When the Final Whistle Blows: Why Sports Clubs end up in Administration
Sports clubs are more than entertainment businesses, they are the cornerstone of communities, providing a sense of identity for fans and supporters. When they go into administration, as a growing number have been since 2019, the public profile makes stabilising a club’s finances a complex challenge.
Why do clubs go into administration?
Since 2019 six football clubs have gone into administration, the most recent being Derby County, which successfully exited administration in July 2022 and Bury FC which successfully exited administration in May 2022 after Bury Football Club Supporters Society bought the business. Later the same year, two major Rugby Football Union (RFU) clubs, Worcester Warriors and Wasps went into administration and were suspended from the Premiership as a result.
All these clubs have one thing in common – they had a large amount of debt that they were unable to pay. How a club comes to a point where it is unable to meet its obligations is complicated due to the scale of these businesses and it varies from club to club. This is in addition to the challenges brought about with the uncertainties from the Covid pandemic and cost of living. Having faced lockdowns, event cancellations and growing social challenges many critical business decisions had to be accelerated to deal with the financial difficulties. While the larger and more elite clubs have fully recovered from the periods of the temporary cessation of operations, the smaller clubs are left with large funding gaps.
Bury FC had a long history of financial troubles and faced expulsion from the English Football League before a Winding Up Petition was issued. At that point, £1.6 million was needed to pay wages and only £180,000 was expected as income in the same period. In the case of Wasps, one of their largest unpaid bills was the club’s £14.1 million Covid Sport Survival Package (SSP) loan from the Department for Digital, Culture and Sport (DCMS) which was administered by Sport England, which demonstrates the impact of Covid on club profitability.
Going back to March 2002, the collapse of ITV Digital caused the administration of several football league clubs which were reliant on TV money that never arrived.
Most clubs seek to avoid administration as it carries added penalties in the form of suspensions, regulations and points deductions. The aim of this practice is to prevent clubs from manipulating the administration process so that they can shed their debts and borrow again, allowing the poor financial management of the club to go on unchanged. Worcester Warriors were expelled from the Premiership altogether. For clubs like Sheffield United, who are likely hoping that promotion to the Premier League will result in greater ticket sales and TV money and therefore more income, losing points would be a disaster. The club is reportedly undertaking money-saving initiatives to avoid administration. In a statement made to Yorkshire Live in March 2023, Stephen Bettis, Sheffield United CEO, stated that the club will not be entering administration this season.
What can club owners do?
If the sports club is unable to generate income and is running on a cash reserve, a prudent step will be to contact an insolvency practitioner and get advice on the available options. There are often variety of solutions, depending on the financial position and the desire of the club to continue trading.
What can administrators do?
When a club goes into administration, an insolvency firm is brought in to manage their finances and to see if the business can be restructured. The aim is to work with the club’s stakeholders to build a plan that gives the club the best possible chance of survival, whilst ensuring that its creditors are paid as much as they can be.
The administrators will start by analysing the club’s finances and try to identify the underlying reasons for its current financial position. To build a comprehensive picture of the state of things, the administrators will examine the club's income, expenses, and liabilities, as well as any outstanding debts or legal claims. Often clubs have assets and stakeholders outside of the immediate business of athletes competing in matches. For example, Wasps are a part of Wasps Holdings, which also includes three Coventry Building Society Arena companies. Alternatively, if the financial situation has caused the club to fall into arrears with its obligations to trade creditors, banks, landlords or HMRC, embarking on a process of negotiation could be the most suitable option. An assessment will be then done to help judge the future viability of the club and its chances of effecting a successful turnaround.
With the analysis in hand, the administrator will develop a recovery plan that outlines the work needed to stabilise the club and put it back on track. The measures implemented usually involve cost-cutting, restructuring debts and selling assets to raise funds. It’s common for the club to look for new owners who can invest new funds at this stage, though some – like Huddersfield – get lucky and avoid administration altogether by finding new owners.
Once a plan has been made, the administrators work with the club’s stakeholders to make it work. This can involve negotiating with creditors to reach a compromise on outstanding debts or working with the club's management team to improve revenue streams and reduce costs. Throughout the process, the insolvency firm will also provide regular updates to the court and other stakeholders, to ensure that everyone is kept informed of progress.
Legal reform of football governance
In February 2023 the Government published a report called ‘A sustainable future – reforming club football governance’ a reform paper aiming to protect the football clubs and ‘put fans right back at the heart of football’. The report suggests committing to a new independent regulator with a primary strategic purpose so that the football clubs are sustainable and resilient. One of the three primary duties of the regulator will be to assess the financial stability of the individual clubs to be backed by legislation.
The reforms suggested in the report are said to ‘give fans a greater voice in their own clubs, make sure those clubs are financially resilient - and ultimately, protect a beloved part of our national fabric.’
The suggested reforms are not yet in place but are said to be ‘the most radical overhaul of football governance since the rules were first invented over a century ago’ and are believed to act as a step towards right direction in support of a long and financially stable future of the clubs.
Keeping everyone happy
Outside of the regulatory and legal challenges an administrator faces when restructuring a club, there is a complex mix of stakeholders and processes to tackle.
Renegotiating player salaries or putting them up for sale is a common part of the process of saving a club, but by its nature, it’s a challenging thing to do. Players expect to be paid what they consider to be competitive wages that match industry standards. If a club can’t afford them, they’ll leave and may take with them a skill set that the club needs to draw in crowds and generate revenue. Equally, a club in distress will be forced to sell players at less than their worth, as the market knows they’re desperate. This is also all happening in the public eye – fans will have their opinions about these choices, and it may mean they won’t support the club in the future.
As sports clubs are often the pillars of communities, their financial failure is an emotional subject. Pope John Paul II is often quoted as saying “Amongst all unimportant subjects, football is by far the most important.”. Navigating the administration of a club is a complex process that requires specialised skills and expertise.
Isadore Goldman are specialist insolvency and restructuring lawyers that provide our clients with high-quality, innovative advice, designed to help you and your business get back on the pitch. Get in touch to find out how we can help.