How to value a football club
Goodison Park - Home of Everton FC
A business should always be considered as the third person and an entity in its own right, free from the people that actually own it. It is also important to understand how a business can be valued:
A Limited company (LTD), which Everton FC is, does not openly and publically trade shares. Therefore it is much more difficult to put a value on the business.
Many methods are used to value a LTD company but things that are generally considered include:
- History of the company
- Current performance
- Future projections
- Current financial situation – cashflow, debts, expenses, assets
- Reason for sale
- Reputation
- Relationship with customers
- Value of goodwill
- Value of licences
- Value of patents or intellectual property
Some of the above are what is known as Intangible Assets. They are very difficult to value, as they are not fixed assets that belong to the business by right.
There are other items that are easily defined compared to the above list:
- Assets
- Debtors
- Creditors
- Employees
- Premises
So Everton, Is it worth the Purported value of £150m?
The answer is simple, if somebody is willing to pay it, then it is worth it.
However, any potential buyer will verify that he is not paying over the odds by assessing each of the points above.
At Everton the current situation is perilous. The club struggles to (or doesn’t) invest in the future due its attempts to service current debt levels and this offers the reason for sale. It generally has a good relationship with its customers (fans) although due to the lack of investment, the relationship and reputation has been significantly knocked. However, as a premier league football club, Everton FC does have a returning customer base that could be, with the right strategy, largely increased. The strategy is not something new or something that has to be sought; as the model is in use at many other clubs across Europe.
As a premier league football club, Everton FC does own licences and Intellectual property with significant worth. For example it holds rights to TV and Media broadcasts and merchandise. These rights are worth approximately £50m per year in revenue.
As the club is in the public eye, with a captive audience of customers, it attracts both contractual sponsorship and ad hoc sponsorship. Added to this is the opportunity for local and national businesses to advertise on the premises, on the website and in company publications. Sponsorship and advertising can be worth between £5-10m per annum in revenue.
Customer purchases are also a considerable revenue stream. Everton play approximately 21 games per year, attracting 35,000 paying fans. The revenue from this equates to around £15-20m per annum
The company also owns premises and rents two retail outlets.
Adding to this are some intangible assets such as the employees. The football players, seen as a commodity, are intangible as they are neither ‘owned’ by the club nor do they have a definite, fixed value. This aside the current squad is worth around £50m (they can only be valued by the price PAID and not the price that they could be sold for).
So if Everton had no debt, you would be buying heritage, TV & media rights, sponsorship deals, merchandise licences and the ability to produce revenue through staging football matches.
In normal terms, a business can be valued at 2-3 times its revenue. Everton has an approximate revenue of £70m – therefore a figure between £140-210m is reasonable in line with this ‘unwritten’ rule.
Another way is to take its profit and add in asset values. Again, assuming there is no debt, Everton would make around £15m profit per annum plus a stadium, plus a squad value. Again, the figure would be around the £200-250m region.
Now here is the banana skin.
Everton is obviously in debt and this massively decreases the valuation. For example the stadium is mortgaged, as is the furniture, fixtures and chattels. Debt figures aside, the organisations acting as creditors must also be considered.
Take the charge against ‘the Stadium Loan Agreement’. Prudential Trustee Company limited, a private banking institute that specialised in portfolio management, investments and pensions, holds this charge. The charge trust deed prevents Everton from being sold without settlement. Second to that, a further charge from the same company also prevents the appointment of a new director or major shareholder without the consent of Prudential to ensure that the appointment does not adversely effect the value of EFC (and therefore the value of the charge prudential holds on the stadium).
A potential buyer must view this in a dim light. Effectively, a new buyer must evaluate this debt (as he has to pay it in order for the sale to progress) and remove it from the valuation of the company.
What’s more, in Everton’s case, the creditors are not only banks but also investment and pension companies. Companies that work on long term returns, not short gains. Therefore, as with Prudential, some creditors are in no hurry to be paid back as they have invested for their client’s futures (i.e. they need the loan amortisation to fulfil their promises to their clients). In short, if they lent Everton £45m (as is the current debt level), the charges and liabilities to pay early would cause an increase to £95m (the figure Everton will have paid if all debts are paid to maturity).
So the question is ‘why would a creditor such as Prudential want to be paid early’. The answer is…He wouldn’t.
The new EFC buyer now has to handle a debt charge of £95m. Using NSNO’s example of house buying – you cant sell a house without settling the mortgage or loan secured on it. A business is very similar (although if a new buyer has history with the creditors, they may let them continue to service a business debt through trust).
So Everton, without debt, is worth approx. £200m (3 x yearly profit = £45m, Squad = £50m, Stadium and other Assets = £100m).
With the debt, the valuation is hampered to the tune of £95m.
The remaining valuation is based on what is left that is worth anything. What do shareholders want for their shares, what does the company have that could make money? How long would it take to get the purchase price back (after all, EVERY business owner aims to get back what he put in and more!).
So asking £150m for Everton is not over inflated in my opinion. Any asset sale, according to the charges from Barclays, Prudential and Adam & Company PLC, would have to include the payment of those charges. This means the liability of £95m has to be covered (they may deal at a lower price but that is unknown until the sale is going through due diligence).
150-95 = £55m
The remaining £55m will be valued against everything that does not have a charge against it, bundled as share purchases (assuming all shares are purchased).
Everton has 35,000 shares, at £1500-2000 per share. That’s somewhere between £52m and £70m
So for £150m a buyer will have got himself a football club free of debt, owning its own stadium, sponsorships, squad, merchandise etc.
The valuation is correct – its around £52-70m, which equated to approx. 3 years profit IF THE CLUB HAD NO DEBT.
Last question then – why has nobody purchased Everton FC
At £150m the club would be debt free BUT would still only be turning over £70m per annum. Of that £70m, £55m is lost in costs to wages, operating costs, upkeep etc. leaving a profit of £15m.
If the new buyer could not envisage increasing the turnover and profits of the club, it would take 10 years to break even.
AND THAT IS WITHOUT SPENDING A BEAN ON NEW PLAYERS OR A NEW STADIUM.
Of course, if it had no debt, the new buyer would be repaid in just 3 years and would see a return 33% return in year 4 and so on.
Disclaimer – I wrote this in a rush with little time for detailed research – it is very much simplified – for exacting figures and charge amounts, please see the many publications available via KEIOC
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