Why football clubs go bust

Back when Aldershot Town went bust in 1992, it was big news. The relative rarity of a football club being liquidated enough to generate items on the national news where comparisons were made with the last club to suffer the same fate – Accrington Stanley in 1962, but these days football clubs hitting the financial skids is hardly news at all, more a regular occurrence that all supporters can expect to experience at least once in their lifetimes.

The strange thing is that although it’s stagnated of late English football has been on a fairly dramatic and long-term upswing since the mid 1980s with rising attendances, better, safer grounds,  and a growing global profile not to mention a record TV deal in the billions, yet this successful period has actually seen more clubs encounter financial problems than the long years of post-war decline.

The reason for this is that strangely a club going bust is not, as you would think, the result of failure, but of success. At least by my reading of some economic theories which seek to explain financial boom-bust cycles.

In the book dealing with the economic crisis, Capitalism 4.0, Anatole Kaletsky summarises the theories of Hyman Minsky an American economist who he says:

argued in the 1960s that long periods of economic stability would lead to conditions of financial overconfidence that would, in turn, promote leverage and exaggerate risk-taking and increase debt burdens throughout society.

But, whilst this may explain the banking crisis, what does it say about football? The key point is that banks are more likely to lend and that football clubs are more likely to take on debt not when times are bad, but when the times are good – as they have been for over two decades. This explains how clubs became increasingly leveraged. Certainly a deal such as that which brought the Glazer’s to Manchester United would have been unthinkable at a time when the fortunes of the game were dwindling rather than at a time when there a the not unreasonable expectation that fans will keep on paying more for tickets and television revenues will keep on increasing.

Though such predilection for increased debt and greater risk on the part of clubs and banks do not necessarily risk the whole game collapsing – for now – such behaviors can nevertheless prove highly damaging to individual clubs caught up in an environment of over-exuberance. Another theory outlined by Kaletsky, George Soros’s theory of reflexivity. can be used to explains how individual clubs can become caught in a cycle of over-confidence. As Kaletsky explains the theory essentially concerns the two-way interaction between perception and reality:

Imagine that house prices have been rising for a period, perhaps because they are recovering from a previous bust. The rise in prices may encourage overoptimism about future housing demand and make houses appear more attractive to bankers as collateral for mortgage loans. The increased availability of mortgages pushes up house prices, thereby justifying the original optimism about them.

This cycle continues to a point where perception becomes so far divorced from the fundamental reality that it is untenable and a bust occurs  So how can this relate to individual football clubs? The answer is that most clubs, at whatever level, who go bust do so following a recent run of success; Leeds in the Champions League, Portsmouth having won the FA Cup, Southampton having reached the FA Cup final, Bradford reaching the premier league, Truro achieving  five promotions in six seasons, Rushden and Diamonds climbing to League One, Weymouth achieving promotion to the Conference, the list goes on…

It is quite a popular notion that football clubs have a ‘natural’ level. Though I have argued elsewhere this is changing, for the time being at least a clubs fortunes are generally  linked to the level of support it receives from its surrounding area, not just fans paying to watch games, but also sponsorship from business in that area. Population is therefore usually a good indicator of a clubs ‘natural’ level in that most top sides are from major urban areas with a large population.

If we accept that each club has a level then this is in effect the fundamental reality. Like the example of house prices a club may have a particularly good season, achieving promotion. This may be for a number of reasons: because the club is below it’s level and simply rising to it’s rightful level, a particularly good manager, or even luck. The problem is then if this success is misinterpreted as a shift in the fundamentals resulting in the cycle of over-optimism. So Bradford City who had achieved Premier League status by a narrow margin become seen as a ‘big’ club leading to more investment,  loans and financing.  This may even produce further success which in turn reinforces the cycle, but all the while sustainability is being stretched to beyond the point it can be supported by the fundamentals which simply cannot afford a player on £40 000 a week, so it is with some inevitability that the over-inflated club will at some point come crashing back to earth.

The two theories together therefore explain why the majority of football clubs go bust; Firstly the growth of the game over the past two decades has resulted in a greater availability loans and finance and an increase in the number of risky transactions. This has in turn facilitated  bubbles whereby some clubs taking advantage of the availability of finance become caught in a cycle of drastically over-extending themselves far beyond a level which their fundamentals can sustain.


One comment

  1. An interesting theory, which deals with a genuine puzzle. First, I’d say a few more words about the puzzle itself. We need to distinguish the notion of a football club that is affiliated to a league, and a limited liability company that owns the football club. To take the example of Aldershot, the company was insolvent and engaged in a financial restructuring agreed with the court from 1989, well before the winding up order which came in March 1992. The problem was that in the intervening period it proved impossible to put together a financial deal which would transfer the ownership of the club to a sound financial entity. But most clubs do not suffer that fate. There are lots of examples, but a few that come to mind are Bristol City (1982) Ltd, which was formed to take over the football club from Bristol City Ltd, a business that was liquidated, or Swansea City (2002) Ltd which took over the football club from Swansea City Ltd which was also liquidated. the point is that some entity can usually be found to take responsibility for the football club, and this has been true both in goods times and in bad. The reason for this is that the principal asset of a football club, it’s ground, usually has no feasible use other than as a place to play football (you’ll seldom get planning permission to turn a ground into a supermarket unless some alternative has been found for the club). The league owns the license to play, so that creditors of the old club are only like to get any money back if they agree to transfer the asset to the new limited company, in return for a small percentage of what they’re owed.

    So, usually the clubs survive but often limited companies that own the clubs are liquidated. Often the companies survive too, even if they have to go through a legal process to write off some of their debts, with the agreement of creditors. But here is the puzzle. Between 1947 and 1982 there are almost no cases of limited companies that owned football clubs going through formal insolvency proceedings, certainly not while the clubs were in the Football League (for example, Accrington resigned from the League but the company was not insolvent and it continued to play football for a few years in the lower leagues before being wound up). Since 1982 there have been around 70 cases of clubs entering formal insolvency proceedings while in the Football League.

    First, the theory you’re espousing above is essentially Marxist. Marx’s economic theory is that capitalism is prone to crises of overproduction which then lead to economic collapse (and revolution). This adaptation of the theory (minus revolution) claims that financial crisis is more likely in good times than in bad. The problem is that, at least as far as I have read it, the evidence does not support the theory. True, there may be bankruptcies which help to trigger recessions (think of the failure of Lehmans in 2008) but there are far more bankruptcies that occur after a recession has started, for reasons which are, I think, obvious. Bankruptcy and economic failure is counter-cyclical (when the economy grows bankruptcy falls, when it shrinks bankruptcy increases).

    So, if this is not the answer, what is? I think it is a combination of three factors:

    1. the finances of football clubs had been deteriorating from the 1950s, but they started from a very strong base. All clubs faced the problem of declining gates and once the maximum wage was abolished (1961) inequality grew quite rapidly. Matters came to a head in the deep recession of the early 1980s and this is when the first spate of collapses occurred- Bristol city, Wolves, Hull, Bradford, Charlton, etc. However, from 1986 attendances started to grow again and football began to recover, so had nothing else changed I think that would have been it, and we would look back on a history of financial crises that occurred only when English football was at its nadir.

    2. However, something else changed. In 1985 and 1986 the government passed new insolvency laws which created the process of administration as we know it today. Insolvency law is complicated, but basically before 1985 anyone owed significant sums of money by a company which was unlikely to be able to repay in full could get the courts to liquidate the business and sell whatever assets were left to pay off part of the debt. This system was inefficient, because it allowed companies which in reality were viable to be destroyed because of short term liquidity problems. Administration essentially protects the company from its creditors while seeking a deal which will repay them as much as possible. Experts argue that system has not been entirely successful in protecting viable companies in general, but they have noted that it has been a roaring “success” in football. Because, as mentioned above, the club license is owned by the league and the football ground usually does not have any alternative use, canny directors have realised that if things go wrong they can keep the company alive, so they have greater incentives to gamble.

    3. The growth in financial inequality between the divisions, especially at the top, means that even prudent clubs are susceptible to runs of bad luck. Insolvent clubs often have history of recent collapse- the best example is Bristol City which failed in 1982 when it was in the process of going from the 1st to the 4th divisions in successive seasons. Inequality has grown consistently since the abolition of the maximum wage (in 1960 the earnings of the average first team player in the First Division was only 25% higher than the average earnings of a first team player in the Fourth Division!). I have a paper (http://www.soccernomics-agency.com/wordpr
    ess/wp-content/uploads/2012/11/Insolvency-and-English-football.pdf) which looks at the data in some detail and suggests that runs of bad luck alone can explain most of the insolvencies of recent years.

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