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Considerations for acquisitions in sport
Under new management? Key considerations for acquisitions in the sport sector
By Tom Wilson, Head of Sport, haysmacintyre
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Due to the continuing challenges of the COVID-19 pandemic, we are starting to see an increase in acquisitions activity within professional clubs. Already we have seen that Newcastle United, Sunderland, and Wigan Athletic are all publicly seeking new ownership, and this is likely only the beginning of major ownership changes in the sector. In this article we’ll share some thoughts on where a potential new owner will want to focus their financial due diligence efforts.
Key financials
Probably the most important area in the current environment is the prediction of the future cash flows. This is obviously a herculean task at present with significant unknowns over when supporters may return to stadiums. This is likely to impact other income streams such as other matchday revenue, merchandising, and even the knock-on effect to the sponsorship and broadcast market. A forecast that predicts differing scenarios will be a key documentation item as it will give the potential owner an idea over how much they may (or may not) need to fund the club, at least in the short term.
Historical financial information would also usually be a key area of review. This will need to be taken in context of the current situation, but reviews of older financial information will give a clue to the standard of financial rigour at the club and its potential for growth (pre-COVID-19). This information will also allow benchmarking of key ratios such as wage income and earnings before interest, taxes, depreciation, and amortization, etc, which will highlight potential cost challenges.
Off balance sheet assets
Clubs tend to have some assets worth more than their carrying amounts in the financial statements. These are mainly the land and buildings of the club (training ground, stadium etc) and player registrations. Players and property often have a market value which often differs considerably from the carrying amount. Understanding this will be important for valuation purposes.
Liabilities
There are generally some straight-forward liabilities for clubs that simply require a strong accounting function: trade creditors, accruals, and tax liabilities. There are other areas that should be much more carefully considered, in particular debt, finance leases, leveraging of future income streams, and debt factoring.
Loans from related parties such as current owners, as well as other financing, will want to be clearly understood. Careful consideration should be given to covenants both past and future to help prevent financing issues.
Regulatory issues
There are several regulatory areas which could have financial consequences. If breached, financial sustainability rules, such as financial fair play or salary caps, can often lead to financial consequences through points deductions and relegation or fines.
Tax
Tax should always be part of due diligence reviews as it is often an area where sleeping liabilities could be hiding. The key point will be ensuring tax compliance matters and payments are up to date.
It is relatively unusual for clubs to pay Corporation Tax but ensuring returns and any potential tax payments will be considered. VAT is, in most cases, straight forward, but there are pitfalls over value in kind arrangements and overseas transactions to take into account. Ensuring employment tax payments are up to date is a given, particularly as clubs tend to have high wage bills, but there are other risks such as staff benefit provisions and off-payroll working arrangements also.
Other considerations
For the selling party, it is worth ensuring the potential buyers’ legitimacy with regards to the owners and directors’ tests and the money to complete the deal prior to any major discussion.
There are many potential contractual issues that could have financial impacts and should be something that doesn’t slip through the legal and the financial work.
Does the entity own the properties of the club? It is not unusual for these to be held in separate entities or third parties.
