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.

7 Comments:

At 12:06 PM, Blogger StoneMuse said...

This has potential NYA - would be interested in learning how it can be taken forward.

 
At 1:31 PM, Blogger Kings Hill Addick said...

It seems like an obvious idea to me. Clearly the board of any football club would not want to share the increase in the value of the player, but if they can't afford to buy him otherwise then it makes sense. 75% of something is much better than 100% of nothing. I also suspect that there would be a good chance that on dissolution of the TeansferCo the investors would probably be interested in investing in another one, so the club might well end up getting the use of the money on the next transfer.

I guess there would need to be total trust between the club and the TransferCo, and there will always be the possibility of the club manipulating the figures for any player plus cash deal, but as the loan would be repaid with interest I guess it doesn't matter too much.

Where I can see an issue, however, is if the club need to sell the player to manage cash flow (and fight off administration) there could be a conflict of interest with the TransferCo who might be forced to waive their loan, but this is true of all investments, they can go dnwo as well as up.

I would also think it could cause a conflict of interest for the club when making a decision to sell a player if they have a significant sell on clause, but that is true of any player that has these type of conditions on purchase.

On the whole my first point is still key, I believe. If the TransferCo is offering to allow the club to sign a player that it would not otherwise be able to I can't see any reason as to why they wouldn't want to do it.

I would certainly be interested in investing in such a scheme - all be it on a relatively small scale.

 
At 6:31 PM, Anonymous Anonymous said...

Still wages to take into account.

 
At 10:26 PM, Blogger New York Addick said...

Given the club has still signed 5-6 new players this season, wages are not a big issue - indeed I suspect Fuller and Kerkar are amongst he best paid at the club given where the came from.

My point is we can sign better players if we have a transfer budget - the wage bill can be managed by farming players off on loan, letting contracts expire etc.

 
At 7:30 PM, Anonymous Anonymous said...

I'm not disregarding the idea.

Just saying that whilst fans signing a player with potential for 200,000 is one thing, the club will still need at least the same amount again in wages over the duration of the contract; and if they don't have the initial £200k to buy the guy themselves, stands to reason they don't have the same 200k to pay him in wages.

 
At 9:45 PM, Blogger New York Addick said...

Sorry that doesn't make sense - £200k in wages is spread out over the season - the transfer fee is payable upfront.

To use a real world analogy, what hurts a household more? £10,000 in mortgage payments spread out over a year, or £2,000 as a one-off unexpected bill payable immediately?

 
At 3:51 AM, Anonymous Anonymous said...

Sounds like an interesting idea.
Only thing is this is football, a sport, not a total business yet. Lot's of grey area.

 

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