are currently a large academy overhead. It would also benefit the club because apprentices’ off-field activities could then be monitored more closely. What is for certain is that the money that it borrows should not be for purchasing first team players. It is established policy that the club should be self-sufficient in this respect. At this stage, we do not know, but the near closure of my club has made me extremely risk averse. I would be wary of any large loans for whatever reason because that is what caused the demise of the club during the Dennis era. That and a sudden and unforeseen reduction in turnover. It is bound to be interesting when we do find out.

 

Club Ownership, Management and Funding (continued)

There have been one or two comments which indicate that because the club is owned by very rich owners, it could not go into Administration. That is not so. For example, if the company made an investment that necessitated it taking out a 3rd party loan that it could not afford. That is, it could not afford on-going interest charges, let alone any repayment of the debt at its due instalment dates, and it suffered a sudden and unexpected reduction in its revenue streams, which as I say above, is exactly what Barnsley Football Club Ltd did under John Dennis, then the new owners have a decision to make. Do they refinance the club? Do they make a call on Share Capital, does one or all of them dip into their resources to make a personal loan to the club. Or do they just stand back and let the club fall into Administration again. You see, they have the choice to do that. They would lose their original investment, the money it cost them to buy the company from Patrick Cryne. But if the hole that the club finances is so deep that there is no prospect of it digging its way out, that could still be the cheapest option for them. Kiss goodbye to their original investment and walk away. Now based upon their actions and the financial conservatism that they have displayed so far, that scenario is not credible. Nevertheless, we cannot rule it out totally because they do not have the deep ties that bound Patrick Cryne to the club, and ensured that he dipped into his own pocket time and time again.


Many BBS contributors refer to the owners as though they are one and the same legal entity as the football club. It is as though the owners and the football club have a single pot of money that they can both use. I hope that my long explanation of how things actually work, and particularly the fact that the company is a separate legal entity to the owners will clarify matters.


Of course, the owners were very popular during the summer transfer window because they were spending money on new players, albeit that not all of that money had been released from player sales during their tenure of ownership. However, there will come a time when everything is not quite so happy and relaxed. A time when the majority of the BBS decides that the failure of the football team is all their fault. It happened with Patrick Cryne, and eventually, it will happen to the new owners as well. Then it will become important to point out that everything that has been done was done in accordance with a long term policy, and that the policy has changed only slightly from the time when Patrick Cryne ran the business. The annual accounts will again be an important tool in showing what cash has been taken out of the business by the new directors/shareholders as loan repayments, as share dividends and as director’s remuneration. Having said that, I do not believe the owners are interested in anything other than eventually selling their shares in the club on for a profit over and above their original investment, because that is precisely what they did in Nice. Frankly, I do not understand how that can be done unless they are prepared to play for stakes that are considerably larger than those that they have risked so far, but I see it as their only route to an eventual return on their investment, and also the time that they have invested in improving the value of the club.



The above paragraphs were written some time ago. As a result of the club’s poor start to the 2019/20 season, many fans have argued that the owners/board should be competing more aggressively on a financial level with our Championship rivals. I have argued elsewhere that our fans are grown-up individuals, who are able to run their own lives perfectly sensibly. That given enough information about their club’s financial position, they would be perfectly able to run it successfully, taking the right financial decisions and managing the club in a way that will keep it safe for the long term. That league position would be less important to them than long term financial stability.


I have spent many happy hours listing, summarising and comparing our fellow Championship Clubs’ accounts in respect of season 2017/18 as filed at Companies House. I will be publishing some of those records, hopefully in a form that most people can understand. I will also provide a commentary to hopefully tell readers what information I have gleaned from them. The purpose is to provide readers with information that they do not currently have, and a better understanding of what it means.


However, the Minority Report that covers filed accounts takes up 19 pages in Word, and that is too much for anyone in one bite. I have given a lot of thought as to how I should present such a long piece and I have reached the following conclusion. I will be submitting it in just 1 thread, albeit in several consecutive postings. The article that follows the 19 pager is also a very long one, but I will be breaking that one down into smaller bites over a few weeks. Many will not get to the end of both articles, but if you want your future comments to be guided by a better understanding of finance, then you should at least try.

 

Many thanks for that, quite a few on here should read and take note before posting....

 

If by competing aggressively you mean bringing in a few old heads and the odd loanees, then yeah, why not?

I don't think anyone wants the owners to bankrupt the club by chasing the premiership dream.

What the club is doing isn't working. It might do in the long term, who knows? But we are paying to watch them now.

I've got tickets for Preston and West Brom and going there expecting nothing isn't fun.

 

It doesn't paint a rosy picture does it. Surely as a supporter you have to have some dreams and aspirations when the renewal letter comes through. This that's your lot and be happy with that mentality doesn't sit right with me and never has done.

 

Thanks, a great piece setting out the cold, hard reality of the football business and the motivations of those in it.

 

My post is about giving people more information about how companies operate. As I point out, most people manage their own affairs perfectly well. I hoped that by giving people more information about how companies operate in the real world, they would be able to better understand the decision-making processes that define how Barnsley FC is run. The problem is that many have got used to the "wild west show" that passes for football management in the Championship. The mess that my next Minority Report will illustrate represents a situation that cannot go on for ever, and I would like to see Barnsley FC benefit from the eventual explosion, rather than be caught up in it. Of course, that requires patience, and unfortunately, patience is not a quality that football fans are renowned for having.

Whether you personally are happy with our yo-yo existence is not the issue, and neither is your perception of my happy-clapper position an issue either. The only issue is where will the cash come from for some alternative policy, because unless you can find another billionaire who agrees with your view of the way forward, you are stuffed.

 

Do we know the amount? It doesn't happen to correspond to the amount of money Chien Lee initially invested does it? A - la the Nice loan.....

 

Great piece, could do with it being made a sticky

 

If it's a bridging loan type arrangement then it's probably not that much, would still be interested to know the amount, not sure if it was widely reported?

 

I wasn't having a dig I was merely pointing out that it looks grim.

 

No I know that you weren't, but it gave me an excuse for further illustrating my motive for my original post.

 

If we do not try to be competitive there is no point playing in it must be the bottom line.

 

I have no problem with that, but you must have a source for the money it will cost, and that is reality.

 

As must all the other clubs at our level so that’s a fallacious argument. Given resourcing we should be able to compete at the same level as Luton and Charlton we are miles behind either who do not feel the need to sell their entire team every 18 months as quite clearly and obviously this will lead to failure. I can see crowds dropping dramatically when we get relegated and a downward spiral kicking in with people Unwilling to invest time and effort in failures

 

Look, I do not want an argument on this, because as I have pointed out, I am just telling it how it is, and if you do not want to accept how it is, that is entirely up to you. However, the board are trying to run the business properly. If you want to run the business your way, then you have to find someone to provide the capital. The bank will not do it because you have no security. So who will do it, because if you are not a billionaire with money to waste, it isn't going to be you.

 

The question for me isn't a case of how much money is spent, but how it is spent. Just as the issue isn't selling players, it's getting below parity when we're in a position where we don't have to sell, and the timing of such sales. Indeed, if we feel obligated to sell a player because he's unhappy, why have we increased the average contract length? Contract length becomes less material if the player just wants away and we're content to take a knock down fee, as we have done in all our summer sales.

But to the main point of how money is used. The club has the choice how many players we have and how big a squad we carry. Just by trimming a little from a huge first team squad (29 have pulled on the red shirt and Oduor, Wolfe and Simoes are around the cusp of being the ones to next step up through the academy), we could free up transfer fees and weekly wages.

Paying 5 average players 2k a week could be used to pay 2 better players £5k a week and so on. We're not going to suddenly jump to paying £20k a week, nor should we... but its not black and white that we have to follow this exact course the owners have embarked on. There are teams who aren't losing £13m a year and playing players with a higher average age than 21.5. Many are using loans. Many have older players.

We have a budget. It could be tweaked, particularly with the transfer fees gained, and the owners could add a few million to write off to get their process moving in earnest and try and attain safety first and foremost. But what we are doing with that budget is the issue.

Of each year of acquiring players to progress, this is the most radical so far in my view. Players of 20 and 21 have been the norm for the 12 signed this summer, rather than 22-24 of prior seasons. Just a season or 2 more experience makes a massive difference and I think we're seeing the result of signing very young players now in terms of results.

One good hiding and I truly fear what a mess we'll be in.