Profitability and Sustainability Rules – Everton’s Position

A look at how Everton's combined losses from previous years are impacting our transfer strategy

Paul The Esk 20/01/2022 28comments  |  Jump to last

Commonly, but incorrectly, referred to as “FFP” profitability and sustainability rules are the regulations that restrict the magnitude of adjusted losses for Premier League clubs.

Before reflecting on Everton’s position, a brief description of the rules applying for this season (about as interesting as I could make it). In terms of relevance, these rules explain Everton’s last summer and this transfer window.  We can also look ahead to have an idea what Everton can do in the coming summer (2022) and for the season 2022/23:

Throughout the height of the Covid-19 crisis the rules were periodically adjusted to reflect the impact and uncertainties for individual clubs and the Premier League itself. It has led to a situation where many fans have thought that the financial regulations have effectively been scrapped. Whilst it is true that there has been far more leniency and a greater understanding of club’s individual plights it is incorrect to assume there have been no consequences for those clubs flying in the face of the regulations. More on that later.

Let’s start with the rules for this current season (feel free to skip if the detail is too great!) :

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The regulations are set out in the Premier League Handbook. For this season 2021/22 (which for the regulations is known as T) each club has an obligation to provide the Premier League with the following information before March 1st:

  • Copies of the annual accounts, director reports and auditor reports for T-1 (2020/21) and T-2 (2019/20)
  • An estimated profit and loss account and balance sheet for T (this financial year 2021/22) based on the latest information available to the club and an accurate estimate of future financial information

If the aggregate of the club’s earnings before tax for the last three years (2020/21, 2019/20 and 2018/19) result in a loss (as is the case with Everton) then they are obliged to provide information for each of the three years.

A club’s requirements change depending upon the scale of the losses.

There’s a calculation called the PSR Calculation. Without getting too technical it is (for this year) the aggregate of:

  • Adjusted earnings before tax for T (2021/2022)
  • The mean of the adjusted earnings before tax for T-1 (2020/21) & T-2 (2019/20)
  • Adjusted earnings before tax for T-3 (2018/19)

If the PSR Calculation results in a loss of less than £15 million then the Premier League Board will check to see that the club can meet its liabilities until the end of the 2022/23 season.

If the calculation results in a loss greater than £15 million, then the club has to produce (by the 31st March 2022) projections for not only the current season, but for the next two years T+1 (2022/23) and T+2 (2023/24).

In addition, the club has to provide such evidence of “secure funding” as the Premier League sees fit.

If the PSR Calculation exceeds £105 million then the club will be subject to the board using its powers in rule E.15 and additionally will be treated as being in breach of the Premier League rules and the Premier League Board will report the club to a “Commission” of three people to deal with the alleged breach.

Rule E.15 applies a budget and places potential restrictions on transfers 

If ultimately the club does not adhere to the restrictions place by rule E:15, and the Commission finds the club to have broken the rules then the range of options in terms of remedy available are virtually unlimited, ranging from a fine, points deduction to expulsion. 

For the preceding season (2020/21), the rules were identical except (obviously) each relevant time period was 12 months earlier. It was those calculations, submitted to the Premier League before March 1st 2021, that determined whether Everton were compliant or not and what could be spent (or not) in the last summer window.

As I will demonstrate, albeit with projected figures for 2020/21 – projected because the accounts for 2020/21 are yet to be published, the probability of Everton being compliant were very slim.

In retrospect (and predicted previously on this site) the summer transfer spend of £1.8m, the sale of Digne to fund two young full backs in this January window, plus the desperate desire to get as much of  James Rodriguez’s salary off the books in the Autumn show the constraints upon which Everton currently operate.

In the following table:

  • Real figures, profit and loss for 2015/16, 2016/17, 2017/18, 2018/19, 2029/20
  • Projected profit and loss 2020/21 & estimated Covid-19 attributed costs
  • Estimated women’s football, youth football, and community costs

In the five complete years (up to June 2021) you will see that the club has only been in profit once (as a result of player sales including that of Lukaku).  Even stripping out the impact of Covid-19 doesn’t change that fact. As a result of the club’s enormous increase in costs combined with a failure to compete in European competitions (with no corresponding increase in broadcast income particularly), significant losses were inevitable.

The key figure

So what does that mean in terms of compliance with profitability and sustainability?

The key figure is the box in red in the bottom right corner of the chart. If that figure is greater than the permitted £105 million aggregate loss position, then we are in breach of the profit and sustainability rules.

Of course, the qualification on the figure quoted in this article is the estimated losses for the year 2020/21 and the permitted deductions which are also estimates. However the margin, the difference between the permitted losses and the estimated losses is greater than £60 million, something which is greater than the likely margin for error.

By my calculations we have comfortably exceeded the permitted losses.

Consequences of breaking the profitability and sustainability rules

Something which must be understood is that this information will have been provided by the club to the Premier League before 1st March 2021, thus giving the Premier League the ability to respond to it before the end of last season, i.e. to be applied last summer and this current season.

The (in my opinion) breach of the profitability and sustainability rules are dealt with initially in rule E.15

  • E.15.1. to require the Club to submit, agree and adhere to a budget
  • E.15.2. to require the Club to provide such further information as the Board shall
    determine and for such period as it shall determine; and
  • E.15.3. to refuse any application by that Club to register any Player or any new contract of an existing Player of that Club if the Board reasonably deems that this is necessary in order to ensure that the Club complies with its obligations listed in Rule E.14.7.

So what does that mean in practice?

It effectively means two restrictions placed upon the club – an agreed budget (meaning an upper limit on costs based on expected income) and an agreement in terms of player trading – i.e. the club having to seek approval or agree to parameters to enable them to buy a player. Those conditions might be a limit on what can be spent without player sales, or a limit after player sales depending upon the profitability and cost implications of the sale, or as is likely an effective salary cap.

Only if the club did not agree or adhere to a financial agreement would other penalty considerations be brought in. In this instance the commission of three people would hear evidence and adjudicate accordingly with almost unlimited sanctions at their disposal.

So, it seems Everton are in a situation where we have to work within a budget agreed with the Premier League. We are not in a situation that results in immediate punishment. That is only likely if we decided to ignore, breach the agreements we will have reached or our finances were materially different from previously reported to the Premier League.

Looking forward it is clear we will be in a loss making position again this year, and likely to be above the £105 million profitability and sustainability limit. This will result in continued restrictions on player purchases into this summer.

Whilst the financial position improves beyond June 30 2022 with the final legacy of the summer of 2017 player purchases and contracts, plus other poor value signings disappearing off the books, our ability to recruit for (hopefully) a new manager will be dependent on what is agreed with the Premier League and/or player sales.

The mismanagement of the early years of Moshiri’s reign cast a long shadow over our ability to spend our way out of our current predicament. The need for proper governance, an effective director of football, and a disciplined recruitment strategy is never so apparent as now, if, as is hoped, our fortunes are to be improved.

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Reader Comments (28)

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Paul Birmingham
1 Posted 21/01/2022 at 00:39:26
Paul, this is the summary, of summaries, and one of your best ever works, on TW.

EFC, within modernity, in my view, should hire you, as the BI specialist, as you have more decorum and nous than the Board of EFC, in the last 72 years.
, by light years.

Your summaries of how it is, is what the current board can’t do.

Turn the mindset and change, the culture, and drive EFC, to the modern day.

It means Everton, could, start, fresh in view of the clubs beliefs.

It seems that the quest, is still on to find a leader and board, worthy of all the
maters EFC. !

Jack Convery
2 Posted 21/01/2022 at 01:51:46
So we have to sell big to buy and what we buy will have to be cheapish. Either way we are hamstrung if I am reading you correctly.

If the new manager reckons he needs 2 or 3 new players - I personally think it's at least 4 and maybe 5, then our best players DCL / Richy / Pickford or Mina will have to go for really good prices and the contracts that are ending will also contribute to the finances available, ie wages no longer being paid. Silly wages will also have to stop and a more reasonable figures paid in line with middling teams in the EPL. The model Brands was supposed to have used, will in fact now come about. Buy young, buy low, pay lowish and then sell high.

It's not good is it. Whoever the new manager is, he will have to be a magician. Potter fits the bill perfectly for the scenario we now have to follow. Young hungry players bought cheaply and coached to a very high standard. It's what he does.

How on earth, can Moshiri call himself an accountant and let this mess come about. It's unbelievable.

Kieran Kinsella
3 Posted 21/01/2022 at 02:15:45
Paul

Based on this, do you interpret last summer as indicating we are already under budget instructions? Maybe rolled out last March around the time Carlo was mouthing off about the ESL being worse than Everton’s financials? Or is this process something that’s yet to be inflicted. In which case I’m wondering if Carlo was telling Mosh to push his luck, Mosh got cold feet, Carlo bailed. The last bit is obviously connecting the dots speculation but just to poke at Martin Mason and Darren I’ll call it FACT.

Laurie Hartley
4 Posted 21/01/2022 at 02:55:06
Paul thanks for putting this in layman’s terms. Would it be reasonable to assume this is why Ryazentsev got the bullet?

Jack#2 - if we sell Richy I will be having an Alan Ball moment.

On the spending side of things - our willingness as an organisation to squander money on such a grand scale makes me feel very uncomfortable. It is quite obscene really.

The signing of Demarai Gray for 1.7m was a breath of fresh air for me. I hope to see more signings of this calibre with whatever money we have to spend in the next two or three windows.

Minik Hansen
5 Posted 21/01/2022 at 02:55:23
So much for bringing in the right man to buy the club.. that said, it’s not a one man job, even though it seems Moshiri has a lot of influence.
I wonder if he is gonna release a letter through that journalist, like he did in the first few seasons, and what it will say.
John Zapa
6 Posted 21/01/2022 at 05:01:38
I predict that Mina, Allan and either Richy or DCL will be sold this summer. The club is still on an unsustainable path. It will be difficult for the club to attract good replacements with Premier league experience, they will have to resort to foreign risks like the young full backs signed this window and hope they come good.
Tony Abrahams
7 Posted 21/01/2022 at 09:11:46
We have to sell to buy, and brought in someone who understood this role, he gets rid of one talented -but underperforming player, the club sign three more players, (probably paying all three, less than what it cost to pay Digne?) although I’m absolutely certain Benitez, only wanted the left back replacement out of all three of them?

Anyway Benitez has gone, but the same problems are not going to go away, without real change, so unless your 27 year’s campaign becomes more savvy Paul, and gets everyone United, and with the same goal, Mr Moshiri is going to keep walking round with his head in the sand, and we all know Bill Kenwright could sell sand to the Arabs.

Trevor Cotterell
8 Posted 21/01/2022 at 10:29:14
Excellent Paul, thank you. I'm not an expert and I'll read through that all again a few times.

Probably just my view, but I do wish a few more TWers would try to understand it too before making some of the endless complaints that I read that we haven't done this or that, and have done the other.

If Moshiri's conversion of loan to shares doesn't help us (and that makes sense, I think - it's the same money in effect) then (other than sell players) is there anything that is open to us?

James Newcombe
9 Posted 21/01/2022 at 10:33:17
Barry, thanks for reminding me to check what David Squires thinks about our situation

https://www.theguardian.com/football/ng-interactive/2022/jan/18/david-squires-rafa-benitez-sacking-everton-merseyside-blues

Joe Aylward
10 Posted 21/01/2022 at 10:34:49
Great article, Paul.

So the EFC statement outlining Moshie's additional £100M investment implies that significantly improves the club bottom line – does this mean the FFP issue has been solved and more players can be purchased?

Stu Darlington
11 Posted 21/01/2022 at 10:42:05
As I have said on other threads, I expect Richarlison and Mina to be sold this summer, and possibly also Dominic Calvert-Lewin or Pickford. Whether we like it or not, we are one of the many clubs in Europe who need to sell their best players to succeed.

I know this goes against the grain for many Evertonians, just look at the uproar when we sold Digne, Rodriguez and Lukaku – and going back as far as Rooney.

Given our precarious financial position as outlined by Paul above, I am afraid we are all going to have to suck it up for the foreseeable future. Sorry to be so pessimistic but if such a situation can trigger a change in strategy in the club maybe all is not lost.

Paul [The Esk]
12 Posted 21/01/2022 at 13:50:01
Just to clarify the conversion of the shareholder loan to equity was agreed last February. It is not new cash. It does not help profitability and sustainability at all and does not impact our ability to spend
Dennis Stevens
13 Posted 21/01/2022 at 14:04:21
So, no money to spend for the foreseeable. Rooney's experience at Derby County may well stand him in good stead!
John Zapa
14 Posted 21/01/2022 at 15:27:26
Paul, with the soon to be released financials expected to show a very large loss, with the total allowable losses far exceeding the Premier League limits for the period, do you anticipate any risk of punishment such as a points deduction, financial penalty or transfer embargo?
Jerome Shields
15 Posted 21/01/2022 at 17:40:50
Looks to me as if Everton are being run by The Self Preservation Society who have the Golden Goose in their pocket and we are all at the wrong end of the bus with the loot.
Shaun Laycock
16 Posted 21/01/2022 at 19:03:30
Hey Paul.

Why don't you apply for a position on the Fans Advisory Group? You know more than all of them put together.

John Chambers
17 Posted 21/01/2022 at 19:23:32
Paul, do these figures include the new stadium? I seem to remember a figure of something like £40m that we had accounted for previously that now construction was underway could be re-allocated to improve the figures?
Martin Mason
18 Posted 21/01/2022 at 20:11:12
Thanks Paul, very clear and informative article. Can you help me with my tax return?
Paul Birmingham
19 Posted 21/01/2022 at 20:50:19
Does anyone know if a club is in regular breach of the FFP rules, ie, breaking the limit for 3 years running, can the Premier League take further action on a club, and potentially prohibit their trading until their books and business plan is deemed viable and sustainable?

Thank you.

Mark Wilson
20 Posted 22/01/2022 at 02:41:52
There’s a massive bit missing here for me ie the fact that given “we” are already about to end up £60m ish over the “allowed” losses, we are clearly going to be in breach of the Premier Leagues “set budget” and “player trading” agreement which Paul seems to say was agreed during 2021 ?

So, if I’ve read it correctly, we are already operating under the PL massively restrictive financial rules / in effect penalty. If that’s right, then how were we “allowed” to spend any amount of money on theee new players in the last few weeks ? Why haven’t the PL said “thanks for raking in £25m for that arrogant over hyped selfish gobshite Digne, all of that money will go reducing the amount you are outside the FFP / PL Sustainability Rules and no you cannot buy any new players….

I don’t get it. Pails brilliant piece makes sense until I get to the bottom line, the “reality”. Or it’s it the reality ? We’ve been allowed to sell a player and in effect, even if spread out over several contract years etc, spend the income and stay at £60m breach of the rules and budget over sight set by the PL in 2021 even if Jim White hasn’t told us about it…..

It doesn’t add up. Please help Paul as it’s a simplification I know, but either we are being managed by a three person board setting whether we can buy players, or we arnt ? Either we can in fact continue to sell players in the next few days and buy more players, or we can’t ? And either we are in the same crap shape in the summer and an incredibly poor prospect for a new “iconic” mgr or we are in rude health and able to buy who we want and make more losses…..or we can’t ?

What does it really mean ? Because my best guess is we must, as others have said, raise money…..I think around £150m in a fire sale in the summer, wipe out the predicted £105m FFP loss. Just to be able to spend £45m on incoming players which clearly, from a footballing standpoint, is not sustainable and would be an absolute disaster if we are still in the PL ?

Cheers !

Don Alexander
21 Posted 22/01/2022 at 03:38:56
I have huge respect for the Esk's analyses but the fact is he speaks, honourably, as a legitimate, informed analyst.

In contrast, Premier League football is festooned by wealthy fly-by-night charlatans seeking to screw the max from any source whatsoever, from TV deals to hot-dog sellers, to family-wealthy mascot parents. It's brazen, and corrupt.

Manipulating rules is what created the fortunes of way too many club owners who've identified "Great" Britain way beyond mere football as the most "giving" banana republic in the world.

If you didn't know better it'd make you wonder whether or not we have a lying, conniving, self-serving shit-house in charge of our entire country, never mind our club.

Peter Mills
22 Posted 22/01/2022 at 07:05:34
Paul, thanks for an excellent article. Like John#17, I also wonder where the new stadium fits into this? Is it possibly being built by a separate company that will lease it to Everton FC?
Paul [The Esk]
23 Posted 22/01/2022 at 16:16:21
We are committed to the new stadium regardless of what happens on the pitch. The stadium will be owned by a company wholly owned by Everton (more because the bankers will require it than any other reason tbh)
Alan J Thompson
24 Posted 22/01/2022 at 16:33:03
Paul, you say that the Profitability and Sustainability rules apply to EPL clubs but is it the same situation if we are relegated and are what have been applied to Derby or does the clock start again? Albeit we would probably be in profit from the sale of most of our "better" players if we are relegated.
Kieran Kinsella
25 Posted 22/01/2022 at 16:43:40
Alan 24

The EFL rules are enforced differently. Firstly they let things go on for several years before investigating. Then when they hit you with fines and punishments you have the option of doing a QPR and just saying "get stuffed," although they also have the Russian roulette option where they will randomly pick a poorly run club whose problems have been public knowledge for years and suddenly dock points or expel them from the league while allowing others in identical situations to carry on. So if we luck out, we can do an Oldham and just carry on regardless, if we are unlucky we drew the Bury card.

Simon Harrison
26 Posted 22/01/2022 at 22:17:16
Hi Paul,

Many thanks for posting your very informative, and interesting post here; though I did read it on your site first.

It is an excellent and comprehensive overview of the financial plight (peril?) Everton currently find themselves in. (I sometimes wonder if, at times like these, it is better to be an ostrich...?)

I feel obliged to say that it makes grim reading for the financial future of Everton Football Club.

Obviously, from what you are inferring about the club and the Premier League being 'open and honest' from March 2021, we don't seem to have been punished as of yet seemingly we must be following the guidance and instructions from the Premier League.

Therefore, I'm deriving from that, that we have thus far, toed the Premier League line. Then hopefully, with maybe some 'creative accountancy', and flexibility brought about by removing James's and Digne's wages, plus Digne's received transfer fee, this has allowed us to acquire Mykolenko and Patterson.

Especially if both initial transfers have been done on the 5-year payment plan that was announced for Mykolenko – but not Patterson...? As I presume, that reduces the initial loss from a £17M hit, to a staggered loss over 5 years? (But if that is the case, then why did we take El Ghazi on loan, and put another wage bill on the books? That would appear to be senseless.)

However, that still doesn't provide us with any idea when or how Everton are going to be able to finance the recruitment of new players. Personally, I don't understand how the club has allowed this situation to come about? Though, as another poster has alluded to, maybe this is why Sacha Ryazantsev got the old heave-ho?

Paul, could I also ask your opinion too, please?

The vast majority of Evertonians seem to be fixated on the stadium as a panacea for some of our financial woes, or some sign of Moshiri's 'goodwill' for the club. (Though that could be debated about whether it is part of a financial gain for himself – and his business partner.)

However, in real terms, Paul, what would the additional seating and corporate hospitality actually bring to the club in terms of additional revenue, therefore assisting us in the P&S calculations?

Could I also ask, in your opinion, Paul, wouldn't it be more financially prudent to actually consider improving the commercial aspect of the club before spending so much money on a stadium?

The club has remained, to my mind, a parochial, navel-gazing club when it comes to looking for sponsorship and new commercial deals, eg, why haven't we got a sleeve sponsor yet?

Why have we sought, and gained sponsorship from two new betting companies, one in Colombia, and a newer one in China – which is probably being used to circumnavigate the strict gambling rules in China. Which means that Everton are now seemingly 'knowingly*' aiding and abetting illegal gambling in the Asian market; after dumping SportPeso...?

*Any decent international or off-shore compliance officer would know about that potential loophole.

Also, we haven't seemingly even looked at increasing, outside of Merseyside, the availability of team shirts in any quantity, or accessibility. There has been very little attempt at expanding the domestic market and commercial potential of the club, let alone anything like attempts at expanding the existing international market. Never mind all this, there appears to have been almost zero effort at finding new international markets.

I've looked at the commercial values of the clubs, and am very surprised that Everton in net terms has risen from 12th to 10th in their commercial value in the Premier League over the last two seasons, yet I don't fully grasp, or know the actual figures for all financial revenue and expenditure for each club. I have found some very basic figures below though:

2020-21 Premier League Commercial values

2021-22 Premier League Commercial values

Looking at all this, Paul, I'd appreciate any feedback regards Everton's commercial potential, and further growth in the current market climate. Surely just building a stadium, and expecting a 33.65% capacity increase, is in the long term going to aid the club's financial situation?

Good wishes, and thanks for your time in hopefully reading this.

Peter Neilson
27 Posted 23/01/2022 at 16:55:39
Thanks for another excellent article, Paul, as well as reiterating that Moshiri's recent loan-to-equity announcement was very old news repackaged for PR purposes. Must admit he initially duped me with that one.

You wrote about our dire position in regard to profitability and sustainability well over 3 years ago. I'm amazed that it wasn't front and centre when we were interviewing Ancelotti. Maybe heads were buried in the sand?

Michael Kenrick
28 Posted 24/01/2022 at 11:21:40
Far be it from me but, in the interests of fact-checking, I'm not sure I agree that this is 'very old news' and that we have somehow been duped, Peter @27.

Insofar as the club issued 100,000 new shares for Farhad to take up last year, yes, he only took up 66,667 of them by converting ~£200M in loans at that time.

The latest transaction was always part of the plan and was anticipated when the 100,000 shares were issued last year, but it hadn't been enacted. It became newsworthy when it was enacted last week.


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