Thursday, September 27, 2012

The TransferCo Concept

A group of Charlton fans are taking steps to set up a Supporters Trust, with the stated aim, "To preserve Charlton Athletic for this and future generations."

I was asked by the interim Chair of the Trust (Barnie Razzell) to publicise this process, and I am happy to do so. Any fans looking for more information can find it here.

However as I explained briefly in an amicable email correspondance with Barnie, I was a little sceptical about what a Trust could realistically achieve, although conversely it can't do much harm either.

My scepticism rests inevitably upon money, the lack of which may render the Trust powerless whether in a confrontational situation or a supportive one (particularly when dealing with owners who are not 'true' fans).

As it happens alongwith a fellow supporter, I have been toying around with another concept for nearly two years now, dating back to the pre-Jimenez/Slater days.

The takeover appeared to render my concept moot, but recent developments have brought it firmly back onto the table now that funds to spend on transfers are seemingly unavailable again.

It is not an alternative to a Trust but potentially represents a way for supporters to get involved, help the team directly, be aligned with the owners and perhaps even generate a healthy financial return too.

The plan very roughly is as follows, and before anyone draws attention to the fact that it perhaps rings some bells from the 1980s, yes I did help to buy Ronnie Moore.

Key to the attractiveness of the proposal is the fact that banks have essentially stopped lending to football clubs, and understandably so.

Thus in the absence of directors' loans (which Charlton have historically relied upon), funds for new transfers can only be generated by selling players, or from operational cashflow.

The former usually weakens the squad in the long-term (the Carl Jenkinson situation was unusual in this sense), whilst the latter is unrealistic in the context of existing deficits.

Everyone knows that medium-sized football clubs are inherently unprofitable, but some aspects of their operations are potentially very profitable. 

Traditional loans to a football club (whether by banks or directors) are used to fund the entire unprofitable operation, but what if loans could be directed specifically towards only the potentially profitable part?

The first formal step in my alternative proposal would be to incorporate a limited company (hereafter termed 'TransferCo'), ostensibly to act as a cash shell at least in the near-term, but in the medium-term to invest in a specific opportunity (see below).

TransferCo's Articles would state that it was in the business of investing in undervalued footballing talent, or something similar.

Directors would need to be appointed, probably selected from those fans keen to be involved and with the time and inclination to do so.

Administration costs (eg. legal, audit etc.) would likely be relatively low throughout given the simplicity of its business, and may well be available from suitably qualified fans on a pro bono basis.

At this point (or perhaps even before), the Directors of TransferCo would approach the club to explain their proposal and hopefully receive some clear 'buy-in'.

The aim as you have no doubt worked out would be to lend the club funds to sign a player but one who has certain important characteristics as follows:

1. the target player(s) should be young (probably 18-21 years old) in order to reduce the 'Bosman risk' in subsequent years, and to provide a longer runway for improvement;

2. the target player(s) should have very clear potential to improve as a player and be receptive to good coaching and mentoring (qualitative factors like character etc. are key here); and

3. the target player(s) should nonetheless be ready for first team action if not immediately, then at least very soon (thus clearly improving the existing squad).

Realistically the target player(s) would already be impressing at League One or Two level, or alternatively on the fringe of Premiership or Championship sides.

Clearly it would be the club's prerogative to provide a shortlist of suitable targets (in the usual way), but equally the Directors of TransferCo would expect to ask important questions especially regarding 'value for money'.

The advantage of having even a very small but real cash transfer budget is that the universe of free transfers, loan signings and out-of-contract players is by definition relatively small and compromised.

Moreover transfer funds saved by recruiting from the above pool is often offset by higher wages and signing-on fees, as canny agents recognise this obvious arbitrage.

The second and most important step would be to issue shares in TransferCo, with the aim of raising say £250,000 for the first acquisition.

This may sound like an unrealistic amount of money, but I would argue it is not so long as shares are offered to a wide enough section of fans.

For example, the following contributions would achieve the fundraising target:

5 x £10,000
50 x £1,000
200 x £250
1000 x £100
TOTAL: £250,000

Minimum investment could be set relatively low (at say £100) to encourage wide participation, and this should not discourage fans able to invest more since their ownership stake would obviously be commensurately higher.

Moreover because of the possibility of a financial return (see below), shares could be offered more widely than to just 'regular' fans. For example local companies, former Charlton players and former directors could be approached too.

Once the monies had been raised and a potential transfer target found (and terms agreed with the selling club), then TransferCo would lend the club money for the sole purpose of completing the transaction, possibly secured on some club assets.

I have not for the timebeing considered the implications of the selling club demanding 'add-ons' (for appearances, promotion etc.), but I'm confident these can be ironed out perhaps simply by offering more cash upfront (since said cash is now readily available).

I would suggest that the money be lent with a moderate interest rate of say 5% (in the current climate), perhaps to accumulate and be payable only upon repayment of the full loan (see next step).

The loan would become payable upon the earlier of the following:

1. an agreed date in the future (say 4 years from the transfer date);
2. the transfer of the player's registration to another club;
3. promotion to the Premier League;
4. injury-forced retirement of the player (presumably triggering an insurance payout).

In addition as a 'kicker', TransferCo would be entitled to a percentage share (say 25%) of any profits made if/when the player is transferred to another club.

From a pure cashflow perspective, it is clearly in the club's interests to opt for repayment in scenario 2. versus 1..

Scenario 3. would be terrific and repayment of the loan can easily be made from the additional revenues promotion would generate. Scenario 4. would be unfortunate but somewhat improbable.

Thus there is clearly an incentive for the player to be used, improved and then sold on for profit.

This may appear to be somewhat self-defeating, but the club still benefits from the player's performances for 2-3 seasons and can recycle any excess cash into new signings if it wishes.

In recent times, perhaps Nicky Bailey represents the best example of this type of approach in action - a raw talent from the lower leagues, he was nonetheless good enough to both make an instant impression and improve sufficiently to attract a sizeable bid 2-3 years down the line.

Perhaps the beauty of this overall proposal is the ability to do it multiple times, either from the same TransferCo, or via several TransferCos of varying sizes (each liquidated upon repayment, and funds returned to shareholders).

It is reasonable to ask why the club would entertain this prospect at all, and indeed I'm honest enough to acknowledge that it is a proposal which would likely have received a better hearing under the previous fans-led administration.

Nonetheless with the club's finances apparently severely challenged at the present time, there is clearly a potential alignment of interests here - all other things being equal, both the owners and fans want a stronger playing squad.

Most interestingly perhaps, it is clear that Tony Jimenez fancies himself as an identifier and developer (via his appointed coaching staff) of footballing talent.

Without wishing to opine upon the relative contributions of owners/scouts/management/coaches, the evidence in just the past two seasons of the likes of Rhoys Wiggins, Michael Morrison, Dale Stephens and Ben Hamer (all signed for a fee) suggests there may indeed be grounds for hope. 

After all each has undoubtedly been a key player since joining, and has a current market value well in excess surely of the fees originally paid.

I'd be very keen to hear your views on the above concept - all comments welcome.