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December 2020

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  But reaction to it was overwhelmingly negative and it was withdrawn in just 79 days.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.