How to value football clubs

In 1985 after 95 years of success, and when nobody was asking for it Coca-Cola  decided to change the formula for Coke.  The new drink was imaginatively called "New Coke".  But reaction to it was overwhelmingly negative and it was withdrawn in just 79 days. 

Surely the worMoney-ball.jpgld record for the shortest time for announcement to withdrawal of a high profile commercial venture.  Until now.  The recent attempt by 20 of the top football clubs to create a European Super League went from initial fanfare to abandonment in just 3 days.

It highlights the huge value of football and of the clubs.  The top 10 clubs are collectively worth c£26Bn and enjoy more than c£4.4Bn of revenues. The UK contingent in the top 10 in declining order by value are Manchester United, Liverpool, Manchester City, Chelsea, Arsenal, and Tottenham.  Together they're worth c£16Bn.

 So how do you value a football club?

Conventional valuation methods don't work terribly well when compared to the prices paid for clubs. The market method which seeks to compare with publicly traded entities is hard to use effectively given the small number of public listed football clubs. The discounted cash flow method relies on a clear quality forecast of profitability which is never going to happen in this sector.  And using revenue multiples is a bit simplistic and takes no account of things such as the clubs stadium, assets and cost base.

So how do you value a football club?

Well it turns out that there is a model to do so. Dr Tom Markham is a graduate of Liverpool University's MBA in Football Industries.  His dissertation on valuation, in which he came up with the model, won the Premier League Best Dissertation award.  And is it seems to be quite widely used.

The Markham model is basically an enhanced revenue multiple valuation.  But it factors in the state of the balance sheet, profitability, stadium utilisation and the wages ratio.  These are all KPIs that are tracked for clubs.

Value = (Revenue + Net Assets) * ((Net profit + revenue))/revenue) * (%stadium filled/% wage ratio)

Put simply the bigger the turnover, the greater the asset value, profitability ratio, and how close to stadium capacity attendances are the higher the valuation. And a higher the wage 1200px-Cambridge_United_FC.svg ratio (wages/revenue) lowers the valuation. 

Interestingly for the 6 UK clubs their revenue multiples are remarkably consistent with the top five ranging between 6.2x and 6.6x with only Tottenham at 4.7x much adrift from the average of 6.2x. 

It would be interesting to see statistics for the lower leagues which of course will have smaller stadia, and revenues but lower wage bills.   There’s not enough information in the public domain to do the same calculation with Cambridge United – but I’d hazard a guess that the revenue multiple could be a low as half the above.


2020: A rollercoaster for dealmaking

It’s been an interesting year. Q1 was active with a steady flow of deals and then in Q2 activity virtually halted as we went into lockdown. Since then, PEMCF have seen a steady uptick, with both paused deals coming back to life and new transactions being initiated. Q3 and Q4 have seen several transactions closing and the latest data shows September deal volumes not that far below what we saw 12 months ago.

RollercoasterActivity is strong in both buyouts and company sales. We recently closed an MBO at a consulting firm operating in the pharmaceutical sector which was particularly attracted to our depth of experience in buyouts and our focus on knowledge-led businesses. And we’re currently working on several other buyouts targeted to close in the current tax year.

We give thanks to Rishi Sunak, as his aggressive shaking of the magic money tree to fund the Job Retention Scheme and other initiatives has stimulated speculation that the Capital Gains tax regime will be changed to help pay for it. Even with the changes to Entrepreneurs’ Relief to limit it financially, and give it a less snappy title, it remains as benign as its been for many years. Momentum is important in deal doing so this has been helpful. Buyouts are also popular as business owners see them as a relatively guaranteed way to get deals across the line in the short term, with banks and private equity houses remaining keen to fund them.

Company sales are also driving activity. We were lead advisers on the recent sale of healthcare software business MJog to Stockholm headquartered Kry. MJog is a patient messaging specialist providing a range of communications solutions such as digital app, SMS, email and voice messaging.  It delivers tens of millions of messages every month, including appointment reminders, recalls and results reaching more than 40 million patients. We’ve also recently advised on the sale of a recruitment services business to a Spanish buyer.

Of course, the other side of the coin is that many growth minded businesses will be looking at acquisitions now. And it’s true that the current crisis is throwing up opportunities. The drivers of all this activity are sector, market liquidity, strategic intent of buyers, and tax, and it feels like they will continue to drive dealmaking in 2021.


"Simplifying by Design" - cutting through the speculation about CGT – why I’d not bet against it going up – and why it might not all be bad for (some) business owners

As if the Chancellor’s need to raise tax to pay for his vigorous shaking of the magic money tree this year wasn’t enough to fuel the fear of CGT rises in the Spring the recently published Capital Gains Tax review by the Office of Tax Simplification (entitled Simplifying by Design) makes it look very likely.  Also Capital Gains Tax for business owners has been about as benign as it was going to get for some time now.

Some themes emerge from the conversations I’m having with business owners, funders and other advisers at the moment.

It’s not a vote loser and yet the Tories would never prejudice entrepreneurship

That’s an interesting comment – and it’s probably true that the average voter won’t weep for too long at the thought of business owners paying more tax.  And yet it’s successive Conservative chancellors who’ve advocated that income tax and CGT should be at similar rates, while in contrast it was Labour under Gordon Brown which introduced the concept of Entrepreneurs’ Relief.  Quoting below from the OTS report:

“When the tax was introduced in 1965, Chancellor James Callaghan said that ‘…gains confer much the same kind of benefit on the recipient as taxed earnings… [and]… the present immunity from tax of capital gains has given a powerful incentive to the skilful manipulator.’ 1 In 1988, Chancellor Nigel Lawson said, when aligning the rates with those for Income Tax, that there is ‘little economic difference between income and capital gains’ so income and gains should be treated along similar lines.2 In 1998, Chancellor Gordon Brown said, when replacing indexation allowance with Taper Relief, that the ‘capital taxation system should better…reward risk taking and promote enterprise.’ 3

It is needed to pay off the national debt

It’s true that the Chancellor needs to raise more cash from somewhere.  But CGT is a drop in the ocean.  As it stands right now raises that national debt of 2.08Tn is 250 times the annual take from CGT.    So using CGT to pay of the national debt is like bailing the Titanic with a teaspoon.

CGT v IT graph

The system if full of distortions so it needs tidied up

Its true that there are lots of distortions and complexities in the system.  And that’s what the OTS report ostensibly sets out to address.   For example, gains on different types of asset, and differences in treatment between IT v IHT v GGT.   An interesting one highlighted in “Simplifying by Design" is the distorting effect of the annual GCT exemption.   They show a distribution of the frequency at which individual’s realise certain levels of capital gain each year.  It has a huge spike generated by people making use of their annual exemption.

Frequency of net gains by size

A new focus on relief for retirement

This is why it’s not all bad.  The OTS suggest that for business owners who plan retirement there’s a strong case for a CGT relief.    It says that Business Asset Disposal Relief (the new name for what’s left of Entrepreneurs’ Relief) is too broad to do this and needs to be “reformed”.   

OTS makes a few suggestions:

  • That the Government consider increasing the minimum qualifying shareholding to 25% so that relief goes to owners managers and not to passive investors
  • Increasing the qualifying hold period to 10 years to direct relief only to people who have built up their businesses over time
  • Reintroducing an age limit perhaps linked to age limits in pension rules to reflect the intent that it should be a retirement focussed relief.

What conclusions to draw?

If you’ve held more than 25% of a business for more than 10 years, are of pensionable age and are headed for retirement there are reasons to be cheerful.   For those who are younger, built their business more quickly, or have a smaller shareholding it’s time to get ready for a much more fearsome CGT regime.   More about Succession Planning for that age group on the PEM Corporate Finance website

Just how much use is EBITDAC anyway?


At PEM Corporate Finance we live and breathe EBITDA – it’s the performance metric of choice for M&A advisers and valuers alike as, at least in simplistic terms, it’s a good proxy for cash flow. And ultimately it’s cash flow that a corporate purchaser, investor or valuer ought to be focused on.  That’s what they’re buying or valuing.


Of course EBITDA needs to be cleaned up before use, often adjusting for the true economic costs of the directors, and adding back any one offs costs. One might think it would be enough to consider the effects of Corona Virus on business, be it in reduced sales, margins, disrupted supply lines, or increased debt, as an add back. But in fact a new acronym has been coined: EBITDAC or earnings before interest tax depreciation and corona.

EBITDAC mug cropYou can even get it on a mug!

How might it help in practice. Well it will depend on how readily you can quantify and clearly identify the effects of Corona. That might not be altogether straightforward. It might hit the business in many ways, some of which won’t become apparent until later. It is also likely that the Corona effect will vary over time, and by sector. So for example we’ve found that some businesses are picking up slowly after an initial hit, and some sectors particularly in tech weren’t much impacted.
I do think it’s worth trying to isolate EBITDAC. It’s going to be an ongoing difficulty for business valuers. But in M&A there are some immediate impacts:-

Price expectations

Coming out of the recession that followed the financial crash in 2008/9 one of the issues was a big gap that had opened between vendors and purchasers expectations as to price. This could be an issue in the short term now. Vendors will want to sell on the back of the EBITDAC profit metric and on pre-Corona multiples. Buyers will want to back off some of the risk that the current reported EBITDA is the new normal through a reduced price. In practice we’re already seeing the use of earnouts, convertible instruments and ratcheted deals to bridge this gap. Creative deal structuring is going to be needed.

Locked box v Completion accounts

The locked box has become quite common and is especially popular with private equity buyers as it gives them certainly as to price/structure and their funding requirements to allow them to draw down funds if needed. However in a fast moving situation where there’s ongoing uncertainty as to how Corona Virus will impact it may now suit both buyer and seller to move to Completion Accounts where the final deal structure is established on completion. It’s quite likely that deals will progress slowly over the summer as buyers and funders are cautious with their diligence – that further emphasises the need to see what the world looks like on completion if that’s going to take to the autumn.

Normalised working capital

Upon closing an M&A transaction there is always a debate around the normal level of working capital, and what are the debt like items are in the target. And from that just how much surplus cash can be taken off the table by the Sellers. Of course short term there’s a good chance that working capital will not be normal, with a build up of creditors on stretched terms quite likely – and so that needs to be dealt with.

Just how much use is EBITDAC anyway?

Short term I’d say it’s interesting, we must use it, but as a proxy for cash flow it’s useless and that will ultimately limit its applicability in M&A without consideration of other factors such as the fundamental value drivers of the business, it’s forecasts and scenario planning for 2021. As far as valuation opinions are concerned 2020 EBITDAC can only really be used alongside consideration of 2019 results, and a detailed scrutiny of the business fundamentals and prospects for 2021.  It really underscores the need to start planning now for the recovery, as it will be all about having a credible view of 2021 and beyond.   

For more on business valuations and corona have a look at our valuations site or this article on the PEM Corporate Finance site 

Filling in the gaps in the safety net

Today's the day that the government's Job Retention Scheme gets going in earnest with the portal open for firms to apply for payment.   And the word Furlough has well and truly re-entered the language with many firms already having Furloughed staff, and which will now be applying to get the grants.  I know that my tax colleagues have been active today helping with this.

If you were being unkind you'd say that that government's support for business whilst swift and very welcome was full of gaps.  These are gradually being filled.  The Corona Business Interuption Loan Scheme (CBILs) was onerous in terms of the guarantees required from business.  But now the guarantee requirements have been softened.  Then there was a gap above CBILs and below the Corvid Corporate Financing Facility for larger businesses.  This has now been filled with the Coronavirus Large Business Interruption Loan Scheme (CLBILS) .  Incidentally why the confused approach to naming these, one's Coronavirus, and other Corvid?

All this still leaves a gap for businesses that don't pass the viability test for CBILs - ie that it would have been viable in 2019 and will be in 2021.  Such businesses are going to have to look to other sources of finance, including the various tax related supports that have been made available, and negotiations with their creditors.  Expect to see the insolvency practitioners busy with a rash of CVAs, prepacks and phoenixes in the Autumn for those firms that can get through until then.

And yesterday the Chancellor announced a £1.25Bn rescue package for start-ups.  He intends to grant c£750m to start-ups through Innovate UK's network of funds.  And to set up the Future Fund which will channel £500m via the British Business Bank to suitable candidates.  Cleverly the loans are conditional on private investors putting in 50% of the money, which should help to filter out the lost causes.  The government will have some kind of equity conversion after three years unless the loans are repaid.  That either means that they'll be left with equity in no hopers, or will have soft conversion rights - or new investors would surely take them out.  But I guess that's a small issue compared with the other burdens the treasury is taking on to support business.

This must be welcome news for venture capital / private equity funds which I know have been closely monitoring their portfolio investments through this crisis.

So the safety net probably still has holes in it - but at least they're becoming fewer.  It'd be nice however if the gaps could  be filled before business groups have to start lobbying as was the case with the start-up community which looked enviously at the generous support in places like Germany, and lobbied hard for this.

We have a Corona Virus hub on our website with lots of information and also practical insights on how to access the right funds.

If you're grappling with how best to access this support, or would simply like to discuss your strategy, get in touch - I'd be interested to hear how you're tackling it.  


Changes to Entrepreneurs' Relief in the March 2020 budget

After lots of speculation, and much lobbying to have it abolished Entrepreneurs' Relief has been spared in the last budget.  But with a reduction from relief from  £10M of lifetime gains down to just £1M it's a mere shadow of what it was.   This means  that someone who was planning to sell for £10M will now take an additional £900k tax hit.  The argument is that it wasn't the tax relief that was motivating them.   And that's perhaps true - but it will have an impact on timing.  A business owner who was planning to sell based on a given level of net after tax proceeds will now need to sell for a higher price, and so probably delay the transaction.


Here's a short video I've just done on the changes, their impact, and how business owners might address the problem.   There's more on our website or YouTube channel

PEM Budget Seminar

You can also watch PEM's budget webinar for an update on all the other changes in the budget.




Half way to crazy

I was reminded again last night of the importance of anchoring while watching Oscar nominated film Marriage Story.  

It tells the story of a marriage break up, and both parties get sucked into dispute once lawyers get involved.   One of the lawyers essentially says you shouldn't be reasonable in your initial demands, and here's why.  The other side will start at "Crazy" and so if you start at "Reasonable" and you settle half way you will be settling half way to "Crazy".   The lesson being if you start at "Crazy" in the opposite direction - you might settle at "Reasonable".

Not I don't suggest that you start at "Crazy", apart from anything else in business negotiations you need a little good will, and the other side need to believe that it's worth putting the time into trying to get a deal with you.  Which they won't if they think you might be totally unreasonable.   But it's worth reflecting that anchoring the discussions will influence the subsequent negotiations.   

If you have some insight into the other sides negotiating strengths and styles that can help too - just how crazy or reasonable are they?



There are still deals to be done even in "difficult" sectors

Its often said that the reason lots of deals are still happening in uncertain times is down to the liquidity in the system, and those companies being in good sectors. Conversely if asked many investors and advisors will tell you the retail and construction are "difficult". So it's heartening to report that there's always cream at the top of the milk bottle and that deals are still to be done in "difficult" sectors provided you're working with really good businesses.

Specifically I'm pleased to look back on two recent deals we've completed over the summer at PEM Corporate Finance, the sale of English Architectural Glazing and the sale of ATP Architects + Surveyors.

We acted as lead advisers to the shareholders of English Architectural Glazing.  Based in Mildenhall in Suffolk and Attleborough in Norfolk, this is one of the UK's leading contracting businesses providing envelope cladding packages for project such as Great Ormond Street Hospital, Wimbledon Centre Court, DLR Station City Airport and the BBC TV Centre conversion. Their clients include the great and the good of UK construction such as Kier, BAM and Skanska. The business was sold to Irish Private Equity Fund Elaghmore LLP. This deal closed in August.

A couple of months later we were pleased to announce the sale of ATP Architects + Surveyors to RSK. ATP, which is based in Ilford in Greater London,  is a multi-disciplinary professional consulting firm, and its purchase was RSK's 7th deal so far this year. ATK, which was established in 1966 provides the complementary services of landscape design, interior design, space planning, employers’ agent, and health and safety. It works with a broad range of clients such as Barratt London, Sanctuary Housing Association and Hollybrook Homes.

We've not done anything in retail recently - but are always keen to speak with good businesses and to help shape their exit plans.

More on our website  about the EAG and ATP transactions.



Is this the end for Entrepreneurs' Relief?

There is a growing chorus of voices urging the government to scrap Entrepreneurs' Relief.  The Institute for Fiscal Studies which suggested that business owners respond more to changes in taxes by adjusting how and when they take money out of their companies rather than by changing their investment plans.  It also claimed that many owner managers hold significant sums of cash in their companies in order to access lower CGT rates and to save tax - no sh*t Sherlock!   IFS issue with the system is that while higher income tax rates encouraged lower income take from companies, especially if it kept owner managers just below the next tax threshold, but that the cash retained wasn't invested just squirreled away.

Now the former head of HMRC has called for ER to be scrapped, as it costs the country c£2bn a year in lost tax but with "no real incentive for entrepreneurship"

An earlier HMRC research paper by IFF, found that in most cases ER was not the primary motivating factor for entrepreneurs when making decisions about investing in assets, or disposing of them.   But it did find that those most likely to be influenced by ER at the point of making their initial investment were those most likely to planning to set up a new company.  Perhaps it's motivating serial investors - and so perhaps this is a driver for enterprise?

It's difficult to predict anything in British politics, and that's also true about the future of ER.   Phillip Hammond tinkered with it in his 2018 budget but resisted calls at that time for it's abolition.  So perhaps more tinkering is the likely outcome post election?

Whether or not a transaction will qualify for ER is always an agenda item in exit planning discussions.   And it's relevant in any M&A activity, whether you're selling your business, doing a management buyout, or even if you're buying business (because it will influence the seller).  But we're now finding, in discussions with entrepreneurs around Cambridge and East Anglia, that the availability of ER is becoming a factor for some in accelerating their exit plans before possible tax regime changes.  It's certainly true to say that it's unlikely to get any more benign.  

Ultimately exit decisions are driven by personal factors such as age, and a desire to do something else in life.  Or by business factors such as the value of the company, and it's strategic plans.  So the tax tail actually doesn't often wag the dog, but it would be helpful to have some certainty on how capital gains on the sale of businesses are going to be taxed.

In the short term the best way for business owners to wrest back some control from the politicians is to have some exit planning discussions, work out a range of dates and values for you exit, and what needs to happen to deliver that.    We're always happy to have this kind of discussion, because it makes it easier for business owner and adviser to act swiftly when opportunity arises.  If you'd like to read more about exit planning and selling your business have a look at the PEM Corporate Finance website

5 Reasons why Brexit might not be so bad for M&A

Despite recent evidence of Brexit hitting M&A it may not be so bad after all.    Here's five reasons why.

1 Liquidity

Companies might be put off attempting larger deals due to the difficulty in raising sterling debt.  Also there’s evidence of some Brexit planning being rolled out with stockpiling of goods and relocation of corporate head offices outside the UK.

But these things are seen mostly at the really large end of the market, and smaller deals should hold up.

Why so?  Because confidence and cash are key drivers of M&A.  Whilst confidence may be in relatively short supply, at least in some markets, there’s still lots of cash around.  Companies and PE houses are holding record bumper levels of dry powder so the Global M&A market isn’t about to grind to a halt, even some fear the UK could.

Given all that corporate liquidity smaller deals especially technology or strategically driven deals should not be hit as hard if at all.  

Brexit2 Specific sectors will hold up

The uptick in inbound European M&A activity in 3Q18 should continue in sectors which remain relatively unaffected by the current tumult.  It’s hard to predict which sectors those might be!  But it’s safe to say that UK technology companies, and other businesses with a real edge, market access or strong business proposition are likely to remain attractive to potential purchasers.  

So I’d imagine that the Cambridge tech cluster and other areas of excellence should continue to see activity.

3 Change as a driver for M&A

Change often drives opportunity, capital flows and M&A activity.  And companies seek to capitalise on disruptive factors by buying and selling companies.

4 The UK as an attractive economy/jurisdiction in which to do business

English law will remains attractive to international companies. 

5 Continued Sterling weakness

A hard Brexit will probably punish the value of Sterling, but as we saw after the referendum the currency effect of a “cheaper” British pound has been a real driver for M&A deals.  Overseas buyers particularly from US, Europe and China have been very active.