Looking at how FFP (Financial Fair Play) works through everyone’s favourite Newcastle striker

I’m just writing into the Mag after reading articles and comments about the Nick Pope transfer, one of the latest of several topics that have been mixed into Financial Fair Play in a way that (intentionally or not) makes FFP a red-herring topic.

That said, just to be clear, I’m not writing this to make anyone look silly, because I’m not a numbers guy, and definitely no accountant myself.

I was a researcher for over a decade, both for a boutique venture capital firm in healthcare (we were seven people and the principals of the group wouldn’t remember me today, so it’s nothing to write home about) and also doing a side gig as a paid sports writer for an American media company (we were underpaid and could all have our freelance contracts terminated at a moment’s notice, so I’m not bragging about this work either). I mention my background only to say there was a time I was paid to look at this stuff; both from the angle of what a venture capitalist like Staveley aims to do with underperforming businesses (though I was paid to research healthcare not sport), and in terms of how money performs in sport.

But I get it: Financial Fair Play is tedious (it’s also dead while UEFA comes up with something new), and the difference between real money and accounting numbers can be a dead boring subject at the best of times. So I’ll spice it up by adding one of The Mag’s favourite names into the mix – Chris Wood – and look at the implications, both real and imagined, on Newcastle’s options moving on with their 25 million pound signing of January 2022.

Let’s just get straight to one of the most thrown-about FFP buzzwords right now: Player amortization. Throughout this all, I can’t overstate enough that FFP money is not real money. Hopefully that will become very clear by the end of our fictional, future Chris Wood scenarios below. But, before speculating on the future, let’s go over the past few months and the effect on the club today.

January 2022 – Chris Wood signs from Burnley

Amortization is not a new thing in 2022, and definitely not “creative accounting” that the Newcastle United regime can use to their advantage. It’s a concept that applies to every club and has done for at least a decade, if not two. Right now, Chris Wood’s contract is getting amortized by his club – Newcastle United – to the tune of 13.7 million pounds per year or 6.8 million pounds every six-month, close-transfer season.

Put in a more straightforward way: Chris Wood is taking up 13.7 million pounds of Newcastle United’s expense budget every year.

I’ve guessed that number, but let’s look at how and why (in reality the number is likely higher). When we’re looking at amortization, we’re looking to establish the total value of any given contract over its lifetime, above all else.

We do this in brutally simple basic sum and division so let’s not make it sound like it’s rocket science or something that only the greatest financial minds in the game could come up with. Because, after all, look at the state of FFP and where it got those minds to, today.

Look at the CVs of the people trusted with buying and selling at Manchester United and Everton over the last decade, and tell me you can spot the difference between them and the new faces behind hired by Newcastle United right now, because I cannot.

This past January, Newcastle agreed to commit to a two-and-a-half year contract with Chris Wood, at a time when he was reportedly being paid 3.7 million pounds per year as a Burnley player. I don’t have Chris Wood’s reported wages at Newcastle right now, so I carried his Burnley wages into this (it’s unrealistic for me to assume Wood signed on at Newcastle without asking for a pay raise, as no one jumps ship to a club deep in the relegation zone in the middle of January for the exact same salary they were on before, but here we are).

That means Newcastle committed 3.7 million x 2.5 (it was a two-and-half-year contract) worth of value to their agreement with Wood. Said differently: Wood will be paid at least 9.25 million pounds by the time his stay in the North East is up in the summer of 2024. Start adding up your contract value for your annual budget here: 9.25 million pounds.

On top of that figure, the Magpies had to come to an agreement with Burnley to buy out their pre-existing contract with Chris Wood, reportedly done for 25 million pounds. Add that into your contract value and you have a total contract value of 34.25 million pounds. If that number seems steep for your Chris Wood tastes, just remember it’s an extremely conservative number with more than one flawed assumption.

We’re assuming Wood didn’t get a pay bump during his transfer negotiations, we’re assuming he didn’t get a signing-on bonus (that’s a flat fee that has to be accounted for on the budget all the same), we’re assuming Newcastle didn’t pay any agency fees during the negotiations, and we (or I) don’t even know if Wood’s reported Burnley salary is a pre-tax or after-tax figure.

In reality, we’d always be throwing in the gross (or pre-tax) salary in, as that’s what has to be accounted for in full on the budget, on top of all the other elements we just listed; so you can imagine Wood’s contract is actually taking a significantly higher amount of space on Newcastle’s budget than the fantasy number – 34.25 million – that we’ve come up with here.

But, at this point, a lot of people will be itching to say “luckily Financial Fair Plays asks that you divide this 34.25 million number up annually” and that’s true.

We mentioned that number earlier before: 13.7 million per year. But that annual expense also holds very different implications for how you see Chris Wood as a Newcastle player today or tomorrow.

For one, if you never liked the Chris Wood signing (personally I don’t have anything against it), then I’ve got some bad news for you: It’s very likely Newcastle will be offering Wood a contract extension.

Offering A New Contract: Why Would Newcastle Do That?

Getting Wood to sign a new contract next January (or any time between then and summer 2024) lets Newcastle free up space on their annual expenses. It’s one of the most common methods of keeping your FFP budget in line, and it often delivers the kind of headlines that frustrate football fans when it comes to the “hard-working” names like Wood, Almiron or at my other club Roma with Bryan Cristante; players who the club spent big transfer fees on yet their time at the club just isn’t living up to expectations.

The club’s number one concern would be that big transfer fee; they want to decrease that number in a way where it’s recognised on the budget. Remember that Wood’s contract is getting amortized – in other words the value is already decreasing – every year, by 13.7 million pounds. That decrease in value is being absorbed by the club’s accounts.

Said differently, Wood’s contract value will then be down to (34.25 – 13.7 equals) 20.55 million next winter. All with Newcastle picking up the tab. But Newcastle need this recognised by FFP in a meaningful way that helps their budget free up space; they do that by getting Wood to sign a new contract, or else he will still be taking up 13.7 million per year on their annual expenses.

That number never stops being true for as long as the original contract signed is in play.

I hope that makes it clear why paying the transfer fee (in real cash money terms) has no bearing on Financial Fair Play. You could pay Burnley 25 million in cash today or in instalments tomorrow, and your bank account may be lighter for it (which is really the more important thing in the grand scheme of keeping lights on and keeping food on the table), but your FFP annual expenses will still be the same from the moment you committed to the contract value to the time that contract expires.

How to make that contract expire quicker? Get the player to sign another one.

Just like how Newcastle can account for Chris Wood’s contract on an annual basis right now (“You see Chris Wood actually only costs 13.7 million a year, so don’t worry about the 25 million” I hear you say in forum debates) they will also be able to account for Wood’s new contract value in the exact same way.

Let’s say Wood signs a contract extension next January, then Newcastle’s budget only has to make space for 20.55 million divided up annually. For argument’s sake, let’s assume he’s offered a one-year extension that sees him through to the summer of 2025 (in other words, two-and-half years from when he signs the extension in January 2023). Now Wood is only taking up (20.55 divided by 2.5 equals) 8.22 million per year on Newcastle’s annual FFP budget.

Newcastle FFP expenses on Chris Wood have been nearly cut in half, just by offering him a one-year contract extension at the right place and right time. Clearly, this isn’t how real money works. But welcome to the world of profit and loss.

It should be obvious, by now, how accounting for value is just an abstraction of money only. FFP budgets are there to balance assets like stadium value, infrastructure, commercial revenue and competition prize money against expenses. As long as your assets and income column breaks even (or right now, makes no more than 30 million losses per year under the relaxed FFP rules) with your expenses, you’re in the clear.

Speaking of relaxed rules, that also makes now the ideal time for a club takeover in football, period. In times of financial crisis, the cash-rich will always have a better opportunity to take advantage of the cash poor. So while this current Newcastle United board is being praised for being better than what came before them, it has to be asked: When will they be more aggressive on the transfer market when there’s no better time for an aggressive strategy to gain the edge?

That’s a question for another day, that goes into the background behind Staveley and her group’s relationship with their biggest clients, PIF. It’s not a question I can answer, only time and action will tell. But the obvious topic being thrown about, on this end, is will Newcastle be able to exploit the same loophole that sovereign funds outside of Europe exploited for the last decade.

What did PSG and Manchester City Do Differently?

Another obvious truth about the fantasy of profit and loss, and Financial Fair Play numbers, is that they are only as important as the authority willing to enforce them; or the willingness to bring consequences on anyone who breaks those numbers. Without that, Financial Fair play makes as much difference to the real world as a John Grisham novel.

As we all know, PSG and Manchester City managed to make themselves above the law over the last decade, but their creativity wasn’t really in the accounting, as much as it was them exploit a loophole that Jean-Marc Bosman split wide open in 1995: They made their club’s growth a question of money (or money flowing into Europe) and not of sport. That held serious implications for UEFA in the wider context of the European Union, but it’s a topic for another day.

The question for Newcastle is whether their latest legal recruit, John Devine, can find a way to make Newcastle United’s growth as a club a matter of business beyond sporting rules, in the same way Bosman did back in 1995. Meanwhile, Devine’s office will be right next to Dan Ashworth, who’ll already have his hands full with how to measure the current crop of Newcastle players.

When Is A Good Signing a Good Signing?

Now that we’ve seen how contract values change with time, it’s always going to rely on context as to how valuable a player is to a club. You could win a Chris Wood debate in his defence today by sounding smart and saying he’s only costing the club half of the big transfer fee thrown about in January, but then you’d struggle to justify Chris Wood still being a 13-million-pound-a-year striker in his early thirties, languishing on the bench in his final season at the club in 2024 (assuming he never signs a new contract).

That’s unless he goes on a scoring rampage in a Newcastle shirt, for season after season, to make age and salary truly just a number.

For my money, Newcastle will take one of two steps (or both) over the next 18 months: They either grow commercial revenue and let the current non-Howe signings run out contracts (assuming they can’t find buyers for them on the market) to just absorb the cost, or they start phasing in contract extensions for the players signed for the biggest fees the club has shelled out over the last few seasons.

That means contract extensions for Joelinton, Willock, Wood, Wilson, Almiron and maybe even Jamal Lewis over the next year and a half, not to mention extensions for Guimaraes and Botman in the longer term. This is always an interesting approach for a new board to take, because it can be a sign they’re running counter to their coach’s wishes for a harmonious, everyday environment. Everyone’s got to balance different priorities, but it’s a timeless debate as to whether the coach or the club’s priorities should have the final say.

Luckily, Eddie Howe strikes me as a resourceful coach who will do a lot to make the most of what’s already there (except arguably his treatment of Dwight Gayle last season – but no one knows the full story). Nonetheless, even if Howe doesn’t fancy some of these players in his ideal team, the sporting director handing out contract extensions can still prove the easiest short-term option to get Howe the players he does want; Ashworth would halve their expenses on the budget and allow space for the club to sign new players in line with the Howe-Ashworth regime.

How far you push that can either keep the squad balance on a delicate, razor-sharp competitive line… or push it too far into squad divisions. For me, the easy extension to make is Joe Willock.

Not only do I feel he’s ready to take his game to the next level with increased squad competition, but he’s 22 so still has a few big contracts at other clubs left in him if Newcastle feel the need to sell down the line, he’s English and meets the homegrown quota, and he just has a damn good sense of timing for the offensive side of the game.

It isn’t just about goalscoring with Willock but the timing of his runs and how he’ll turn a 3 vs 3 situation into an attacking overload in Newcastle’s favour at any moment, helping grease the wheels of Newcastle’s overall attack for his teammates around him to get easier chances. But that’s another topic entirely. The point here is that if you can retain all that at the club in one player, and absorb his original 25 million pound transfer fee into the budget with a new contract, then do it.

As for Wood, if he does get a new contract with Newcastle anytime before 2024, he’d still be only in his early thirties by then, and his game has never relied on mobility. So it’s not out of the question that this is a road Newcastle go down. I mean 5.48 million’s worth of budget space saved through a Wood contract extension next winter is no joke; that’s an international player’s salary in their prime you’ve freed up right there to welcome a new signing.

FFP Instalments vs Real Money Instalments

Going back to the recent Nick Pope story touches upon one way you can actually avoid committing value to a contract, in FFP terms: the loan-with-option-to-buy or loan-with-mandatory-buy agreement.

In Pope’s case, the instalments were just a matter of cashflow. Again, this will always be the more important way to handle business because it’s real money; 2 million in the bank today covers unexpected costs that the club could face tomorrow and stops a club from folding (something that isn’t legitimately a concern if you’ve really got PIF on the phone ready to make cash injections at a moment’s notice – yet not everyone in the world can fall back on that option).

This is different to the kind of staged payments you could look to make in the FFP world, mainly through loan-to-buy deals.

A loan-to-buy agreement means the club only has to commit to a contract with a player for the length of his loan stay at the new club. For example, if you signed Diaby (it’s not going to happen – he’s committed to Leverkusen for this coming season) for a one-year contract as a loaned player, you would – just like before – have to account for his wages in the club’s annual budget and the loan fee on top. You save yourself having to account for a much larger permanent transfer fee on the books, because Diaby’s stay at your club – under the terms of his current contract – holds just a lifetime of one year.

You don’t need your budget to account for any separate agreements you’ve made outside of the player contract. Ever. That isn’t creative accounting, simply something that holds true whether signings a player permanently, on loan or anything in between.

Obviously, in the real world, if you know you’ve agreed (separately) to pay up 50 million in a year’s time, you want to make sure your bank account can handle that hit well before time. But that isn’t a FFP budget concern.

Why it would be in everyone’s interests to agree to this (the loaning club, loanee club and player) is because the player’s old club has a separate agreement with the old club in stages. If it’s an option, then it’s just the prospect of a future transfer fee (on top of the loan fee) in 12 months time. But if it’s a mandatory buy, then the old club has a commitment from the new club that a sale will be coming in, in a year’s time. Both in terms of FFP and real money (assuming the player’s contract is sold for more than its amortized value at the time of transfer) that’s a plus column in the club’s bank account and their budget.

Meanwhile, the player has the assurance that they’re on the wages they train for, no matter what happens. In their current loan agreement, they’re paid their salary. If the move with their new club falls through, for whatever reason, they still go back to being paid their salary by their old club on the existing permanent contract with them (which hasn’t been cancelled out by the loan – the loan has just lifted the wages from the loanee club off their books for the year). If their move to the new club goes through, the player is paid all the same.

All the player has to worry about is whether they like playing for their new club or not. But it’s uncommon for this kind of agreement to be struck for in-demand players.

It mostly only happens when there are no takers for a player elsewhere at a price above or equal to the player’s current amortized value, and the loanee club is so hard up for budget space that they could do with accepting the loan fee (and not having to account for the player’s wages) on the books for the season.