SCOTTISH FOOTBALL IN CRISIS: Money too tight to mention?

GRAEME MACPHERSON asks Stephen Morrow, Head of Sports Science Studies at the University of Stirling, a chartered accountant, and author of several books on finance in football, about the key financial issues affecting Scottish clubs.

Is it realistic to expect those clubs with massive levels of debt to ever be completely debt-free?

“In the current trading model that Scottish football is in, it is difficult to see how they could find a way to pay that off. That’s not to say they can’t manage that debt. They can look after the interest payments on it but unless something changes to the structure or the finances of those clubs -- or something substantial changes to their trading environment -- then all they will be doing is very, very slowly bringing the debt down, but nothing dramatic is ever likely to happen.”

Can this go on ad infinitum then?

“From the lenders’ point of view, as long as the clubs are meeting their obligations and making their interest payments, there’s no particular challenge to that. If they keep servicing their debt there would be no particular threat to their financial viability. But what it means is that a chunk of your recurring income is going out to meet those debt payments. You’re not getting something for it, like a new stadium or training facility, you’re just using those sums to tread water.”

Are banks now taking a closer look at clubs’ finances given their own well-publicised difficulties?

“It would be surprising if the banks weren’t looking at the levels of debt and how best to manage those because the environment they work in has changed quite markedly. In the overall scheme of things, with regards to bank debts and obligations, we are still talking about relatively small sums of money here. We have to keep things in perspective as most Scottish clubs are very, very small business organisations. So the degree of exposure the banks have got, in overall terms, is virtually negligible.

“I don’t see them rushing to demand repayments. What you will find is that there will be discussions and negotiations with the clubs as to what they see is the best way forward so, over time, there is a trend or a movement towards bringing debt down to a manageable level, but I don’t think there will be any dramatic movements by the banks. It’s not in their interests, as it’s small sums of money in their terms, and there would be a lot of community uprising and people concerned from a social perspective if they were to do anything dramatic to any particular club.”

What about Rangers’ relationship with Lloyds TSB and the bank’s decision to put 
a representative on the Ibrox board?

“The Rangers situation is slightly different to other clubs as we know it is wrapped up with the wider concerns of Murray International Holdings, and the fact that the owner of the club is on record as saying he wants to sell up. There’s a longer standing issue around that. Rangers’ debt level is a bit bigger, but, in percentage terms, it is worth less of its assets than some of the other clubs in Scotland. And it pales into insignificance with some of the English clubs who have huge levels of debt.”

What about those clubs who find themselves largely reliant on one financial backer?

“If you were going to design a business model you would want your income and funding sources to be as diversified as possible, with a strong capital structure which involves equity finance and a bit of borrowing in there, too. Ideally, you would have numerous different sources of revenue, so you are not as dependent on any one area.

“Football, though, is quite a simple business and doesn’t really follow that model. If someone was to offer you quite a lot of money, in capital form if they are buying into the club, or a TV firm offers you a lot of money, then you’re not likely to say, “Sorry, this doesn’t fit my business model” and you take it. After that, it’s how you manage that income going forward and that’s where there have been challenges for some of the clubs.”

What are the chances of a cash-rich consortium of businessmen investing in a Scottish club as has been the case regularly down south?

“There is no evidence to suggest that will happen in a Scottish context. One thing the recession has demonstrated is that the football “business” isn’t really anything of the sort. Clubs, for the most part, haven’t made profits and aren’t likely to do so in future, so it is different from other forms of economic activity. Those investing in Scottish football are doing it for social reasons or to sustain a community organisation. It certainly isn’t about making money, that’s for sure. Somebody coming into a club now would certainly have a different view of it than they would have done even 12 months ago.”

Do the clubs deserve some credit for trying to run their operations more prudently than perhaps a decade ago?

“It’s important that point is made. There has been, without doubt, improved financial management within most clubs. A few years ago, clubs were going into administration due to living outwith their means. Many Scottish clubs have worked hard to balance their income and expenditure and to try to create a sustainable model. The challenge that brings is that it’s not as exciting, and people criticise them for not taking risks to improve the product on the pitch.

“But clubs have worked hard to cut their costs and when the improved Setanta TV deal was announced last year the future probably looked quite rosy for many of them. Sadly, we know what happened there largely through no fault of the clubs.”

Do you expect to see any Scottish clubs fall into administration in the near future?

“I don’t necessarily think so at the moment. There is always that risk as you have clubs effectively living on the edge as, if you have a club with a high level of debt, it doesn’t take much for it to go wrong. But I think the clubs are reaping the benefits of trying to sort out their internal management processes in the last few years which will earn them a bit of sympathy from the banks and others around them.”

Is there any value in clubs voluntarily falling into administration to wipe out their debt?

“You could see it as one way of eliminating the debt but, from a social perspective, it’s clearly abhorrent as, quite often, it’s those communities and people who have supported the club who are the ones who suffer. Clubs are social institutions and so the last thing they should do is anything that would diminish the relationship with the people they deal with regularly. I don’t think there is any sense in going into administration.”

Could clubs be doing more to increase their turnover?

“There are always things you could be doing a little bit more of but we have to be realistic. These are quite mature businesses and many have worked hard to diversify their income and make their themselves more attractive. On a large scale, I’m not sure what more they could do, aside from getting their cost base fully in line with income. Some clubs have done well in diversifying their income streams, others not so much. On their core business, everything is stacked against them making profits as there’s always a pressure to spend more, especially when more money is coming in. So the best they can hope for is usually to break even.”

If clubs reduce prices to encourage higher attendances will they necessarily make more money as a result?

“Not necessarily, but it could be a worthwhile long-term strategy regardless. One of the things clubs are trying to do is get more young people into games as, with an ageing population attending games, clubs need to try to make the product 
more attractive to the next generation. That’s why I think initiatives, such as reduced prices for kids, are a good thing, even if they cost the clubs money.”

Once we emerge from the recession, are 
we likely to see an upturn in clubs’ finances, or are we set for more of the same?

“I think we know the level we are at. You would like to think once we emerge from recession there will be, for example, better rewards available from media organisations. But we have to be realistic and acknowledge that it’s always going to be Scottish football played within a Scottish market. That brings its own limitations.”

What about proposed changes to the way Scottish football clubs are run?

“One thing that may change in future is ownership structures at clubs. Historically, we have had traditional limited liability companies, and we know why they are there, but as most clubs aren’t posting profits there is an opportunity to look at the ownership structures and see if other models might be more appropriate, like community interest companies. That is maybe the kind of area, if there was support from the government or other external areas, that might be seen as making more sense as football can no longer really be seen as an industry or business in the conventional sense.

“We are seeing discussions ongoing at Rangers on this matter, as well as a similar scheme planned for Stirling Albion, and given that the structure of Scottish football is largely non-profit-making and is more about social and community organisations, I think it would be good if clubs looked more closely at this.”