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How would I do it?

By John  Hughes :  05/08/2008 :  Comments (27) :

There has been plenty said about investment and it either waiting in the wings or it has just walked on by. So why is it so difficult to buy Everton Football Club?

For argument's sake, let's say I have the ability to invest (unfortunately I don?t). What would my due diligence include in order to make a bid for EFC? What are the pitfalls of making such a bid?

Firstly, I would have to look at the club's debts. According to a few posters on here it seems we have £26m in loans and a £40m overdraft, which is basically an unsecured loan, which can be recalled at any time. Effectively, though, we are £66m in debt. These debts are secured against future revenue streams.

So, I now know we are £66m in debt, what are the clubs out goings?

  • Loan repayments
  • Staff/player Wages
  • Policing
  • Transport
  • Business & Utility Bills
  • Stadium Maintenance
  • Tax
  • Training facilities
  • Community Work
    What are the Clubs main income streams?
  • Prize Money
  • Gate Receipts
  • Merchandise
  • Sky

What is the clubs turn over trend? By this I mean has turnover increased or decreased, and what are the reasons for increased income or decreased income?

What?s the clubs asset/liabilities ratio? This means are the clubs assets worth enough to cover its liabilities? A benchmark for a successful business would be around 3:1 ratio in favour of assets against liabilities. In EFC?s case it seems it?s the other way around or 1:1. This would not make good reading for a potential buyer.

So, I?ve gone through all of the above, I?ve found that the Club has made losses during four of the last five seasons and the reason for profit in that sole year was player sales and good finishing place in the league. (4th).

I?ve found out that we make a pittance from merchandise, both locally and internationally, and the marketing function is outsourced. Merchandising has also been outsourced for a very low guaranteed income. These are both long term contracts which are not easy to cancel.

Stadium maintenance costs are excessive due to lack of planned preventative maintenance year on year.

The stadium has inadequate facilities to draw larger revenue streams from it, i.e. little or no corporate facilities. It has too many obstructed views and in current circumstances is unable to be redeveloped, although I do know the local council are willing to discuss the redevelopment possibility.

Christ, I might just walk away. But because of good league finishes, a turnover of £56m and taking into consideration player assets and future income the club is valued at £80m by the present owners ? rough guess ? coupled with fact that the current owners are unable to invest anymore and are desperate for a return on investment. With the marketing and merchandising offering a huge opportunity when done properly it starts to make it look quite interesting, to me at least.

So I?m interested. I want to talk to the owner and he wants to listen. The majority shareholder owns 26% of the company; at current market value that equates to £20.8m. He wants current market value for his shares. However, it?s not as easy as that for me. I want total control of the club. I don?t want to have to pay £20m for a club, improve it the way I want to and this means investing a huge amount of money. But by investing all my money and increasing the value of the club, indirectly I would be increasing the value held by BCR Sports, Lord Grantchester, et al so I have to buy them out also. I find out that I would have to buy 85% of the club (15% would be owned by single or extremely low-volume shareholders, usually supporters) and at current market value that is £68m.

It?s not actually looking that interesting to me now. But I am encouraged to hear that the chairman wants to sell to a buyer who has the club's ?long term? interests at heart.

OK this is where my business plan comes in. First and foremost, I would make it known to the public that in the current economic climate the stadium move would be scrapped. The club does not need to be saddled with more debt without justification for increased capacity and I?m not willing to pay £78 million out straight away. Secondly, money would be made available for David Moyes to break into that top four during the next two seasons.

Once demand for seats outstrips capacity at Goodison, then ? AND ONLY THEN ? will redevelopment or a stadium move take place. In the short term, I would propose to utilise the space underneath the Top Balcony overhang to create 25 corporate boxes. The Main stand would then be extended all the way down to pitch level. Investment in the squad would be my priority. A successful team can play anywhere and money follows success. Money does not follow mediocrity. For those of you who are skeptical of this plan my case in point is Arsenal. In the early part of the Premier League, Arsenal finished 10th and 12th and they played at Highbury. Look at them now.

So, I?ve made public what my intensions are. I?ve told the chairman I am a willing and committed buyer. I?m now going to tell him that I value the club at £40m and I am not willing to go any further. For this £40m I will be inheriting £66m of debt, an old stadium and a non-existent merchandising operation. I will tell him that I can take this club onto not only the next level but can provide sustained investment and my desire would be to see this club become self reliant.

Assuming future success, and demand follows success, I would look to either relocate EFC to a more desirable location or redevelop Goodison in phases. But only when the demand is there.

At £40m BK stands to receive £10.4m, BCR would get £9.6m, etc. They would all make a ROI but not as much as they wanted. Time will tell who, if anyone is a willing and committed buyer. Time will tell how much Kenwright is willing to accept. I for one just wish I had that money.

This is all done with a pinch of salt and obviously, as much as I try, I can?t escape from my Evertonian roots, beliefs and wishes. But I?m trying to capture what problems an investor would come up against. Like I mentioned it?s not just about buying Kenwright out. It?s not just about money for players. It?s not just about the stadium. It?s about going back to basics when a new ?owner? is found.

The whole company needs overhauling. It?s not an impossible job. It?s a time-consuming one but from a football point of view the action required is simple. Provide funds for the manager. Get this part right and things within the business can be done as and when required. By this I mean relocate/redevelop when we have demand for 50,000 seats at every game. Ramp up the merchandising when we are successful. Ramp up marketing when we are successful. They should be ramped up now but it should get far more importance the more successful we become.

Anyway lads and girls, I?ve tried. I?m sure some of you will pick holes in this. That?s fine. I hope some of you might read and say god yeah I never thought of that. There will be things I?ve missed. There will be things I?ve not elaborated on. This may well pose more questions for you to ask. If that?s so then great. If you think it?s a pile of piss then your entitled to your opinion. If you have experience in due diligence then share it with us. We are mostly all lay people here and we?re trying to make sense of it all. Enjoy or not as the case may be.

Reader Comments

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John Charles
1   Posted 06/08/2008 at 03:33:12

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The arguement for demand is we fill Goodison 90% to capacity for most of the season while 10% of the stadium is obstructed seating.

Therefore the main arguement is the club already fills the stadium regularly.
Simon Skinner
2   Posted 06/08/2008 at 07:23:30

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John

A few quick points.

Firstly don’t make the mistake of comparing a football club to an ordinary business. The "3:1" rule you state is very, very generic and in any case does not apply to a business whose main assets are off-balance sheet. Everton’s largest assets are largely off balance sheet: e.g. Cahill, Arteta and Yobo are wholely off balance sheet, while Johnson, Lescott and the rest are partially off balance sheet and therefore undervalued. So the 3:1 rule (of debatable value anyway) is of no use here, and would not put off a buyer.

Secondly, just to quickly avoid the scaremongering, our debt is not £66m (or at least it wasn’t when we last published our accounts) and we certainly do not have a £40m unsecured overdraft. The overdraft was £3.5m at the last count, and is in fact secured.


I think you’ve not included the number one question any investor would ask himself: how, and when, will I get my money back? On the assumption that, as you state, an investor is willing to fund Moyes for two seasons to break into the top 4. How much do you think that would take? And how is he going to get that money back?
Ben Alcher
3   Posted 06/08/2008 at 08:05:03

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The simple answer is that no businessman in his right mind would take over Everton at Goodison Park ? as Kenwright has found out. I?m not even sure it?s a goer at Kirkby either. Too many imponderables, I?m afraid... and little prospect of profit for a new owner for decades. The only hope is that a Russian/Asian with money to launder or a reputation to build might find it an opportunity. Don?t hold your breath!
John Hughes
4   Posted 06/08/2008 at 08:53:31

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Simon Skinner ? Thanks wasn?t sure if it applied. Like I said it was done with a pinch of salt. But I?m glad it?s seems to be opening a debate other than the stadium.

With regards to the ?when will I get my money back? I did mention there were some parts I didn?t elaborate on. When I mentioned EFC being self reliant I made the assumption that this would be after I had got my money back. By making EFC self reliant any future sale of the club would be for far more than I invested and would be total profit. (Ideal world I know)

With regards to how much do I think it would take to break into the top four, well Moyes is reported asking for £40m for players. Providing you assuming he gets the players he wants for £40m and does finish in the top four then I reckon you will need at least another £40m to build on that. I know in reality you have to take risks such as injury into consideration but even so in the scenario I mentioned I would have only (I wish) spent £120m. OK there would still be debt and a stadium to fund but wouldn?t it be pertinent to only do this when the demand far outstrips the supply? Plus assuming we are successful wouldn?t sponsorship and turnover increase as a direct result? It has done for the current Top Four.

John Charles ? The club fills 90% of a 40,000 seated stadium. This is not demand outstripping supply. This is supply meeting demand. The argument for this will go on until EFC have 10,000 fans who can?t watch the game on a regular basis because of capacity restrictions only. Then you will have a scenario where demand outstrips supply.

Ben Alcher ? Like Simon Skinner said running a football club is not like running a normal business. This is the mistake I made when I went started writing this. A football club is a rich mans toy. I?m beginning to realise this now as I?m bouncing my idea?s about. Simons made a good point and I don?t think we should be looking for business man of the year here as the person who comes to take over the club. We won?t get him any as like you said who in the right mind would buy us in the current situation. However there are many mega rich men out there willing to buy a toy to play with. The only problem for all of football is when they get fed up?.where does that leave you?
Paul O'Hanlon
5   Posted 06/08/2008 at 08:48:15

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Simon, is there not a chance that when we publish our accounts we?re not including all existing debts, such as the £13m debt to Earl to purchase the Yak and any possible loans Green may have given to Kenwright in the past? Or would these debts have to be included by law?

John as usual I think you?ve got a few good ideas, just a pity you don?t have the cash to buy Kenwright out! Although I?m not sure he?d take £10.4m for his share, no matter how much he bleats on about finding the ?right? investor.
John Hughes
6   Posted 06/08/2008 at 09:56:02

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Paul ? I?d hope that by going public it would put pressure on BK to sell?.sort of make his position untenable if you like. But as I also mentioned BK isn?t the only hurdle you have to over come. Earl is also only 2% behind him. But as I mentioned Earl reportedly paid £7m for Greggs shares. Getting £9m back is still good business and he will of made a ROI but it?s again pressure. I think BK would walk it the right pressure was applied to him. It?s about power. If you have more power (look at the relationship with Green) you pull the strings. If I had the money I?d have to really think hard about it?.like for 1 minute and then I?d buy?..but it would have to be my trainset?.at least at the outset and I would have to get my money back.

In an ideal world we need a buyer who wants to come in and eventually make EFC self reliant. How would they do this? God only knows but we can dream.
Steve Pugh
7   Posted 06/08/2008 at 10:02:59

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John,

You have mentioned one thing that has always confused me. You said you would go public, as would I. Over the years people have accused BK of turning away potential investors, and the club seem to have admitted this in the last few days. If we have had so many potential investors why have none of them gone public? In the current climate the fans would go wild at the thought of a big investor.
John Hughes
8   Posted 06/08/2008 at 11:31:49

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Totally Agree Steve ? As to the question of why?.my guess is as good as yours.

One thing remains clear though. BK has to sell and maybe just maybe one of these potential buyers will go public with their interest.
Steve Green
9   Posted 06/08/2008 at 11:40:18

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John, You say that the long-term merchandising contract would not be easy to cancel. Well admittedly I am not party to the detail of the contract but surely, surely, JJB must have already broken the terms of the contract with their lack of stock availability. As I recall all / most stores were meant to have EFC stock highly visible and presumably available in varying sizes etc. This doesn?t even happen in Merseyside / North West from the majority ol verbatim accounts, never mind further afield.

Either JJB have not done what they said on the tin (and signed up to), therefore breaking the terms of the contract and giving EFC the scope to cancel the agreement without penalty or legal wrangle, or EFC have not couched the contract in sufficient terms to enable this in the circumstances.

Either we proceed down a different track in respect of merchandising direction or the board have to admit to further weaknesses in their commercial aptitude.

John Hughes
10   Posted 06/08/2008 at 12:35:16

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Steve Green ?Either we proceed down a different track in respect of merchandising direction or the board have to admit to further weaknesses in their commercial aptitude?

I think you?ve hit the nail on the head. Like I said in the original post its how I would do it and being involved in commercial contracts before, if they don?t have the right KPI?s attached to them, or the right clauses for non performance so you can justify cancellation your putting yourself in a nasty situation. Secondly non performance will be measured over a period of time and not just 1 bad month. You have to remember JJB are the professionals when it comes to retail and they would not have signed a contract which is heavily weighted towards them. EFC on the other hand were losing money hand over fist on the merchandising side and would have jumped at the chance to turn a deficit into minimal profit. I think £300k per year is what the contract is worth to EFC. Also with retail activity why would you put all your eggs in one basket. Why, when you are trying to build a brand to you only put it’s merchadise in one shop. Commercially it doesn’t make sense and smacks of another KW "quick win"!!!!!

There?s probably more of the same in the other departments too Steve.
Paul O'Hanlon
11   Posted 06/08/2008 at 12:43:03

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I?d imagine the reason investors have never gone public about their interest in the club is because after looking at the books they weren?t really that appearance. I?m sure if an investor was keen on buying the club, but Kenwright refused to sell we?d hear something from the press (especially with Kenwright now going public about his desire to sell).
David Chait
12   Posted 06/08/2008 at 13:10:28

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A question please: the last set of financials I saw are very old. Scoured the official site for latest ones - no luck.... can anyone link to the latest financials. Financials are my game and would love to pick these ones apart.

And Simon is right - the players are off balance sheet - but only partly - from what I could fathom from headline numbers the intangible I assume is the contract of the player and is depreciated over the life of the contract - so I look at our profit I take it before htis write down as it isn?t really an expense... Simon is right... the value of the players are not reflected on the balance sheet.
Jay Harris
13   Posted 06/08/2008 at 15:54:19

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Simon
I not sure how people are defining Everton?s debt but from the shareholders resolution demanding an EGM they are showing Debtor/creditor liability of £59 million as of 2007 and I am sure I have read on a couple of reports recently that Everton currently are £66 million in debt.
Mike Green
14   Posted 06/08/2008 at 16:33:42

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I believe we, as a club, are in a horrible position. If we move to DK we risk losing our indigenous support ? of which we have the strongest in the football league ? within a generation. If we stay no one seems to be willing to invest. If we do nothing every kid around the country will look at the Top 4 and no further, making the gulf even wider. If we gamble and spend big in search of that success we risk doing a Leeds.

I?m just glad it's not my decision.
Dave Whitwell
15   Posted 06/08/2008 at 16:50:06

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Paul

Yes all the liabilities of the club would need to be declared in the accounts, any loans to shareholders to purchase shares would be personal liabilities and not have to be declared unless the contract entitled the lender to have any holding over the shares, which would then need to be declared.

There are 3 companies involved in Everton’s group being Everton Football Club Company ltd, Everton Investments ltd, & Goodison Park Stadium ltd.

David the last filed accounts were for y/e 2007. Next ones aren’t due to be filled at companies house until 31/3/09 although its normally before that.
John Charles
16   Posted 06/08/2008 at 17:04:58

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Nar, I disagree John on the capacity issue.

50,000 would be good for Everton. We?d probably get 43-44 thousand easy if you could buy a ticket without an obstructed view... plus you could give probably 30% of teams in the league an extra away allowance (?blah blah we don't want away support? - it's more money).

If you build it, they will come!
Graham Atherton
17   Posted 06/08/2008 at 16:58:10

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Here you are David: http://www.evertonfc.com/assets/_files/documents/jan_08/efc__1199722913_Report_and_Accounts.pdf

So far as I can see debts (payable in one year) were £37million in mid 2007 plus a long term loan of £19 million = £66 million total

If I remember correctly debts in 2001 were £33 million but with a much smaller turnover to be used to service that debt.

Debt increased some £11 million over 2006 but assets also increased £6 million (nominal squad value I assume).
Debt seems to have increased in line with our ability to pay.
Adam Cunliffe
18   Posted 06/08/2008 at 19:15:41

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YESSSSSSSSSSSSSSSSSSSSSSS it?s been called in!!!!!

Sorry I had to say that.

The article, very good, agree with it all. BK needs to get his finger out or go. I like him as a bloke, but no good at running Everton Football Club
Michael Ward
19   Posted 06/08/2008 at 19:03:27

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Firstly £19m +£39m = £56m sorry mate don’t mean to sound like a smart arse just trying to help, secondly, the accounts are set to the year end of May and are audited by Deloitte. I personally work as an auditor for Deloitte and so based on usual Audit sign offs would expect the accounts to be ready pretty soon.

Players registrations are recognised as intangilble assets and amortised over the length of the contract, i.e. Lescott £5m 2 years ago will now be valued at £2.5m, players from the youth team i.e osman, hibbert, vaughn are not recognised at all as a reasonable valuation cannot be placed on them.

The supposed debt to Earl would be recognised as either a shareholders loan or as a debt and would be in the accounts, even if in the reserves. Anything else I can help with I am happy to talk about anything I know, I dont work on the Everton audit however so dont know any inside knowledge, I do understand accounts though and have been involved in evaluating companies etc...

Anyway that’s all from me for now, Kirkby being called in now too, wtf is going on with us?!
Simon Skinner
20   Posted 06/08/2008 at 19:23:08

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Paul

The latest acounts do show all debts, as they are required to do by law. Deloitte as auditor sign off that the accoutns are indeed a true and fair reflection of the company’s position.

For example. a couple of years ago the accounts disclosed minor payments made to Paul Gregg’s companies. I’m sure we would rather they weren’t published, but they have to be, so they weren’t.

Re: debt, out debt isn’t £66m. "Debt" is a difficult word to define (I’ve been involved in all sorts of legal arguments after the fact solely on the definition), and it’s more about context than a strict definition, but I’ve never seen one case where debt is equal to gross liabilities.

For example, the £66m includes about £11m which is a "debt" to our season ticket holders, who have prepaid for the following season. This "debt" will be repaid in the form of playing matches.

Hence, in the context of our arguments, this isn’t really a debt - there’s no interest to pay and no cash settlement required. Including the £11m in an argument that our debt has become unsafe is clearly incorrect.

Secondly, interest on our debt (which, for a low-asset, cash generating business is by far the most important figure) is £3m per year. That’s equivilent to the wages on one good player. Therefore it seems strange that people would go nuts at the huge debt figure, but would be happy when we sign a player - surely, every time we sign a player, these same people should be up in arms at the potential expense and the risk of ruining the club?
Simon Skinner
21   Posted 06/08/2008 at 19:39:36

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John H

OK, the investor spends £80m on players (I think that figure is fair by the way, as Liverpool etc would raise their own spending to compete). That’s, say, 8 players at an average of £10m each. The average wage for these players would be a mimimum of £50k per week - that’s an extra £20m per year in wages, and I think that estimate is on the low side.

Hence, turnover has to rise by £20m just to break even. That’s basically our Champions League prize money right there.

Therefore, the additional profit that the investor is making would come solely from increased matchday revenue (i.e. ticket price increases) and increased merchandising.

Now, I realise that you haven’t done hours of work on the figures, but you must see that recouping £120m is going to be difficult. How much extra revenue can we get from fans? Hypothetically, say the prices of every single ticket DOUBLED overnight when we qualify for the Champions League, and we also doubled our merchansidising revenue.

Then, assuming the investor took every single penny of profit for himself, it would take FOUR YEARS to recoup his £120m. That’s four years without a single penny being spent on players by the way - would we hold onto our Champions League spot that way?

Of course, being a businessman, he’d want to actually make a profit on his £120m. And not just any profit - one relative to his risk. What is the risk that Everton DON’T make the Champions League, even if we spent £80m on players? What is the risk that we’d only make it once? How certain are you that we could make the Champions League 5 years running (which is required for the investor just to BREAK EVEN?)

I’m not being critical of you John in the slightest. It’s important that fans put ideas out there. However, you must also appreciate that, even if these ideas sound good, they aren’t necessarily sound financially

Again, this is important because if we do get taken over, you then have to ask what exactly is the motivation of the investor? It very clearly isn’t to build a sound business model to break into the top 4. Therefore it’s either to pump money into the club as a plaything (that’s good) or to keep the club as a midtable team and extract money from the fans (that’s bad). If we blindly assume that ANY investment is good (and better than Kenwright), we could doom out club to being the best run mid table team for the next 20 years.
Jay Harris
22   Posted 06/08/2008 at 20:34:11

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Michael
I’m not being a smart ass but you need to audit your own posting before auditing other peoples.

If 19m+39m=56m I’ll give you as many 19 and 39 mill combinations as you want in return for the %9 million you give me back.

Always had my doubts about auditors!!! LOL
David Alexander
23   Posted 06/08/2008 at 20:57:19

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Fact is that if BK had done what Paul Gregg wanted and borrowed an extra £30 mill (a pittance) we could be moving into the Kings Dock - this summer (or last) with 55k seats and the best side we have had in years. We had our chance and missed it...
Eric Holland
24   Posted 06/08/2008 at 21:44:39

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Adam,

(Sorry) I had to say that.

You will be.
David Chait
25   Posted 07/08/2008 at 11:40:04

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Thanks for that Graham... I might just write up an analysis and see what it shows us..
John Hughes
26   Posted 07/08/2008 at 12:57:36

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Simon S ? your right I didn?t pour over the fingers for hours as I wrote the whole thing in about an hour.

I agree with what you are saying. I also said in my original response to you and a few other people that I had made the mistake of looking at a football club as an ordinary business. You just can?t do that.

There are no guarantees of success?.Leeds are an obvious example of boom and bust but the article was purely about opening up the ideas of what we could do. If I had billions to play with I wouldn?t be looking for an investment in a football club. I?d be looking for a toy. It?d be something of a challenge for me to make my toy the best toy in the street. I mean you?d have to be bonkers to believe that Roman Abramovich bought Chelsea to make any money out of them. He makes enough money from his ?proper? job and plays with Chelsea as a hobby.

Therein lays the problem. Like you said, do we want an ?investor? to take us over?.remembering that he?s going to want a return on his investment over a period of time or do we want a billionaire bored with his last toy and who want to play with the big boys? The differences are if an investor takes us over everything he does will be short term to make the club look solid. Priming it for a take over where he makes that return on investment. A billionaire will look at us, buy the best players, maybe redevelop the stadium in piece meal. Pay wages out of his own pocket bail us out when the wage bill becomes to high and then leaves us with all the debts and over priced players when he?s had enough. The money he losses would fund thousands of us for years?..to him it?ll be small change.

I guess the questions I?ve thought of since writing this isn?t how I would do it but rather how should we do it?

By the way thanks for your explanations, you can learn and play at the same time after all hey?
Michael Ward
27   Posted 09/08/2008 at 11:10:28

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John H, TYPO hahahaha, I promise I can add up


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