Was FFP the reason for hig h-profile 'Loan&Buy' deals this transfer window? 4 Sept 2014

During the Summer 2014 Transfer Window we saw a number of deals where a player was loaned for 12 months, with the option to buy at the end of the loan. There were a number of reports that FFP was the reason for this type of transaction and it is worth exploring the issue.

There are a number of reasons why clubs might want to enter into a 'Loan&Buy' deal:



To get round a spending cap

Under the UEFA FFP sanctions, Man City and PSG were give a net player spending restriction (in addition to other sanctions imposed). One way to possibly work round the sanction might have been to sign a player on loan with an option to buy at a later date - this approach was reportedly considered by PSG for Di Maria. However despite the player's apparent desire to join PSG, the deal didn't take place. We can only speculate about UEFA's reaction if PSG had decided to test their resolve and conclude such a deal.



To manage the timing of Profit/Loss for the 'selling' club

When a club sells a player, it will account for any profit or loss (i.e. compared to a player's book value) in the accounts for the year in which the sale transaction takes place. It doesn't matter when the funds for the player are actually received - the Profit and Loss Account (and FFP Break Even calculation) will record the profit or loss during one account period only. Under UEFA rules, the Break Even Deficit is measured for FFP compliance on a rolling basis over three seasons and having one season with a large deficit or profit may be undesirable. Any loss-making season would need to be included in three seasons of FFP calculations it is generally going to be beneficial to spread any hit over a couple of seasons. A club might also have known revenue changes in a future season (such as a new sponsorship deal or a new TV deal) and wish to control the year in which the profit or loss from a player sale lands in the accounts.

When Monaco originally signed Falcao in 2013 on a 5 year deal for around £50m, they will have planed to account for the purchase as an 'amortised' expense in their P&L (and FFP calculation) of £10m for each of the five consecutive years of the player's contract. As at Aug 2014, Falcao will be on Monaco's books with a book value of around £40m. If Man Utd take up the option to purchase Falcao next year for £50m, his book value will be £30m and Monaco will report a 'profit on player trading' of £20m. Given that Monaco are likely to be facing some FFP sanction next season, this £20m 'profit' might be more useful to the club than a £10m 'profit' if they had sold the player this season.



It is worth pointing out that when a club sells a player for a large fee, it won't usually receive the cash in a lump sum in year one. Selling clubs will often get 30-50% of a transfer fee in the first year, with the rest usually paid over two following years (eg 44% in y1, 28% in y2, 28% in y3). Selling clubs will sometimes arrange external financing and engage (and pay) an external 'factoring' company so it can receive the full transaction value in year 1.



To manage the timing of the purchase for the 'buying' club

Many of the issues outlined above for the selling club also apply for the buying club. However there are a few additional factors to consider. A loan fee is usually paid to the club that holds the player's contract - this is very often broadly equivalent to the annual amortisation charge for the player (eg approx £10m for Falcao). In addition the loanees wages will usually be paid by the club that the player joins. Depending on the circumstances a minimal loan fee is sometimes paid (eg where a club wants to get the player's wages off their books, such as when Andy Carroll joined West Ham on loan from Liverpool). Also, it is fairly common for lower-ranking clubs not to cover the full wages of a high wage-earning player (eg when Wayne Bridge was loaned from Man City to Brighton). However, where a full loan fee is paid and the wages are paid in full, there would be no financial FFP benefit in year one for either club in undertaking a Loan&Buy option. However the option does give a club a chance to look at a player and consider if it really wants to pay a large transfer fee - this might be beneficial to both clubs (and also the play if he carries some baggage or injury worries).



Although there might be no pure financial FFP benefit in year one, the Loan&Buy option does provide the buying and selling clubs to manage their cash-flow in line with known future events. Man Utd spent a net £122m during the Summer 2014 window and will have a had to pay out around £54m in hard cash (assuming the club pays around 44% up-front). By taking Falcao on a Loan&Buy option the club will have avoided having to hand over another £22m (£50m x 44%). Whether this matters to Manchester United is unclear - however it might have been an issue for some clubs. Manchester United have a huge sponsorship deal that commences during 2015/16 and deferring the pay-out for Falcao might well make sense from a cash flow perspective. Many clubs in the Premier League (inc Southampton and QPR) have previously mortgaged their TV revenue as a way to ensure they can sign players and manage their cash flow - potentially a Loan&Buy option might remove the need to do this.



Readers might identify other reasons for the Loan&Buy option and it does seem that the FFP benefits of avoiding a large loss-making season and to ensuring that large profits land at a convenient time for the club has added to the prevalence of this kind of deal. However, other than the potential PSG case (which didn't materialise), it doesn't seem likely that this type of deal is any kind of 'trick' to beat FFP. All costs need to be incurred in full and at best it provides a way to better manage the timing of expenditure and receipts. Having said that....



Falcao's wages and the Premier League's FFP Spending Constraint rules

As we know, Falcao's wages at Monaco are not subject to income tax - however it is unclear how the mechanics of the Man Utd deal are going to ensure that the player so he does suffer a reduction in his take-home pay. At Man Utd, Falcao will now be liable to UK tax and Man Utd would have to pay the player around £18m a year gross to match the take-home pay he receives at

Monaco. The Manchester club insist he is not being paid that kind of money, so, unless the player is taking a significant wage-cut, it would seem that Monaco are paying the difference. However, this also seems somewhat unlikely as Monaco would be effectively be paying around £9m back to the player (effectively all of the loan fee).