In this article series I would like to discuss the pitfalls of accounting for a professional soccer club. A large part of this should also apply to other sports, but in soccer these are common practice in any case.
After looking at the the accounting of player values and its pitfall yesterday, today I want to focus on another area, which is commonly used by soccer clubs to pump up their cash-flow and earnings: contracts with Sports Marketing Agencies:
Sports Marketing Agencies
On of the central sources of revenue for a soccer club is selling the right to use its own brand to market products and services to other companies. Typically, soccer clubs have exclusive deals for specific products categories with different companies. For example many clubs have an exclusive deal for a car partner, soft drinks, banking etc with various companies, which want to use the brand recognition of the soccer club to market their products.
There is typically three to four categories of marketing contracts, which are most valuable for the club and its customers:
- The main sponsor, which is visible on the jersey
- The sleeve sponsor, which is visible on the sleeve of the jersey
- The outfit sponsor, who defines the brand of the jersey
- The stadium sponsor, which has the right to name the stadium
Given that the core business of a soccer club is playing soccer successfully, it is no wonder that sport marketing agencies such as Lagardère Sports (formerly Sport Five) have emerged, which help the clubs to get the best deals for selling their brand name. The reward for such services is typically rewarded with a small percentage of the revenue the Sports Marketing Agency manages to generate for the soccer club. In theory, this would all be relatively straight forward and nothing to talk about too much. However, reality shows that the soccer clubs use their relationship with these Sports Marketing Agencies as an alternative source of financing and also to influence their earnings and equity.
The trick is that the service fee is often increased to a level which is clearly beyond what is reasonable as a service fee. In return, the soccer clubs get an up-front payment, with the amount being dependant on the percentage fee they will later pay to the Sports Marketing agency and the duration of the contract. This amount will immediately increase the liquidity level of the club and boost its earnings and equity in the short term. In the coming years however, earnings and cash flow will be burdened by the fee the agency takes.
These up-front fees can become relatively big and often surpass 20 million Euro or more.
So if you read in the papers next time that your favourite club has published a very positive financial result, it could well be that they just sold a big part of their future income to a Sport Marketing agency.