Thanks to Dave, who is an experienced and qualified accountant. In this piece he assesses Sunderland’s worrying financial position and the struggles they face in League 1 next season. Please, no laughing at the back!’
In my recent article on SAFC’s recently released accounts, I highlighted their impending financial doom if they failed to gain promotion to the Championship. The defeat to Lincoln in the play offs means that this threat is now a painful reality.
So, it’s with a heavy heart, that I’m forced to write about what this financial predicament will mean to SAFC’s future. Spoiler – it’s bleak. The club’s problems include:
- Paying the bills to simply keep the lights on;
- Complying with the L1 rules on player wages next season;
- A drop in income over the last 4 years that no club in the world has ever endured;
- Unsustainable overheads for L1 (including running a Category 1 Academy);
- 21 players who are either out of contract, or who’s loans will expire, in the summer.
Their new owner, Kyril Louis-Dreyfus (KLD), may already be regretting purchasing the club. ‘If he is to resolve SAFC’s financial predicament, he will face some deeply unpopular decisions which will make him as popular as previous owners. We’ll look at those later. But let’s start with the first fire he has to put out.
Keeping the lights on
In his interview following the play off defeat, KLD laid it out starkly. ‘First and foremost we have to support it [the club] as we have done over the last four months to cover the significant losses that every football club is having right now due to the pandemic, and I think there will be continued losses as long as there is uncertainty about the pandemic,”
This will not be a problem unique to SAFC at the present time but let me be clear. If Donald and Methven were still the majority owners at SAFC, there would have been a real risk of administration. That immediate risk has diminished due to the new owner’s personal wealth (or at least his family’s) but the club is still making hefty financial losses. This should not be a surprise to KLD. The club have lost ‘1/4b in the last ten years. SAFC are the very definition of a ‘financial basket case’.
KLD has stated that he does not want to go down the route of previous SAFC owners in propping up the club but in the short term, it’s difficult to see what else he can do. But covering short term losses does not improve the infrastructure of the club or improve the team on the pitch. It essentially just keeps the administrator away. And all the time, the debt edges up.
For over a decade, SAFC have thrown good money after bad. The hope is always that at some stage in the future, if enough cash is thrown at the club, it might become successful and start making money. Any business owner will tell you that this approach rarely succeeds. At some stage, SAFC have to become self-sustaining. Not just to align to the new owner’s objective of self sufficiency but also to comply with the L1 financial rules. And this brings us to their next big problem. The League One’s Salary Cap Management Protocol (SCMP).
Complying with the L1 rules on player wages
These protocols were reinstated after the EFL salary cap was withdrawn following a decision by an independent arbitration panel. The SCMP dictates that only 60 per cent of projected revenues can be spent on players’ wages. This projected income does not include any money invested by the owner. It’s based purely on income generated by the club.
The penalties for breaching the protocols include transfer embargoes and / or points reductions. Next season, as the impact of Covid hopefully recedes, it’s likely that there will be no relaxation of the rules.
In 19/20, SAFC’s wage bill was ‘16.3m (the figures for last season are not yet available). In 21/22, I estimate that wages will not be permitted to exceed ‘8.7m (60% of projected income of ‘14.5m).
So effectively, SAFC will have to halve their wage bill from that incurred in 19/20 when they missed out on the play-offs. They may have started that wage trimming last season but it’s clear that they will still need to trim considerably more next season. Both Johnson and Louis-Dreyfus have confirmed as much in interviews since the end of the season.
In the first three seasons in L1, SAFC have had a huge advantage over all other L1 clubs by being able to pay the highest wages in the Division. In fact, in 19/20 they paid twice as much as the next highest payer (Portsmouth). Naturally, this should have allowed them to buy the best players in the division. The league positions would suggest that they missed a huge opportunity. And now that comparative advantage is fast disappearing. Next season, it’s likely that Sheff Wed will be the highest wage payers.
SAFC will have to buy virtually a new side but on significantly lower salaries. That’s a huge challenge for any club but especially one with SAFC’s recruitment track record. They desperately need to increase their income in order that they can build this new side. But their income has crashed. Let’s take a look.
An income that has fallen off a cliff over the last 4 years;
Only 4 years ago, SAFC were generating over ‘123m. Last season, I estimate they generated less than ’10m. It’s a drop in income which no club in the world, at any time in history, has experienced. The mother of all implosions. Whilst some of the drop is due to the impact of Covid, I estimate it will only marginally increase next season when restrictions ease.
Essentially, they are now an established L1 club and their income reflects that. Like all other L1 clubs, they get very little TV money since their parachute payments ended. So they are now reliant on generating income through commercial activities and gate receipts.
And this brings us to their next major problem. They generate virtually no income through the turnstiles. After ten years in the Premier League, this should have been an income source which was light years ahead of all L1 and most Championship clubs. But it isn’t. Why? Because virtually nobody pays to watch SAFC. Or at best, they pay very little.
These are borne out by the figures. In the last set of accounts (19/20), despite an average attendance of 30,169 gate money generated only ‘5.7m. Let me put that in context. The graph below shows the revenue generated per person. Most L1 teams do not publish a breakdown of gate receipts in their accounts so the comparison is against Championship sides.
SAFC fans contribute the lowest amount of money per supporter of any club in the table. Either a huge number of free tickets are given away at the SoL or there are so many concessions that we can only assume that the vast majority of attendees must be OAPs and under 16s.
In the past, this didn’t really matter. Their club was not overly dependent on gate money.’ They had the Premier League TV money and a sugar daddy to bail them out every season. Now everything has changed.
SAFC’s income is now hugely dependent on what is generated through the turnstiles by the supporters. But on average, they contribute less than a tenner a game! They need to start supporting their club, as Newcastle fans do, by actually paying at the turnstiles.
Whilst giving tickets away for free or at hugely discounted rates may be good to keep up the illusion of a ‘big club’, the new owners will need to decide whether they want to continue this policy. And it’s this determination to keep up the delusion that they’re a big club temporarily outside the Premier League which is one of the main factors contributing to their financial plight. And this leads us to their next problem.
Unsustainable overheads
SAFC have a huge stadium and first-class training facilities. They are undoubtedly Premier League standard. Unfortunately, they also come with Premier League running costs which Stewart Donald described as ‘scary’. He observed:
‘You could put together seven or eight teams in League One and that would cost the same as the cost-base here, before you pay a player. So when you go into League One you think you’ve got a massive financial advantage, well we’ve actually got a financial burden which in all honesty is a hangover from the club thinking it was going back to the Premier League when it didn’t.’
They are still paying Premier League overheads on League One income. Take their Academy for example. Of the 24 clubs with Category 1 status in the country, only SAFC, Reading, Derby, Middlesbrough and Stoke are outside the top flight. SAFC are the only one in L1.
To maintain Category 1 status costs SAFC about ‘4m per year (although there are reports that these costs could rise as high as ’10m). That’s a huge chunk of L1 income (estimated at only ‘14.5m next year) yet the academy is producing hardly any first team regulars. Those that have broken through (e.g. Jack Diamond) have hardly pulled up any trees.
So their academy is essentially an unaffordable white elephant. The rational decision would be to downgrade. But the new owner knows this would result in a backlash from their support who cling to any shred of evidence that they’re still a ‘big club’.
The lack of talent from the academy, brings us to their next problem.
Replacing 21 players in the summer
SAFC have 21 players who are either out of contract, or who’s loans will expire, in the summer. This includes virtually all their star performers last season ‘ Charlie Wyke, Aiden McGeady, Luke O’Nien, Lee Burge, Jordan Willis, Dion Sanderson.
The problem is, as highlighted earlier, SAFC have to slash their wage bill and most of these players will have been amongst their top earners. It’s likely that the offer of any new contracts will be on worse terms than those that they are currently on. Some may accept those inferior deals but most will go where they can get more money.
So essentially, SAFC will have to replace 21 players in the summer with little or no transfer budget and very few players of the required standard coming through the academy.
It is possible to build a side good enough to win promotion on a shoestring budget as several L1 clubs have shown over the last three seasons. But recruitment has to be shrewd and there’s nothing in SAFC’s recent history to suggest they will succeed with less money.
It’s a huge summer for them. Get it wrong and they could be in for a long stint in the third flight. They might have to ‘enjoy Burton’ for a while yet.
David O’Brien
