Everton’s financial position is clearly broken down by supporters under new team cost ratios, explaining how amortization, wages and profits on player sales, as well as stadium and commercial income, change the spending space.
I thought I’d try to give a simple explanation of Everton’s actual financial position and, more importantly, how the new Team Cost Ratio (SCR) works.
I’m by no means a finance expert, but there seems to be a lot of confusion around the idea that Everton have to sell before they can buy, so I’m trying to understand how it actually works rather than just looking at the headline transfer fee.
The most important thing to understand is that SCR is not just “Everton have spent £X million, so we need to sell £X million to spend again”.
Under the new system, the team’s costs mainly consist of player salaries, transfer fee amortization, agent fees and certain other player-related costs. This is then compared to the club’s relevant football revenue.
The easiest way to explain transfer amortization is with an example. If Everton buy a player for £30m and give him a five-year contract, we don’t simply hit SCR with a £30m hit that season. The £30m transfer fee is usually spread over five years, so the annual amortization cost is £6m before adding in his wages, agent fees and other expenses.
So if the player earns £100,000 per week, that would be another £5.20 per year. So this £30m signing is likely to add around £11.2b per annum to our squad before agent fees and other costs, rather than being a one-off £30m.
That’s why just thinking about transfer spending can be very misleading.
Take our summer signings for example. We brought in players such as Merlin Röhl, Hayden Hackney, Tyrique George and Christian Nørgaard, and the reported fees added up to a considerable amount. But these transfer fees are spread across their contracts. What really matters to SCR is the annual amortization, their salary, agency fees and other related costs.
The same applies when we sell players, but this is where it gets really interesting.
When we sell a player, the transfer fee is usually not spread over a further five years. Instead, we look at the player’s remaining book value.
For example, let’s say we buy a player for £20 million on a 5-year contract. In three years’ time, he may still have £8 million left on his books. If we subsequently sold him for £60m, we might make an accounting profit of £52m on the sale. The profit is recognized in the relevant accounting period, rather than spread over five years as with new signings.
This is why selling players under financial rules is so valuable.
For example, if N’Diaye was sold for £60m, we wouldn’t simply put £60m in the bank and spread that £60m over five years. Based on his remaining book value, a significant portion of this £60m could be recognized as profit on the sale of the player for that period. We will also deduct his salary from our squad costs.
Academy players may be more attractive financially. If a player like Harrison Armstrong has little remaining book value because he came through our academy, then a £35m sale could create a very large accounting profit. This is one of the reasons why academy sales are so valuable to clubs under these rules.
This is also why Beto trading is financially useful. We agreed to sell it for around €18 million (approximately £15 million). His remaining book value should be significantly less than the sale price, so the club should make a profit from the sale while also deducting his salary from the squad. Again, this does not mean that £15m automatically becomes £15m of SCR headroom, but it can have a very positive impact on the calculation.
The Dwight McNeil/Brennan Johnson trade is slightly different in that it’s actually a player swap rather than an outright cash purchase. Both parties have their own accounting values and salaries, so the impact of SCR depends on how the deal is valued and the difference between their existing book values, salaries and contract terms.
Salary is another important component of this.
If Everton signed a player for £100,000-a-week, it would add £5.20 a year to the team’s costs from his wages alone. If we sell a player who earns £100,000 a week, we might deduct £5.20 a year from the squad costs.
That’s why getting rid of several high earners is just as important as bringing in transfer fees.
Agency fees must also be considered. When a club signs a player, there may be agent/agent fees, signing fees and bonuses. These also add to team costs, so a £20m transfer is not necessarily the full cost of bringing that player to the club.
That brings us to the new stadium, which I think is another part of this conversation that gets overlooked.
Hill Dickinson Stadium is more than just the place where Everton play their 19 home league games each season. This is a business asset. We may generate additional revenue through increased attendance, hospitality, corporate boxes, food and beverages, conferences, concerts, other sporting events, stadium visits, venue rentals, sponsorships and other commercial activities.
Obviously, not every pound generated by events is pure profit, as there are costs involved in running and staging these events. But the important point is that the increased revenue associated with qualifying football can increase the team costs we can cover under the SCR.
For example, if Everton generate an additional £20m of qualifying football revenue, an 85% squad cost allowance would theoretically represent an additional £17m of potential annual squad cost capacity. That’s not a transfer fee of £17m, but £17m of extra space per year to cover costs such as wages, amortization and agents’ fees.
And the stadium isn’t the only source of revenue. Everton also generates revenue from Premier League broadcasts, matchday tickets, hospitality, commercial partnerships and sponsorships, merchandise, prize money and European competitions (should we advance in the future).
The more revenue Everton generates, the greater the basis for measuring the team’s costs.
That’s why I think it’s important to understand that Everton’s financial position is more than just how much money we have in the bank today. It’s about how much revenue we generate, what our wages are, how much transfer amortization we bear, how much we pay agents and how much profit we make from player sales.
The latest independent estimates put Everton’s utilization rate under the new SCR system at around 102%, with the red threshold at around 115%. That doesn’t mean we’re completely off limits, but it doesn’t mean we’re on the brink of financial disaster either. This shows that we still have some room before reaching the red threshold.
Importantly, that room can change.
When you sign a player, we add his amortization, salary and other costs.
By selling a player, we can deduct his salary and potentially make a sizeable accounting profit.
Selling an academy player can be particularly profitable as there may be little book value left.
Generate more stadium, commercial or broadcast revenue and we increase the revenue base against which team costs are measured.
That’s why I think the saying “Everton must sell first before buying” is no longer accurate.
We obviously have financial constraints. We’re not going to suddenly become one of the richest clubs in Europe and we can’t spend whatever we want. But we are also in a different situation than we were a few years ago, when the PSR influenced almost every transfer decision.
We’ve invested heavily in Rohr, Hackney, George and Norgaard this summer, brought in Johnson as part of the McNeil deal, and now we’ve got around €18 million for Beto while also taking away his wages. We’ve also made adjustments to other players and their salaries.
So the question isn’t just “Have Everton sold enough players to pay for the players we’ve bought?”
That’s not really how the new system works.
A better question is: “What is the total annual cost of our squad compared to the revenue Everton generates?”
That’s why I think Everton are in a much healthier position than some people realize.
Selling Ndiaye will obviously provide us with significant financial growth and create greater flexibility due to the size of the potential profit and the reduction in wages we will have. But that’s very different from saying we can’t actually buy anyone unless he’s sold.
We no longer live in Everton’s old world where every transfer had to be funded by another transfer. The new stadium, increased commercial revenue, player deals, reduced costs and the new SCR system fundamentally changed the financial picture.
We are not bankrupt.
We are not unrestricted either.
But I think it’s important that we understand the difference.
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