Wed, Apr 29, 2020

Sports Organizations Must Understand Source of Funds Despite the Current Economic Environment

The COVID-19 pandemic has created a whole series of unanticipated financial difficulties for sports organizations.

No sports organization, however large and successful, will emerge from this unscathed while play is suspended in the short term, and, in all likelihood, many will suffer for a considerable length of time afterwards.

Football clubs, for example, are experiencing a decrease in income from matchdays and merchandizing, and also face the prospect of reduced TV, sponsorship and prize revenue. All the while, outgoings remain high, particularly due to player salaries.

Some clubs have been able to offset the financial downturn by placing some of their staff on furlough. While supporters are sympathetic to clubs in the lower divisions who make this decision, there has been widespread criticism of larger clubs that have announced their intention to rely on tax-payer funding.

In particular, the reaction to Liverpool and Tottenham Hotspur’s initial decision to furlough non-playing staff points directly to an issue in football that has been increasingly relevant in recent years but is now more significant than ever before—how to maximize revenues and protect profitability while avoiding reputational damage.

In this distressed economic climate, many football clubs will invariably seek to maximize their revenues from sponsorship and, in some cases, investment from third parties in return for ownership stakes.

However, today’s socio-political climate means there is greater interest than ever before in non-financial information—that is, ethical, cultural and behavioral standards. It is clear that a well-performing company with a strong market performance can have its valuation and reputation tarnished by an ethical, cultural or behavioral scandal.

Sport is not immune to this growing interest. While the furlough issue has provided an example of the reputational impact on clubs deemed to have made a wrong decision in the eyes of supporters, it is unknown the extent that a club’s brand would be affected should they be associated with a company or individual known to have a chequered background or questionable ethical position.

In our work in football, we are regularly asked to review commercial backgrounds and reputations of potential sponsors, branding partners and investors. 

On numerous occasions we have uncovered allegations of fraud, financial malpractice, a lack of visible funds and other issues that would have had a detrimental impact on a club had they proceeded with the deal and the issues been uncovered at a later date.

For example, in one investigation into a manufacturing firm based in an emerging jurisdiction conducted on behalf of a football club, we discovered that, the company was not the reputable and stable enterprise it purported to be and was facing severe financial difficulties. Its manufacturing plant had closed, there was a growing list of creditors and the owner was at the centre of allegations of defrauding investors.

In another investigation, as part of our efforts to ascertain the source and size of wealth of a potential investor into a club, we discovered the subject had fabricated letters from a bank to show he was worth more than he was. 

We have also read in the media of several cases where, we assume, a club has not done the required level of due diligence on a potential commercial partner and issues to emerge down the line. This often results in the club being forced to end the partnership to limit the reputational damage and, since the club chose that partner over another, they can lose income that could have been obtained from elsewhere.

When we have advised clubs, our clients have been able to make their decisions with their eyes wide open and balance the benefits of accepting the finances in question with the risks involved.

Based on our experience, as clubs face economic difficulties in the months ahead, we would suggest they take steps to investigate their potential counterparties so they can make informed decisions and not pay the price later on. 

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