Declan Rice is set to become the most expensive British footballer of all time after West Ham United and Arsenal agreed a transfer fee worth a guaranteed £100m ($126m) and possible £5m in surcharges.
There was a lengthy dispute over the amount, with treble winners Manchester City making a surprise late offer of £80m with an additional £10m bid before being outbid.
While clubs always haggle over the amount of a transfer fee, a key factor in this particular deal was the deal’s structure – which has not yet been confirmed in detail – with West Ham wanting more money upfront and Arsenal preferring to have the payments spread out in installments .
This type of dispute is becoming increasingly common in the world of football transfers, a market that, like everywhere else, is struggling with how to deal with high interest rates and rampant inflation.
In the decade and a half since the recession of the late 2000s, two things have shaped the economies of developed countries. First, interest rates – which drive the cost of borrowing – were close to zero. Second, inflation – the rate at which the cost of goods and services is increasing – has been low.
This has made it cheap to borrow money and paying in installments rather than up front hasn’t made much of a difference as the value of cash isn’t greatly diminished by inflation.
But now, like everything else, high inflation is having an impact on the way football clubs manage their finances, as those selling and buying have different incentives when it comes to transfers.
Rice with West Ham chairman David Sullivan (Photo: Tim Goode/PA Images via Getty Images)
“There are considerations from a cash flow perspective,” football finance expert Kieran Maguire says of the impact of inflation. “(Sellers of racquets) would rather have the money now because of inflation – purchasing power is falling.”
Let’s take a hypothetical transfer of a player worth £20m, paid in four annual installments of £5m each. In a world of high inflation, the last payment that arrives in three years is worth far less than the first that is being paid now. On the other hand, such an agreement would suit the buyers’ club, since they effectively pay much less in the last year.
The cost of running a football club is constantly increasing and is being passed on to fans in the form of more expensive tickets and merchandise. For example, energy prices in the UK have risen dramatically over the past year while wages are also rising rapidly. In April, the national minimum wage (for people over 23) rose from £9.50 an hour to £10.42 – a rise of 9.7 per cent.
All this increases the incentive to receive money from transfers in advance.
However, there is a difference. Everything discussed in this article concerns cash flow between clubs – how much money they send and receive between each other. This differs from the accounting concept of ‘amortization’, which refers to how transfer fees are recorded in clubs’ books.
Generally, when a club buys a player, those payments are spread over that player’s contract period – amortized – and not all fall in the year the player is bought.
For example, a transfer of £50m for a player on a five-year contract will be credited to the buying club’s accounts in five installments of £10m each (whereas for the selling club it will all appear at once in the first year).
These calculations feed into the Financial Fair Play (FFP) regulations, which regulate how much a club can spend. This week, European football’s governing body UEFA ruled that transfer fees can only be amortized over a maximum period of five years after clubs – notably Chelsea – were criticized for signing players on much longer contracts.
This is a completely different issue than cash flow to clubs.
dr However, Rob Wilson, football finance expert at Sheffield Hallam University, explains that payback has had such an impact that it has combined with inflation to lead the game to be more likely to be played in installments.
This reflects broader trends in society, particularly when interest rates have been low; Many people have bought consumer goods like cars or electronics in installments rather than paying a lump sum. But this payment method has suddenly become a lot more expensive.
dr Wilson says the surge in mortgage payments actually predated the recent rise in interest rates and inflation.
“Covid was sort of the turning point for that, the volume of trade that started through an organized payment structure,” he says, citing the example of Cristiano Ronaldo, who joined Real Madrid from Manchester United for £80m in the summer of 2009. The Spanish club pays outright the full amount.
Ronaldo is unveiled in Madrid in 2009 (Photo: Denis Doyle/Getty Images)
“Today it is much more common to distribute transfer fees.”
This is often an advantage for the buying club, as it means that it has more money in the bank in the short term to make more transfers. However, they may be burdened with payments for a longer period of time. Wilson highlights Manchester United as a club currently paralyzed by this problem.
This is confirmed by Maguire, who notes that Premier League clubs owed £1.87billion in unpaid transfer fees at the end of the 2021/22 season. He thinks this could explain why some clubs stayed quiet in the market last summer as they already had huge transfer debts to settle.
Maguire agrees that in a world of high interest rates and high inflation, there is increasing pressure from club sales to get more money from those who buy the clubs up front.
“It’s about getting cash into your business as quickly as possible,” says Wilson. “If I said to you, ‘Do you want £1,000 now or in 12 months?’ You would say ‘Now’.”
This may seem obvious, but for a long time when the value of money was relatively constant, there was surprisingly little difference.
There is an option for clubs that get their payments in installments but need more cash upfront: they can use funding to pre-transfer the money.
Using Rice as an example, Maguire explains how this could work: “(West Ham) will say, ‘We have three promissory notes from Arsenal’ and they will pay the installments due.”
Of course, there is interest to be paid on this, and these costs have risen significantly in recent months.
Such agreements, for which the Australian bank Macquarie is a popular provider, do not only exist for transfers, explains Maguire. Leicester City and Southampton have achieved this with their expected earnings from Premier League broadcasting and find themselves in a difficult position after being relegated last season. West Bromwich Albion did the same for the parachute payments granted when clubs are relegated to the Championship from the Premier League.
This allows clubs to spend money now, whether to pay off other signing debt or simply to keep going – at the cost of having to spend less money in the future.
“Borrowing isn’t a bad thing, but it does lock you into certain payment terms,” says Wilson. “But the more you have to pay monthly, the less flexibility you have for other things.”
The cultural trend of “buy now, pay later” is ingrained in the world of football transfers.
However, as the global economy changes dramatically, having cash in the bank now is becoming increasingly important.
(Top Photo: Ben Stansall/AFP via Getty Images)