Milan - Warning Signs

By most people’s standards Milan have just enjoyed a pretty good season. They were runners-up in the league, only behind an undefeated Juventus; they reached the quarter-finals of the Champions League before being eliminated by the mighty Barcelona; and lost in the semi-finals of the Coppa Italia. However, it was still a disappointment, as they had established a healthy lead in the race to the scudetto, and it was a backward step compared to the previous season, when they had won Serie A for the 18th time.

Last year’s triumph was particularly noteworthy, as it was under the guidance of the previously unheralded Max Allegri, who won the title in his first season – just like his more famous predecessors Arrigo Sacchi and Fabio Capello. However, this year Milan have been plagued by injuries, losing the likes of Mathieu Flamini, Antonio Cassano, Alexandre Pato, Thiago Silva and Kevin-Prince Boateng for lengthy periods. As their talisman Zlatan Ibrahimovic lamented, “Injuries have followed us for the whole season.”

Ibra himself had done his utmost to secure another title for the rossoneri, as his 28 league goals earned him the capocannoniere (top scorer) award for Serie A, though this was not enough to continue his remarkable record of gaining a league winners’ medal every season since 2003 (with Ajax, Juventus, Inter, Barcelona and Milan).

"Partial to your Ibracadabra"

However, whether it was down to injuries, second season syndrome for Allegri or the simple fact that the team was not quite good enough, the fact remains that Milan did not win any silverware – unless you count the 2011 Supercoppa, the curtain raiser to the new season. “Close, but no cigar” is not good enough for a side that has a fantastic record in winning trophies, including the Champions League on an incredible seven occasions (only bettered by Real Madrid) and the European Cup Winners’ Cup twice.

No matter how impressive Milan have been in the past – and they can lay claim to having the best side of all time under Sacchi – they are now facing daunting challenges, both on and off the pitch.

Many of the old guard have left the club this summer, including the elegant defender Alessandro Nesta, the prolific Pippo Inzaghi, the tigerish Rino Gattuso, Mark Van Bommel and Gianluca Zambrotta. In addition, there are question marks over the veteran Clarence Seedorf, who is mulling over a one-year extension, and the club has not exercised loan options for Maxi Lopez and Alberto Aquilani (though the latter may yet sign on a reduced package). That’s a lot of experience to try to replace in one fell swoop.

"Allegri - Mad Max"

This mission is made more difficult by Milan’s financial situation, which is by no means disastrous, but is bad enough to give the club pause for thought. Their traditional modus operandi has been to operate with substantial losses, which are then covered by the owners, but this will not be possible in the new world of UEFA’s Financial Fair Play (FFP) rules where clubs will have to live within their means without the assistance of a wealthy benefactor.

This will test to the limit the negotiating skills of Milan’s vice-president Adriano Galliani, who has proved himself to be a wily old fox in the past, especially when he snapped up Ibrahimovic from Barcelona for around a third of the price that the Catalans paid a year before. The need for Milan to find bargains was further emphasised this summer when they signed two international midfielders on Bosman free transfers: Riccardo Montolivo from Fiorentina and Bakaye Traoré from Nancy.

Ibrahimovic of all people highlighted the club’s financial woes, “Milan’s problem is economic. There is no money to buy five players, or even the ones we need. We made a couple of signings, maybe there will be a third.”

When you look at the club’s most recent accounts (for the year up to 31 December 2011), you begin to understand what the big Swede is talking about, as these reported a thumping great loss of €67.3 million. Amazingly this actually represented a slight (€2.4 million) improvement on the previous year’s loss of €69.8 million, an indication of Milan’s structural weaknesses. The losses in both years would have surpassed €80 million without the benefit of substantial tax credits, €15.7 million in 2010 and €13.3 million in 2011.

Revenue grew by 7% to €234.8 million, but this was matched by a €13.7 million increase in the wage bill to €206.5 million, a record high for Milan. Note that this definition of revenue excludes €23.6 million profit on player sales and €8.4 million increase in the value of fixed assets (shown elsewhere). If these are added back, we get the €266.8 million of revenue mentioned in the club’s press release.

This produced operating an operating loss of around €100 million level for the second consecutive year, which is distinctly uncomfortable for a club aiming to be self-sufficient in the near future.

I should clarify that this analysis is based on the accounts for the consolidated Milan Group, as opposed to just the football club AC Milan SpA, as these are the accounts that will be used for UEFA’s FFP review. The group accounts include Milan Entertainment SpA and Milan Real Estate SpA, but there is not a significant difference. In fact, the loss of €67.3 million for Milan Group is €8.2 million better than the €75.5 million registered by AC Milan SpA.

Milan’s poor financial performance is nothing new. The last time that the club made money was 2006 and even then the €11.9 million profit was heavily influenced by once-off factors, namely the €40 million profit from selling Andriy Shevchenko to Chelsea and a €27 million once-off payment for an option on future TV rights. Since then, there have been five consecutive years of losses, adding up to a combined deficit of around a quarter of a billion Euros.

The only recent year that looks good on paper is 2009, when the loss was “only” €9.8 million, but this was almost entirely due to the hefty €74 million profit on player sales, arising from the transfers of Kaká to Real Madrid and Yoann Gourcuff to Bordeaux. As we have seen, it is difficult, if not impossible, to raise similar sums form player sales every year, not to mention the detrimental effect it would have on the team.

In each of the last two years Milan have generated €23-24 million from this activity, much of which has been derived from the special relationship that they appear to have with Genoa, who have contributed over €30 million in this period, including €17 million in 2011: Alexander Merkel €9.9 million, Nicola Pasini €3.3 million, Mario Sampirisi €2.0 million and Sokratis Papastathopoulos €1.8 million.

One more technical point: for profits on player sales I take the plusvalenze less the minusvalenze to give a net figure, e.g. in 2011 €23.6 million minus €0.3 million (to release Onyewu Oguchi) gives the €23.3 million in my schedule.

If we exclude tax movements and profit from player sales, then the adjusted loss for Milan over the last four years would add up to a colossal €386 million with three of those four years coming in over the €100 million mark. In other words, with the sale of a world class player Milan make losses; without such a sale they make large losses.

Of course, Milan are not the only leading Italian club to find themselves in this situation. Indeed, in 2010/11 the losses were even higher at Juventus (€95.4 million) and Inter (€86.8 million). The big three contributed 89% (€252 million) of the total Serie A losses of €285 million. Note that I have used Milan’s 2010 loss in this schedule to be consistent with a survey prepared by La Gazzetta dello Sport, but the loss is around the same level in any case.

More encouragingly for Italy’s top flight is that the number of clubs making a profit in 2010/11 doubled from the four in the previous season to eight (Bari, Lazio, Palermo, Catania, Napoli, Udinese, Parma and Brescia). This list includes two clubs that qualified for the Champions League (Napoli and Udinese), so sound husbandry of a club’s finances need not necessarily mean lack of success, though it should be acknowledged that some did benefit from substantial player sales.

Over the last three seasons it has been more or less the same story of colossal losses at both Milan clubs, who are by some distance bottom of Italy’s profit league. Juve’s losses over the period are virtually all because of 2010/11, mainly due to not qualifying for the Champions League and investing in their new stadium, while Milan and Inter’s figures have been consistently poor. At least Milan win the financial Derby della Madonnina with Inter’s astonishing losses of €310 million in this period being more than twice Milan’s €146 million. In truth, neither club has much to write home about on this topic.

But surely all the top football clubs lose money, right? Actually, that’s not really the case, as a few did report profits in 2010/11: Real Madrid made a sizeable €47 million, thanks largely to their enormous revenue; Arsenal €14 million, boosted by property sales; and Manchester United €11 million, as their awesome cash generating capacity was enough to cover interest charges on their massive debt. Bayern Munich only recorded a small profit of €1 million, but this represented their 19th consecutive year of profits. Even big spending Barcelona’s loss was relatively small at €9 million.

Of course, some leading clubs abroad also employ the sugar daddy model, such as Champions League winners Chelsea, who made a loss of €75 million, while Manchester City’s attempt to gatecrash the party cost them €219 million. Even so, it is clear that Juventus, Inter and Milan all face more serious issues compared to the others, as their ability to generate additional revenue in the short-term is more constrained.

 That said, Milan’s revenue is not too shabby by Italian standards. In fact, for 2010/11 (the last season when all clubs have published accounts), their revenue of €220 million was the highest with only Inter anywhere near them (€211 million). The other clubs were miles behind with only three others earning above €100 million: Juventus €154 million, Roma €144 million and Napoli €115 million. This is despite the leading lights effectively transferring some of their revenue to the others after the collective TV deal was implemented.

However, as John Donne said, “No man is an island” and Milan also have to look beyond their borders at other European clubs. At first glance, Milan appear to be sitting pretty at seventh place in Deloitte’s Money League, but problems begin to emerge on a closer inspection, as they are a long way short of their peers abroad. In particular, the Spanish giants generate significantly more revenue with Real Madrid (€479 million) and Barcelona (€451 million) earning around twice as much as Milan, benefiting from huge individual TV deals.

Both Manchester United (€367 million) and Bayer Munich (€321 million) earn around €100 million more than the rossoneri, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts everyone else to shame. In fact, at the latest exchange rates United would also break the €400 million barrier. This vast revenue discrepancy makes it difficult to compete, especially when that shortfall in turnover occurs every year.

Eagle-eyed observers will have noticed that Milan’s revenue figure of €235 million is different to the €253.2 million included in the club’s accounts for 2010. There are two reasons for this. First, in order to be consistent with other countries, Deloitte excludes: (a) player loans €0.5 million; (b) profit from player sales €25.5 million; (c) change in asset values €7.6 million. Adding those to the €220 million shown in my analysis gives the €253.2 million reported in Italy.

Second, Milan’s accounts cover a calendar year (up to 31 December), while the majority of clubs’ figures coincide with the football season, so the accounting close is in June. Because of this anomaly, Deloitte adjust Milan’s figures based on information provided by the club, leading to the €235 million in their league table.

Regardless of all these technical adjustments, the underlying themes for Milan (and Italian football) are very much the same. A recent report from the Italian Football Federation (FIGC) concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money.

These problems have been reflected in the lack of revenue growth of Italian clubs. Since 2005 Milan have managed to grow their revenue by just €20 million (9%), which is only ahead of Juventus among leading European clubs. In that period they have been overtaken by Barcelona, Bayern Munich and Arsenal. Most strikingly, Barcelona’s revenue was €7 million lower than Milan in 2005, but is now far over the horizon at €216 million higher, while the investment in new stadiums at Bayern and Arsenal has really paid dividends. As Galliani put it, “Twenty years ago Milan invoiced more than Real Madrid, today only half. That’s the real problem.”

Essentially, Milan’s revenue has been flat for the last few years, though this disguises two opposing factors: TV revenue has fallen by €29 million since 2006 to €114 million, largely due to the move to a collective deal, while commercial income has increased by €23 million to an impressive €91 million.

Match day revenue has also risen by €3 million, though it remains a feeble €29 million, just 13% of total revenue, which, in fairness, is typical of all Italian clubs and helps explain their relative revenue weakness. Despite the decline in TV revenue, it is still the most important revenue stream, accounting for just under half of Milan’s revenue. This is partly due to the higher payout from the Champions League, which rose €16 million in 2011, more than offsetting the €7 million fall in domestic TV money.

The €114 million earned from television in 2011 comprised €78 million from the domestic deal and €36 million from the Champions League (a combination of the last 16 in 2010/11 and the group stage in 2011/12). They received the third highest domestic money, just behind Juventus and Inter, but a fair bit more than other Italian clubs, e.g. Napoli and Roma got around €60 million; Lazio about €50 million; and Fiorentina, Palermo and Udinese around €40 million.

This represents an improvement for mid-tier clubs following the implementation of the new collective agreement in 2010/11. Under the new allocation, 40% is divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

The result is a reduction at the top end, so Galliani is not a happy customer, “In football big teams have to share income with other sides and this is an anomaly.” This may be a bitter pill to swallow, but it has been sweetened by the distribution formula, which still favours the top clubs to an extent with the allocations based on historical success and number of fans. Even now, Milan’s TV income is the sixth highest in Europe.

Furthermore, the decrease would have been even higher if the total money negotiated in the new deal had not been 20% higher than before at around €1 billion a year. This cemented Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of the other major leagues, despite the Bundesliga increasing its rights by over 50% for the next four-year deal. The new French contract has actually fallen from €668 million to €612 million, considered a good result in this harsh economic climate.

As you might expect for a club with media magnate Silvio Berlusconi at the helm, television income has always been important to Milan, climbing as high as €140 million in 2007, the highest in Europe, partly due to a sensational domestic deal, but also thanks to the payment received for winning the Champions League.

Qualification for the Champions League is imperative for Milan with the accounts identifying this as a key risk for the club’s economic prospects. This can be seen in 2008/09, when Milan earned just €0.4 million from the UEFA Cup, compared to €25.8 million from the Champions League in 2010/11. This was made up of €7.2 million participation fees, €2.4 million for performances in the group (2 wins at €800k plus 2 draws at €400k), €3 million for reaching the last 16 and €13.2 million from the TV (“market”) pool.

The money received for 2011/12 should be much higher: (a) Milan progressed further (to the quarter-finals); (b) they will receive more from the TV pool, as they won Serie A in 2010/11 (half is allocated based on finishing positions in the previous season’s domestic league).

The size of the prize is now enormous, as we can see from the finalists in 2010/11 (Barcelona and Manchester United) each receiving over €50 million, not including additional gate receipts or increases in sponsorship payments. Financially, the Europa League provides little compensations, with the four Italian clubs only receiving around €2 million each.

Furthermore, there has been talk in the English media of Champions League revenue significantly increasing in the next three-year agreement, citing David Taylor, UEFA Events’ chief executive, “We have at least achieved triple-digit growth.” Unfortunately the Italian league has lost a place to the Bundesliga, due to lower coefficients, so now only the top two teams in Serie A are assured of direct entry, while the third-placed team goes into the preliminary qualifying round.

The most glaring revenue weakness for Milan is match day revenue. Even though this is the highest in Italy at €36 million (ahead of Inter €33 million, Napoli €22 million and Roma €18 million), it is dwarfed by major clubs in other countries, especially England. Chelsea earn more than twice as much €81 million, while Manchester United €130 million and Arsenal €112 million generate around three times Milan’s figure. Granted, they have staged more home games, but United earn €4.5 million a match compared to Milan’s €1.4 million.

Although Milan have the highest average attendance in Italy of 51,400, this was a 4% reduction from the previous season and means that only 64% of the stadium’s capacity was filled. In fact, Milan’s crowds have dropped significantly from the 64,500 average achieved in 2002/03. In fairness, this is a generic problem in Italy, where total attendances in Serie A have slumped from 9.4 million in 2008/09 to 8.9 million in 2010/11 (per the  FIGC), despite low ticket prices, due to a combination of obsolete stadiums, poor views and, let’s be frank, the suspicion of match fixing.

This is why Milan have been exploring opportunities for moving to a new stadium that could maximise their revenue earning potential. It’s not just that the club currently pay the council over €4 million rental a year under a 30-year lease ending in 2030, but the lack of ownership means that they miss out on profitable opportunities like premium seating, corporate boxes, restaurants, retail outlets, naming rights and non-sporting events. As Galliani explained, “A new stadium is essential for a club that wants to compete in the future. Look at Bayern Munich: since they built a new stadium, their revenue has increased by €60 million.”

Closer to home, Juventus have just moved into a fabulous new arena, but are the only leading Italian club to own their stadium. Although it cost them around €150 million to build, much of the funding was sourced from innovative deals, e.g. 60% of the money was derived from a naming rights deal. Milan would undoubtedly require substantial funds to do the same, but the benefits would be substantial, e.g. Juventus believe that their match day revenue will at least double,

Galliani recently revealed that the club had tried to buy San Siro, but the price quoted by the council was too high, so they have instead turned their attention to modernising the ground in order to develop an “elite stadium”, ready for the 2015 Champions League final. However, he admitted that this was not ideal, due to “the problems that follow when you share it with another club.” Any new development will be a long-term project, e.g. even Juve’s new stadium took more than 10 years to complete after the first discussions with their local council.

"Silva and Gold"

It had been hoped that new stadiums would be developed as part of Italy’s bid for Euro 2016, but unfortunately this was lost to France, as was the catalyst for government intervention. Galliani warned, “Germany have overtaken us thanks to the wonderful new stadiums they built for the World Cup in 2006. Thanks to the new stadiums being built for Euro 2016, I predict that the French will also overtake us.” This is why Italian owners hope that new laws will be introduced to facilitate new stadium construction.

Whatever the solution, something must surely be done, as this massive revenue shortfall means that Milan are not competing on a level playing field, especially with the advent of FFP. As Galliani lamented, “The rankings for revenue and sporting success tend to coincide. The gap comes from different points of departure: in the case of Milan the gate receipts do not reach €30 million a year.”

Where Milan have really begun to motor is in their commercial operations, as revenue here has really taken off in the last two years, rising by €10 million (13%) in 2011 alone to €91 million. This is not only the highest in Italy by some distance (Inter and Juventus are the closest challengers at €54 million apiece), but is also the fifth highest in Europe. That said, Milan still only earn half as much as Bayern Munich’s astonishing €178 million and are a long way behind Real Madrid’s €172 million and Barcelona’s €156 million.

Commercial revenue was inflated by once-off payments in 2009 and 2010: the former contained €20 million for the sale of Milan’s image archive, while the latter included €5 million for the sale of some apartments. Excluding these once-off items, the underlying growth since 2009 has been a very impressive 50%, partly due to the partnership with Infront, who handle all sponsorships except kit deals. Progress can be measured by the raft of new sponsors signed up in the last 12 months, including Taci Oil, Indesit, United Biscuits and Nivea for Men.

Milan have long-term deals with their shirt sponsor and kit supplier. The Emirates contract runs until 2015 and is worth a guaranteed €12 million a season plus performance related bonuses (€2.7 million in 2011), while the Adidas kit deal has been extended to 2017, generating €17.5 million last year, including a €1 million performance bonus.

These deals compare pretty favourably with those at other Italian clubs (a) shirt sponsors: Inter – Pirelli €12 million, Juventus – BetClic €8 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Inter – Nike €12 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

However, these agreements are still worth much less than those at foreign clubs, e.g. Manchester United, Barcelona, Real Madrid, Liverpool, Bayern Munich and Manchester City all have shirt sponsorships worth more than €20 million a season. Similarly, the first four of those clubs have penned kit supplier deals for over €30 million a year,

Milan reportedly sell between 400,000 and 600,000 shirts a season, which would put them in the top ten clubs worldwide and around the same level as Inter and Juventus, though the likes of Real Madrid and Manchester United sell nearly three times as many. The rossoneri are now looking to make more from global opportunities, e.g. this summer they will play prestigious friendlies against Real Madrid and Chelsea in the United States.

Fundamentally, the most important challenge for Milan is the wage bill, which rose €14 million in 2011 to a totally unsustainable €206 million. Even though most of this increase was due to higher bonuses for winning the scudetto in 2011, the fact remains that this is the highest wage bill in Milan’s history and the second highest ever for Serie A, only surpassed by the €234 million paid out by Inter in their 2009/10 treble winning season.

Since 2006 wages have grown by 50% from €138 million to €206 million, while revenue has actually decreased by €3 million in the same period, leading to a rise in the important wages to turnover ratio from 58% to 88%. This is much worse than UEFA’s recommended maximum limit of 70%, though Milan are far from alone in struggling to confront this issue in Italy, as seen by Juventus (91%) and Inter (90%).

In Italy only Inter come anywhere near Milan’s wage bill. In 2010/11 they were just behind Milan’s €193 million with €190 million, while the next highest were Juventus €140 million and Roma €107 million. To place Milan’s wage bill into context, it is around the same as Fiorentina €55 million, Genoa €52 million, Napoli €52 million and Lazio €39 million combined. An analysis by La Gazzetta last summer suggested that the cost of Milan’s first team squad of €160 million was far above Inter’s €145 million, but it’s far from certain that their figures are accurate.

Milan’s wage bill also looks excessive in comparison with foreign clubs, only surpassed by Barcelona €241 million (including other sports), Real Madrid €216 million, Manchester City €209 million and Chelsea €202 million. Strikingly, it is higher than Manchester United and Bayern Munich, who have been more successful recently. It is also apparent that most of these clubs have a much better wages to turnover ratio than Milan, because of their higher revenue, e.g. Real Madrid 45%, Manchester United 46%, Bayern 49% and Barcelona 53%.

Galliani has recognised the problem, “Both Fininvest and I are trying to reduce the amount of money spent on wages.” However, we have heard this before. Last year, he said, “Milan absolutely have to reduce the wage bill. It is difficult to increase revenue, so we have to act on the salaries and hope that the players understand, especially with financial fair play.” The problem is that it is difficult to cut the wage bill without reducing the competitiveness of the squad.

That said, Allegri appears to be on message, “We had 33 players in the squad this season, but that was because we had to make some adjustments in January because of injuries. We’ll have a 25-26 man squad, including three goalkeepers, for the new season.” Many senior players have left this summer, while others will be only be given contract extensions on reduced terms, e.g. Flamini has reportedly been offered €1.75 million instead of his current €4 million, while any offer to Aquilani will also be much lower. Using salary figures from La Gazzetta, the gross saving would be at least €30 million. Clearly some players will need to be replaced, but the cost should be much less, e.g. Van Bommel and Gattuso were both costing €7 million.

The other element of player costs, namely amortisation, has also been rising, having doubled from €22 million in 2006 to €45 million in 2011, though it is still lower than Inter €52 million and Juventus €47 million – and miles behind a big spender like Manchester City €101 million. In addition, the club has written-down €9 million in player values in the last two years for the sales of Ronaldinho and Ricardo Oliveira.

As a reminder, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Ibrahimovic was signed for €24 million on a 4-year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €6 million a year.

This growth is a reflection of Milan’s activity in the transfer market, which can be divided into three periods in recent times. First, the boom time with €237 million net spend in the four years up to 2003; then the age of austerity with net sales proceeds of €18 million in the seven years up to 2010, when Milan had to “sell before we can buy” per Galliani; finally a return to investment with net spend of €51 million in the last two years.

Milan might be shopping at the cheaper end of the market, e.g. Stephen El Shaarawy for €10 million and Kevin-Prince Boateng for €7.5 million, but this has still been enough to make them the third highest spenders in Serie A during this period, only beaten by Juventus €101 million and Roma €58 million.

The annual deficits have resulted in net debt doubling in the last five years to stand at €292 million, comprising €156 million of bank loans plus €136 million owed to factoring companies based on future income. Most of this is short-term debt, but is supported by a €390 million line of credit from Fininvest. On top of that Milan owe other football clubs €30 million, mainly €16 million to Barcelona for Ibrahimovic and €10 million to Manchester City for Robinho, though are themselves owed €16 million by other clubs.

In fairness to Milan, this is a problem throughout Italy with La Gazzetta complaining that clubs were “buried under a mountain of debt”, following the 14% increase last year to €2.6 billion, but it is worth noting that Milan’s debt breaches one of UEFA’s warning indicators, as it exceeds 100% of revenue.

In fact, Milan’s balance sheet is the weakest in Serie A with net liabilities of €77 million, even after an improvement from €97 million the previous year. This is a little misleading, as the value of the players in the accounts of €136 million is smaller than their worth in the real world (€271 million according to Transfermarkt), but it is nevertheless an indication of the club’s financial fragility.

This has necessitated the support of the owners with Fininvest pumping in €210 million in the last five years, including €87 million in 2011 alone (plus a further €25 million in March 2012). As Galliani put it, “The losses have been completely covered by Fininvest. I thank the president for his passion. Without Fininvest, we couldn’t be an example of sporting excellence the world over.” Berlusconi wryly echoed these thoughts in a message to new Roma owner Thomas DiBenedetto, “You spend lots of money and earn nothing.”

Although the cash flow statement suggests that Milan are fine at an operating level, the reality is that they cannot afford to purchase players without increasing debt and/or additional funding from the owners. Incidentally, player purchases are much higher in cash terms than has been reported in the media, presumably due to the nature of some of the rights sharing deals with Genoa.

These difficulties have raised the prospect of Berlusconi selling Milan, especially as Fininvest is not exactly thriving in today’s tough economy, exacerbated by the €560 million fine following a court ruling that it bribed a judge during the Mondadori takeover battle. His daughter Barbara, who joined the board in 2011 “to reaffirm and strengthen the tie between the team and the family”, has said that her father has no intention of moving on, but there has been talk of selling a 40% stake to an overseas investor, though they might be put off by the stadium issue.

Even if Berlusconi did want to return to the good old days with a few extravagant purchases, he needs to be mindful of UEFA’s Financial Fair Play regulations, which will ultimately exclude from European competitions clubs that continue to make losses.

Fortunately for Milan, all of the losses made to date are not considered for FFP, but they have to get their act together immediately, as the first monitoring period will taken into account losses made in 2012 and 2013. However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

Getting to break-even will be an arduous task for Milan, because they will need to radically overhaul their strategy, as conceded by Galliani, “FFP hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and Moratti would be able to support us, but with the fair play it will no longer be possible.”

"Duck Rock"

Barbara Berlusconi underlined the need for change, “Soccer teams will have to transform into proper companies. If you can only spend what you get, then you have to keep costs in check and increase revenue. It’s a challenge that can become an opportunity.” That’s undoubtedly true, but, given Milan’s limited scope to increase revenue, that effectively means cutting the wage bill, which Galliani accepted, “No question, we’ll need to reduce our expenses.”

Alternatively, Milan could boost profits by selling players and both Thiago Silva and Ibrahimovic are much in demand, though the dilemma was neatly summarised by club legend Paolo Maldini, “If you want to win something, then you can’t do without them. If the objective is to balance the accounts and have a decent campaign, then you can sacrifice one of the two.” On the other hand, the club might be willing to listen to offers for Robinho or Pato, who are not indispensable.

"KPB - a prince among men"

In a certain sense FFP might actually point the way forward for Milan, as the break-even analysis excludes costs for stadium development and the youth academy. The latter has proved a little disappointing in recent years, especially when you consider that Milan’s greatest teams have always included many in-house products like Franco Baresi, Billy Costacurta and that man Maldini, but Galliani only last week stressed the importance of youth players breaking into the first team.

Right now, Milan will need to show some fancy footwork to improve their finances, while maintaining their ability to challenge at the highest levels. Ibrahimovic has already voiced his disquiet about the change in direction, “There used to be a great Milan project, now we’ll have to see if they take it forward”, but the Berlusconi-Galliani axis really don’t have too many options. If they do manage to pull this off, then we will have to accept that the devil really does have all the best tunes.

Leeds United - Marching On Together?

So another season passes with Leeds United failing in their attempt to return to the top flight. Having narrowly missed out on the play-off places the previous season, hopes were high that this could be their year, but the Whites went backwards, ending up in the bottom half of the Championship. Poor results resulted in the January dismissal of manager Simon Grayson, who had guided the team out of League One two years ago, to be replaced by the experienced Neil Warnock.

However, there was little improvement, though Warnock’s cause was not helped by the timing of his arrival – one day after the transfer window closed. That said, given the limited investment in the squad in the last few years, it is doubtful whether Warnock would have been able to spend much in any case.

In fairness to Grayson, it must have been difficult for him to make significant progress, as the club has got into the habit of selling its best players. Before a ball was even kicked, goalkeeper Kasper Schmeichel was sold to promotion rivals Leicester City, and then tricky Ivorian winger Max Gradel, Leeds’ player of the year, joined French club Saint-Étienne in August.

"Howson - Jonny, come home"

The fans’ unhappiness was compounded in January when club captain (and local boy made good) Jonny Howson was transferred to Norwich City. Leeds argued that this was good business, as he was in the last year of his contract, but this was not the first time that the club had allowed itself to get into such a situation. In much the same way, other decent players, such as Jermaine Beckford (to Everton) and Bradley Johnson (also to Norwich) had exited stage left.

This lack of ambition is infuriating to most supporters, especially as it is in marked contrast to a ticket pricing strategy that is Premier League in all but name. Even new captain, Robert Snodgrass, was moved to break ranks after Howson’s unpopular transfer, “How can you say you’re aiming for promotion and then sell your captain?”

It’s not so long ago that Leeds United were a force at the very highest levels, reaching the Champions League semi-finals in 2001, before being eliminated by Valencia. This was in the middle of a purple patch when they finished in the top five of the Premier League every season between 1998 and 2002. Leeds were actually the last club to win the old First Division before the creation of the Premier League in 1992.

Going back further, Don Revie’s Leeds side had been even more potent, never finishing out of the top four between 1965 and 1974, winning two league titles in the process in 1969 and 1974, before the FA chose him as England manager. Known far and wide as “dirty Leeds”, this team could also play a bit, as seen when Jimmy Armfield steered the team to the 1975 European Cup Final, where they were defeated by Bayern Munich (in hugely controversial circumstances).

"Peter Ridsdale - riddle me this"

In short, Leeds United were a genuine big club for many years, though they spectacularly imploded after chairman Peter Ridsdale’s catastrophic attempt to “live the dream” resulted in a financial nightmare. Before the likes of Chelsea and Manchester City brought in their billionaire benefactors, Leeds reported the largest ever loss by an English football club of £49.5 million in 2003 (after a £34 million loss the previous year).

Ridsdale’s decision to “go for it” could be described as courageous, though reckless and irresponsible would seem more appropriate. When he jumped ship in 2003, Leeds were around £100 million in debt, after a grand acquisition strategy using innovative finance models, i.e. other people’s money, to fund player purchases. These included high interest sale-and-leaseback arrangements, which allowed Leeds to spread the cost of buying a player over the length of his contract, and a £60 million loan, a record for English football at the time, which was essentially secured on supporters’ loyalty, i.e. future gate receipts.

A consortium of local businessmen, led by insolvency specialist Gerald Krasner, took over Leeds, but the damage was done. When results on the pitch did not improve, the club could not sustain the massive wage bill, leading to a fire sale of players and many other important assets, including the stadium and the Thorp Arch training ground. The financial turmoil ultimately resulted in two relegations with Leeds dropping to the third tier of English football for the first time in 2007.

"Ken Bates - meet the new boss..."

Before that fateful day, Ken Bates had appeared on the scene with the former Chelsea owner looking for “one last challenge.” Even after all the sales, Krasner’s motley crew was still struggling to make ends meet, so a 50% stake was sold to the old bruiser for a reported £10 million in 2005. Or rather to a company called the Forward Sports Fund (FSF).

Despite extensive cost-cutting measures, two years later the club entered administration in May 2007 via a Company Voluntary Arrangement (CVA) with debts of around £35 million, incurring a 10-point deduction from the Football League, which officially relegated Leeds to League One.

The CVA was challenged by HMRC following an initial offer to settle debts at just one penny for every pound owed, but eventually went through (at an undisclosed higher payment) after it was approved by the required majority of 75% of the voting creditors.

Crucially, one of the major creditors, Astor Investment Holdings (an offshore company registered in the British Virgin Islands), said that they were willing to write-off their £17.6 million loan, but only if FSF remained in charge with Bates as chairman. This seemed extraordinarily generous, not only because other bidders offered more money, but it meant that they were supporting a man who had effectively lost them their cash.

"Ross McCormack - just can't get enough"

That does not make much sense – unless Bates was in some way connected to these companies. Indeed, he initially stated that the two shares in FSF were owned by him and his financial advisor, Patrick Murrin, but later corrected this “error” when he revealed that were in fact 10,000 shares in FSF – with undisclosed owners.

Although the club admitted that there had once been a link between Astor and FSF, they said that this had been severed in 2006 before the club went into administration, an explanation that was accepted by the administrators. This may seem a trivial issue, but it is important, as if there had been a link, then Astor would not have been able to vote on the CVA as an “unconnected” creditor and it would not have been passed.

Whatever the circumstances behind the exit from administration, the result was clear: FSF had retained control of an asset, which was now profitable after the slashing of the wage bill, while clearing almost all of the debts. Of course, this phoenix-like rise from the ashes was perfectly legal, albeit perhaps not the most moral course of action, as it left many bills largely unpaid, including many from small businesses and £7.7 million owed to the taxman.

Leeds United did not get away entirely scot-free, as the Football League imposed a further15-point deduction, due to the club not following its rules on clubs entering administration, which meant that they missed out on automatic promotion from League One and ended up losing to Doncaster Rovers in the play-off final.

"Luciano Becchio - don't cry for me, Argentina"

The ownership issue was still far from transparent. Indeed, the report from the House of Common select committee on football governance specifically singled out Leeds for criticism with MP Damien Collins stating, “The principle is that it should never be allowed to happen again that football clubs are bought by offshore trusts of which we have no idea who the owners are.”

Under pressure from the Premier League, who require its clubs to publish the names of all shareholders with stakes of 10% or more, the Football League tightened its rules, following which Leeds “clarified” its ownership: Leeds United Football Club Limited was owned by Leeds City Holdings Limited, which was majority owned by FSF, which was owned by three discretionary trust funds, which were in turn owned by Chateau Fiduciare, a Swiss-based trustee.

Far from clearing up the situation, this statement only added to the confusion, bringing to mind Sir Walter Scott’s famous quote, “Oh, what a tangled web we weave, when first we practice to deceive.”

Never mind, because in May 2011 Leeds issued another statement, following the “scaremongering arising out of the football governance inquiry”, which addressed the ownership issue: “The chairman, Ken Bates, has completed the purchase of FSF Limited for an undisclosed sum. FSF Limited is now owned by Outro Limited, which is wholly owned by Ken Bates.”

"Andy Lonergan - hold it now, hit it"

This was not enough for that man Collins, “Very important questions remain unanswered about the real identity of the previous owners of Leeds United, and the nature of the sale of the club to Ken Bates.” The most obvious question is why FSF would sell at a time when the riches of the Premier League appeared to be within reach, having supported the club through the dog days in League One?

Also, why wouldn’t they hold a beauty contest for other potential bidders to secure the maximum return on their investment? The price that Bates paid was (surprise, surprise) undisclosed, but it is unlikely to be that high, given that the man himself informed the High Court in 2009 that he had little cash with most of his wealth tied up in assets. It is true that there are not too many people rich (or foolish) enough to invest in a football club, but they do exist, e.g. the Liebherr family at Southampton and Vichai Raksriaksorn at Leicester City.

Whatever FSF’s thinking was, Bates is still holding the reins at Leeds. His time as chairman has been colourful to say the least, featuring bans for the BBC and Guardian, when irked by their reports on his activities, and insults aplenty for those fans of the club who have the temerity to disagree with his approach, describing them as “morons” and “dissidents”. That is by no means the end of his seemingly customer hostile strategy, as evidenced by the stratospheric ticket prices.

"Michael Brown - tough love"

Even when he made a valid point about adopting a long-term strategy, it was done in a crass manner, “In an age of instant gratification, Leeds United is having a long, drawn-out affair with plenty of foreplay and slow arousal.”

In fairness to Bates, other owners have gone down the path of splashing the cash with little success to show for it, so his prudent policy is not all bad. As he said, “All football clubs are now realising that you have to get your balance sheet and your profit and losses right first and then play football, otherwise as you're seeing every week you won't be able to play football.”

Indeed, he has managed to steadfastly improve the finances at Leeds, while reversing the club’s slide down the divisions, which is an achievement. However, it should be remembered that this financial recovery was originally due to the tactical administration, which cleared the club’s debts and enabled it to start afresh.

So how do the club’s finances look these days? Not too bad at all.

In 2011 the club made a profit after tax of £3.5 million, which was the highest since the £4.5 million reported in 2008 for the first 14 months after coming out of administration. Even though £2.6 million was due to the club recognising a deferred tax asset arising from previous losses, this still left a solid £0.9 million profit before tax.

Despite a £5.2 million (19%) rise in revenue from £27.4 million to £32.7 million following promotion to the Championship, the profit before tax fell by £1.2 million, as the wage bill grew £2.8 million (20%) and profit on player sales fell by £3.9 million.

Note that these figures relate to the football club (Leeds United Football Club Limited), but there’s not much difference in the holding company (Leeds City Holdings Limited), which reported revenue of £34.5 million and profit before tax of £0.3 million in 2011. In essence, revenue is slightly higher, but profits are lower (by £0.6 million in each of the last two seasons).

In addition to the football club, the holding company owns Yorkshire Radio Limited, Leeds United Media Limited and Leeds United Centenary Pavilion Limited. The latter two companies were only created last year “to allow separate… investment into these particular areas of our business in the future.”

Since coming out of administration, Leeds have been profitable for four consecutive years, a rare feat in the ultra-competitive world of modern football. The combined profits before tax are £7.5 million (2008 £4.6 million, 2009 £0.015 million, 2010 £2.1 million and 2011 £0.9 million), while profits after tax are worth £10.1 million.

In fact, just three out of 24 clubs in the Championship managed to make money in 2011 with Leeds’ £0.9 million only surpassed by Watford £9.6 million and Scunthorpe United £1.5 million. Nine clubs lost more than £10 million, including QPR £25.4 million, Hull City £20.5 million, Middlesbrough £18.7 million and Leicester City £15.2 million.

This is partly a result of low TV money in England’s second tier, but also due to many clubs over-spending in order to reach the promised land of the Premier League. Leeds are very much an exception to this rule. In fact, they are the only club in the Championship to have made profits in both of the last two seasons.

However, the impact of player sales on these results should not be ignored. Excluding the £11.5 million profit made from this activity between 2008 and 2010, the club would have registered losses in each of those three years. As well as normal player sales, the first year after administration benefited from compensation paid by Chelsea for two academy players, Tom Taiwo and Michael Woods. In 2010, the sale of Fabien Delph to Aston Villa transformed a £1.7 million loss into a £2.1 million profit.

The good news is that last season’s profit was entirely due to normal business, as there was no once-off profit on player sales. That was the first year since administration that Leeds made an operating profit (£0.9 million), which represented a £2.6 million turnaround from the previous year’s operating loss of £1.7 million. Next year will be business as usual, as the figures will benefit from the sales of Howson, Gradel and Schmeichel amongst others.

In many ways, it is not that surprising that Leeds are profitable, as their revenue is exceptionally high for a Championship club. At £32.7 million, it is not only the largest in the division, but it is £5-6 million more than the next three clubs in the revenue league (Burnley, Middlesbrough and Hull City), all of whom were boosted by £15 million of parachute payments following relegation from the Premier League.

Excluding that factor, it is clear that Leeds United’s revenue is the highest by some distance with the closest contender being Norwich City, whose £23 million is almost £10 million lower. Incidentally, the other clubs promoted to the top tier in 2011 have even lower turnover: QPR £16.2 million and Swansea City £11.7 million. One conclusion is that Leeds are punching well below their weight.

Revenue has risen over 40% since 2008 from £23.2 million to £32.7 million. Much of that is due to the better TV deals in the Championship compared to League One, but the majority comes from gate receipts and merchandising. Put another way, the club is very reliant on the loyalty of its supporter base for its high turnover.

Last season the fans contributed at least £19 million (gate receipts £12.7 million plus merchandising £6.1 million), which represents around 60% of the club’s total revenue of £33 million. If other activities such as catering were broken out of Other Commercial revenue, the proportion would be even higher.

Of course, the high gate receipts represent something of a double-edged sword, as it its partly due to the very high prices that Chairman Ken charges his fans. Not only are they the highest in the Championship, but, according to a survey conducted by the award-winning Leeds fanzine, The Square Ball, only four clubs in the Premier League have higher priced entry-level season tickets (Arsenal, Chelsea, Liverpool and Tottenham Hotspur).

However, this attempt to squeeze the orange until the pips speak could be counter-productive, as average attendances have fallen by 4,000 (15%) to 23,300 this season, when overall Championship crowds rose 2%. This is still the fourth best in the division, only beaten by one promoted club (Southampton), West Ham and Derby County, but it’s a measure of how much Bates has tested the supporters’ patience.

The previous season Leeds had the highest crowds in the Championship with 27,300 (more than eight Premier League clubs), while they averaged nearly 25,000 in League One. As an indication of the potential at Leeds, average crowds were just under 40,000 at their height in the Premier League.

The decline in attendances this season will cause something like a £2 million hole in the 2011/12 accounts. That will reduce the reported revenue, but the actual cash available to the club is also going to be impacted by an agreement made post balance sheet, whereby the club sold season tickets for both the 2012/13 and 2013/14 season for £5 million in order to finance further development of Elland Road.

Leeds’ total commercial income of £14.5 million is also impressive. To place that into context, it is only just below the money generated from this revenue stream by Aston Villa £16.7 million and Newcastle United £15.8 million, while it is actually higher than many Premier League clubs, including the likes of Everton £11.7 million and Fulham £14.1 million.

However, while merchandising revenue has grown 77% (£2.6 million) in the last three years to £6.1 million, other commercial income has actually fallen 8% (£0.7 million) to £8.4 million in the same period. Leeds recently extended their shirt sponsorship deal with Enterprise Insurance for two years until the end of the 2013/14 season, while the club signed a lengthy six-year kit deal with Macron in 2010. Financial details of both deals were undisclosed.

The influence of television on a football club’s finances is undeniable and Leeds United are no exception. Relegation from the Premier League in 2003/04 led to an immediate £9.4 million decrease with TV revenue falling from £16.9 million to £7.5 million, even though the fall was cushioned by annual parachute payments of £6.6 million for the next two seasons. When these stopped in 2006/07, the club’s finances were dramatically affected with TV money crashing to £1.2 million, which was exacerbated by the relegation into League One giving TV income of just £0.7 million.

The rise in 2010 to £ 1.6 million was partly due to higher payments from the Football League (central distributions £0.64 million, solidarity payments £0.1 million), but also owed a lot to a splendid FA Cup run, featuring four ties against Premier League opposition (Liverpool, Tottenham and Manchester United).

Promotion saw a big increase in TV money, as the Football League distribution to Championship clubs is worth £2.5 million (increased from £1 million in 2010/11) with a £2.2 million solidarity payment from the Premier League (up from £1.3 million). In addition, each club was given an additional £0.5 million as their share of the parachute payments for Newcastle and WBA, because they went straight back up to the top tier.

"Elland Road - I could build you a tower"

Although there is never a good time for a football club to be relegated, it is fair to say that Leeds’ timing was particularly unfortunate, as they missed out on the significant growth in TV deals, e.g. the three teams relegated from the Premier League last season received an average of £40 million compared to Leeds’ £17 million in 2004. Similarly, while their relegation was eased by £13 million of parachute payments, teams now will receive £48 million (£16 million in each of the first two years, and £8 million in years three and four).

The other cloud on the horizon is the new Football League Sky TV three-year deal that kicks off in the 2012/13 season, which will be £69 million lower than the current contract at £195 million, a reduction of 26% or £23 million a season. This reflected what Football League chairman Greg Clarke called, “a challenging climate in which to negotiate television rights.” Whatever the reason, it will mean a reduction in the payments distributed to Leeds.

This is another reason why it is a little puzzling that Leeds do not push harder for promotion to the significantly more lucrative top tier, as that would conservatively be worth around £90 million. That doesn’t come in one fell swoop, but it’s still a magnificent prize. Even if a promoted team comes straight back down, it would receive £40 million TV income plus £48 million parachute payments over the next four years. Leeds would also benefit from much higher gate receipts and better commercial deals.

Furthermore, if Leeds were to finish higher in the Premier League, they would receive even more TV money with every season survived adding another £40+ million to the coffers. This explains why many clubs push themselves to the absolute limit to secure promotion, though it’s a dangerous game, as only three clubs go up every year.

One concern is that a promoted club might eat into that higher revenue by increasing wages and other costs, but the net effect is still likely to be positive. If we look at the three teams that were promoted to the Premier League in 2009/10, we can see that Newcastle United, WBA and Blackpool all dramatically improved their operating profitability, even though wages increased.

Leeds’ wage bill has long been a bone of contention among the fans, as it is very low compared to the club’s turnover. Despite a 20% (£2.8 million) increase from £13.7 million to £16.5 million in 2010/11, the wages to turnover ratio is only 51%, which is not only the lowest in the Championship, but is also lower than all but two clubs in the Premier League (Blackpool 48% and Manchester United 46% - though United benefit from enormous revenue of £331 million). Since exiting administration in 2007, wages have grown by just £3.8 million, while revenue has increased by £9.4 million.

This is the football club’s total wage bill, comprising £14.9 million salaries and £1.6 million social security. It is higher in the holding company, but only by £0.5 million, at £17.0 million. Directors’ emoluments are also up, rising from £174k to £299k, presumably largely for Shaun Harvey, the chief executive, as Bates “did not receive any benefits.”

According to the club website, “First team squad and management costs were £11.6 million, increasing from £7.7 million in the previous period.” They do not explain why the increase in these costs is higher than the overall growth in the wage bill, but it is probably due to bonus payments (including additional payments for loan players) made in 2009/10 for promotion. After Grayson was fired, Bates claimed that he had allowed his manager to go over his wage budget of £9.5 million in 2011/12 by 23% at £11.7 million, but that will only be confirmed by next year’s accounts.

While Bates has defended his record here (“At 30 players we have one of the largest squads in the Championship”), the figures do not lie and clearly show that Leeds’ wage bill is strictly mid-table in the Championship, coming in at the 12th highest in 2010/11. Leeds’ £16.5 million was around half the £30 million that QPR paid, though part of that will include promotion bonuses.

Although many Championship clubs have over-stretched themselves with nearly half reporting unsustainable wages to turnover ratios over 100%, they do not enjoy Leeds’ revenue advantages. All other things being equal, the Whites could safely increase their spending on player wages without going crazy.

If they targeted the 60% ratio adopted by Football League clubs in Leagues One and Two, that would mean an increase of £3.1 million to £19.6 million; if they opted for UEFA’s recommended upper limit of 70%, that would mean an increase of £6.4 million to £22.9 million. Either of those options would provide a budget good enough to mount a meaningful promotion challenge, more than the two other clubs that went up in 2010/11: Norwich City £18.4 million and Swansea City £17.4 million.

However, another factor needs to be considered at Leeds, namely the high amounts spent on Other Costs. Excluding salaries and amortisation, these stand at £13 million, which is very high for a club outside the Premier League. If we compare that with other Championship clubs with high revenue (not benefiting from parachute payments), we can see that Leeds have the highest Other Costs, e.g. twice as much as Norwich and Reading, with the highest proportion of total costs, though, in fairness, it does not look too high as a proportion of revenue,

Unfortunately, the club does not provide much detail for these costs, but one of the significant items is the rent paid for the stadium and training ground, after their sale and leaseback, which is around £2 million (increasing by 3% every year), a major financial burden. Nothing was identified for legal fees in 2011, but these have also been on the high sides in recent years: between 2008 and 2010 a total of £1.5 million was paid to a company controlled by RM Taylor, a director of the holding company.

Where Leeds have not spent big is in the transfer market, at least since the Ridsdale era. His unwise spending culminated in £69 million in the two years up to 2002, followed by a massive fire sale that produced £101 million of net proceeds in the next three years. Since then, the club has continued to make money from player trading with net proceeds of £15 million: £4 million in the four years up to 2009 and £11 million in the last three years.

Although Simon Grayson spent very little, having to mainly make do with free transfers and loans (an incredible 33 in his 37 months reign), he put a brave face on this, “Money isn’t the answer. It’s a help. It’s good management and scouting.”

It is undoubtedly true that money is no guarantee of success, as can be seen over the last three years with the likes of Leicester City and Nottingham Forest under-performing despite being among the highest spenders. Nevertheless, only four clubs have spent less than Leeds in this period – though admittedly one of those is Reading, who have just secured promotion to the Premier League.

It will be interesting to see if Bates continues his tight hold on the purse strings after the arrival of Warnock, who argued, “We’ll have to invest. The chairman knows what I’m looking at and what I think. The job requires major surgery in all departments.”

Net debt (in the holding company) is just £0.5 million, comprising a loan from Outro Limited (Bates’ company) of £975k, which has since been repaid, £149k of finance leases less £600k of cash. This is very respectable, though not as good as the previous year when the club held nearly £4 million of cash. Of course, the low debt levels are perhaps not that surprising after writing-off so much as a result of the administration.

However they got there, this is a better position than the vast majority of other clubs, as can be seen by the concerns of the Football League chairman, Greg Clarke, “Debt's the biggest problem. If I had to list the 10 things about football that keep me awake at night, it would be debt one to 10. The level of debt is absolutely unsustainable. We are heading for the precipice and we will get there quicker than people think.”

That said, Leeds do have other important potential liabilities: (a) if they are promoted to the Premier League before the 2017/18 season, they have to pay £4.75 million to the liquidator; (b) £875k may be payable on transfer fees depending on player appearances and/or Premier League promotion. Note: Leeds owe £133k transfer fees, but have transfer debtors of £988k.

"Adam Clayton - losing his edge?"

In addition, a total of £3.2 million has been raised via preference shares, which is a hybrid form of financing somewhere between equity and debt. These are worth £4 million when redeemed, guaranteeing a profit of £0.8 million for persons unknown. There is no fixed date for repayment, but they may be redeemed if the club is sold, liquidated or the majority shareholder (that would be Bates via Outro) decides to buy the shares.

Finally, there are the future receipts owed via the pledging of season ticket money (portion unspecified) to part fund the development of the Elland Road East Stand.

The football club’s balance sheet looks fairly strong with net assets of £10.6 million (up from £7.1 million), especially considering that the value of players in the books is only £1.5 million, compared to a real world valuation of £12.2 million (“based on the average opinions of seven members of senior football management”). Working capital is negative, but has been improving (from £5.7 million in 2009 to £1.2 million in 2011) and includes £8.1 million of prepayments of tickets and sponsorship revenue.

It also includes £4.6 million owed to other group companies (up from £0.4 million the previous year), which means that money from the football club is flowing to other companies, as opposed to being invested in the squad. The holding company notes that £2.1 million has gone to Yorkshire Radio.

The cash flow statement shows that Leeds generates money at an operating level (£9.1 million since administration), which is boosted by £5.4 million cash from player sales, but £16.6 million has been spent on capital projects, such as new executive boxes and lounges. This is consistent with Bates’ claim that “approximately £20 million” has been spent on “the clapped out, decaying stadium that I inherited”, but it gives the lie to his assertion that “all the money we have received has gone back into the squad.”

Clearly, improving stadium facilities is no bad thing, but it may be a case of putting the cart before the horse, if the club is prioritising property development before promotion. Bates has recently stated in his programme notes that the rebuilding, refurbishment and improvements of Elland Road are nearing completion, which would theoretically increase the money available to bolster the team, though, as we have seen, millions are still being invested into the East Stand.

This focus on property development should come as no surprise, as Bates once said, “In my view a football club is a property business that hosts a football match 25 days a year and is shut for the other 340 days.” While it does make sense “to increase the income generating potential of the club on non-match days”, this strategy has not always proved successful, as Bates himself should appreciate after Chelsea Village was on the brink of financial collapse before Roman Abramovich flew to the rescue.

"Tom Lees - searching for the young soul rebels"

Leaving aside reservations over whether the proposed hotel, superstore, retail arcade and casino are mere vanity projects that will not generate much revenue, the burning question is why the club should invest millions in properties that it does not own?

Stop me if you’ve heard this one before, but it is not clear who owns the stadium  beyond Teak Commercial Limited, an offshore company registered in the British Virgin Islands in January 2005 (coincidentally the same month that Bates became Leeds United chairman). The uncertainty about ownership has already contributed to the local council rejecting an application from Leeds for a development loan, though this decision was also partly due to the failure of England’s 2018 World Cup bid.

Either way, what might be of interest to a potential investor is that the club has the opportunity to purchase Elland Road for £14.85 million, which was valued at £54.72 million according to the accounts, while Bates has confirmed that they could also buy back the training ground for £5 million.

Furthermore, Leeds should be a beneficiary of the new Financial Fair Play (FFP) framework, which was approved by the Championship clubs in February. This will see the introduction of a breakeven model, requiring clubs to stay within pre-defined limits on losses (falling from £4 million in 2011/12 to £2 million in 2015/16) and shareholder equity investment (falling from £8 million in 2011/12 to £3 million in 2015/16).

If clubs are promoted to the Premier League with losses above these limits, any excess will be taxed with any proceeds distributed among the clubs that comply with the FFP regulations, while offending clubs that fail to achieve promotion will be punished with a transfer embargo. However, no sanctions will be implemented during the first two seasons in order to give clubs a sensible period of transition, so it will be a while before this helps Leeds.

On the other hand, Leeds voted against the introduction of the Elite Player Performance Plan (EPPP), as this is likely to hurt their ability to sell young stars to top clubs for large sums. This has resulted in the club “reviewing our Academy structure to ensure we are best placed to benefit from its provisions.”

"Warnock points the way forward"

In conclusion, Leeds United are the proverbial sleeping giant, a club with a fine history and bags of potential, but it can only be realised with promotion to the Premier League. Love him or loathe him, Neil Warnock has a proven track record in getting teams promoted, but he will need financial backing to do the same with Leeds.

To date, Ken Bates has not provided his managers with an adequate budget, his attitude encapsulated by his comment after dismissing Simon Grayson, “We are building a club first and a team second and we are making progress when so many people are having financial difficulties.” Fair enough, but it could also be a false economy to not spend more and miss out on the riches available in the top flight.

More encouragingly, Bates suggested that this might be about to change, “We want to be in the Premier League and we will support Neil in the quest to get us there.” Leeds fans might be forgiven for taking this with a pinch of salt, but there is little doubt that the club could afford to be more aggressive with its spending on the pitch – without entering dangerous territory. Or will it be another chapter of broken dreams?