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SAFER THAN THE BANK OF ENGLAND: WHY FOOTBALL CLUBS ALMOST NEVER DISAPPEAR

On 15 September 2008, the American investment bank Lehman Brothers collapsed, followed almost immediately by the world’s stock markets.

Any football club on earth was a midget next to Lehman. In the fiscal year ending in September 2007, the bank had income of $59 billion (148 times Manchester United’s at the time) and profits of $6 billion (fifty times Manchester United’s), and was valued by the stock market at $34 billion. If United’s shares had been traded on the market at the time, they probably would have been worth less than 5 per cent of Lehman’s. Yet Lehman no longer exists, while United very much does. So does almost every club in Europe that existed in 2008.

In the years before the global economic crisis, people worried a lot more about the survival of football clubs than that of banks. Yet it was many of the world’s largest banks that disappeared. Then, after the recession began, worries about football clubs increased again. Many people pointed out that when Chelsea met Manchester United in the final of the Champions League in 2008, the two clubs had a combined net debt of more than £1.3 billion.

While Europe’s biggest clubs are now becoming serious businesses, many small clubs still live from debt crisis to debt crisis. Yet the notion that football clubs are inherently unstable businesses is wrong. They virtually never go bust. Although large numbers of them are still incompetently run, they are some of the most stable businesses on earth.

First, some facts. In 1923 the English Football League consisted of eighty-eight teams spread over four divisions. In the 2016–2017 season, eighty-four of these clubs still existed (95 per cent),* and seventy-two remained in the top four divisions (82 per cent). Thirty-seven were in the same division as they had been in 1923. And only eight teams still in the top four divisions were two or more divisions away from where they had been in 1923. (Of the twenty-two teams in the First Division in 1923, only three were playing below the second tier in 2017: Bolton Wanderers and Sheffield United in the third tier and Notts County in the fourth tier.)

You would have expected the Great Depression of the 1930s, in particular, to pose the clubs something of a threat. After all, the Depression bit deepest in the north of England, where most of the country’s professional clubs were based, and all romantic rhetoric aside, you would think that when people cannot afford to buy bread they would stop going to football matches.

Crowds in the Football League did indeed fall 12 per cent between 1929 and 1931. However, by 1932 they were growing again, even though the British economy was not. And clubs helped one another through the hard times. When Orient in east London hit trouble in 1931, Arsenal wrote its tiny neighbour a cheque for £3,450 to tide it over. Clubs know they cannot operate without opponents, and so unlike in most businesses, the collapse of a rival is not cause for celebration.

The Depression culled only a couple of clubs. Merthyr Town, after failing to be re-elected to the league in 1930, folded a few years later, the victim of economic hardship in the Welsh valleys (as well as competition from far more popular rugby). Wigan Borough went bankrupt a few games into the 1931–1932 season. It left the league, and its remaining fixtures were never played. Aldershot was elected to replace it, and sixty years later, in another recession, it became only the second English club in history to withdraw from the league with fixtures unplayed.

Almost equally hard as the Depression for English clubs was the ‘Thatcher recession’ of the early 1980s. Again many working-class fans lost their factory jobs. The league’s attendance dropped from 24.6 million to 16.5 million between 1980 and 1986. Among those who continued to show up were lots of hooligans. Football seemed to be in terminal decline. As Ken Friar, then managing director of Arsenal, put it, ‘Football is the oddest of industries. It sells one product and has ninety-two outlets for it. In any other business, if not all ninety-two outlets were doing well, there would be some talk of closing some of them down. But in football, all ninety-two outlets claim an equal right to survive.’

Many clubs in the early 1980s seemed to be dicing with death. If we look at one of the diciest, Bristol City, it will help us understand just how football clubs almost always survive.

Bristol City got into trouble in the same way that a lot of clubs do. In 1976 it had been promoted to the old First Division, then the highest tier in English football, a status the club had last enjoyed before the First World War. The fans were excited: attendance jumped from 14,000 per game in 1974–1975 to 24,500 in 1976–1977. The average ticket then cost less than £1, but the higher ticket sales still boosted the club’s income from around £250,000 per year to £665,000. City survived three seasons in the top flight. As we’ve already seen, that took money. The club paid handsomely in the transfer market, and its wage bill doubled: all City’s extra income was channelled straight to the players.

The money didn’t do the trick. In the 1979–1980 season, the club was relegated just as Britain, in the first year of the new Thatcher government, was entering recession. First Division attendances dropped 5 per cent that season, but Bristol City’s gates fell 15 per cent, while its wage costs rose 20 per cent.

Clearly the club needed to lose some of its expensive players. Unfortunately, the manager, Alan Dicks, who had just overseen the most successful period in Bristol City’s modern history, had signed many of them on extraordinarily lengthy contracts – some as long as eleven years. Soon after relegation, Dicks was sacked. But by the end of the next season, 1980–1981, City’s average attendance had collapsed to 9,700 per game (half the level of the previous season) and the club was relegated to the Third Division. Income was tumbling, yet most of the squad were still drawing First Division wages. When City’s accounts were published on 15 October 1981 it was apparent that the club was in deep trouble, but the best that the new chairman could say in his report was that ‘so much of this depends on success on the playing field’.

It is doubtful that promotion back to the Second Division would have improved the club’s financial position materially in 1981–1982, but that’s a purely academic question since by the end of 1981 Bristol City were heading for the Fourth Division. By now only 6,500 fans were showing up each week, about a quarter the number of four years earlier. An independent financial report produced that December showed that the club owed far more (over £1 million) than it could realistically repay in the foreseeable future. Early in 1982 Bristol City Football Club PLC – the limited company that owned the stadium at Ashton Gate, the players’ contracts and a share in the Football League – was on the verge of appointing an official receiver to liquidate the company. That would have meant the end. In a liquidation all the players’ contracts would have been void, the share in the League would have been returned to the League, the stadium sold, probably to a property developer, and any proceeds used to pay the creditors. Like so many British companies at the time, Bristol City seemed headed for extinction.

But football clubs command more love than widget-makers. Just before City could fold, Deryn Coller and some other local businessmen who were also fans offered to take over the club. It was at this point that the ‘phoenixing’ plan emerged.

Coller and his associates created a new company: BCFC (1982) PLC. It was to be a ‘new’ Bristol City: a phoenix from the ashes of the old club. The Coller group aimed to sell shares in the new company to fans. With the money, the group would buy Ashton Gate from the receiver. The group also asked the Football League for permission to acquire the old club’s share in the League. Then the new Bristol City could ‘replace’ the old one in the Fourth Division. In short, the new company would take over almost everything of the old club – except, crucially, its debts and unaffordable players. Collier’s group intended to ask City’s most expensive players, left over from the First Division days, to tear up their contracts. You could see the appeal of the plan, as long as you were not one of the players.

The Football League said the plan was fine as long as Gordon Taylor, the head of the Professional Football Association (PFA), would agree the deal on the players. Taylor was by no means sure that things were as bad at Bristol City as the directors said (after all, directors are always complaining about wages), but eventually he was convinced that the deal was the only way to save the club. No union wants to see an employer go bust, especially not an ancient employer loved by thousands of people.

The final decision was down to the players. Naturally, they were reluctant martyrs. But the pressure on them was intense, including some threats from fans. In the end, after some sweeteners were thrown in, the players agreed. Peter Aitken, Chris Garland, Jimmy Mann, Julian Marshall, Geoff Merrick, David Rodgers, Gerry Sweeney and Trevor Tainton are not the biggest names in football’s history, but few players can claim to have given more for their clubs. On 3 February 1982 the ‘Ashton Gate Eight’ agreed to tear up contracts worth £290,000 and accept redundancy in order to save their employer. By the standards of the time, they were on very good pay. Most of them, nearing the end of their careers, would never earn as much again. They got a miserly pay-off of two weeks’ wages, and afterwards they had to choose between retiring from football, moving abroad or joining lower-division clubs. The eight really deserve statues outside Ashton Gate. They gave Bristol City a future.

The phoenix rose from the ashes: the club was transferred from the ownership of Bristol City PLC, a company heading for liquidation, to BCFC (1982) PLC. The directors of the new business still faced the formidable task of finding the money to buy Ashton Gate. They had agreed a price with the receiver of just over £590,000. They raised £330,000 by selling shares in the new club to fans and well-wishers. They might have raised more, but they felt obliged to close the share offer early when rumours emerged that an unknown bidder was considering buying a majority of the shares on offer, possibly with the aim of selling off the ground to property developers. (Ashton Gate is handily located near the city centre.) The rest of the cash was raised from short-term loans.

Today Bristol City still play at Ashton Gate, in the Championship. (And Ashton Gate is now much more than a mere stadium. ‘A premier conference and events venue, our stadium features a wide range of function rooms for both corporate and private hire,’ proclaims Ashtongatestadium.co.uk.) The ‘phoenixing’ of Bristol City was the first of its kind in English football, and established a template that, like the club itself, survives to this day.

Other clubs quickly cottoned on to the joy of phoenixing. Between 1982 and 1984 Hereford, Hull, Wolves, Derby, Bradford and Charlton went through much the same experience as Bristol City. All these troubled clubs survived either by creating a new ‘phoenix’ company (Wolves, Bradford and Charlton) or by getting creditors to agree to suspend their claims (a moratorium), under the threat that a phoenix might be the alternative. In all cases, the bankrupt company was ditched, but the immortal club inside it salvaged.

Phoenixing – the creation of a new company – turned out to be an excellent way to escape creditors. Clearly there is something suspect about the method. Phoenixing allowed disastrous directors to escape the consequences of their decisions. Their clubs survived, but at the expense of creditors (often players, banks and the taxman), who never saw their money again.

Still, this was just what hapless football clubs needed. Many of them struggled in the 1980s, and several survived only thanks to a ‘sub’ – financial support – from the players’ trade union, the Professional Footballers’ Association. Charlton and Bristol City’s neighbour Bristol Rovers had to move grounds because they could not pay the rent. However, nobody resigned from the league.

Soon after the Thatcher recession, a new law made it even easier for British clubs to survive. Historically in Western countries, attitudes to bankruptcy had been harsh. In nineteenth-century England, bankrupts were still being sent to prison. But over time, we have become more forgiving. Increasingly, people have come to recognize that bankruptcy can be caused by bad luck as well as bad judgement. As well as relaxing our moral stance, we have discovered some self-interested motives: bankruptcy destroys a company’s value, often unnecessarily. By the 1980s, the UK’s traditional method of liquidation – the bankrupt company’s assets were sold, the debts repaid as far as possible and the company liquidated – had become discredited. Critics said it gave stricken companies little chance to recover. They praised the American approach, which treated failure as a frequently necessary precursor to eventual success. In 1979 the US had introduced the now famous Chapter 11 provisions. These protect a firm from its creditors, while it tries to work out a solution that saves the business. Britain – where insolvencies hit an all-time high during the Thatcher recession – wanted some of that. Later, Italy, Germany, Spain and eventually France too moved towards more forgiving, ‘American’, bankruptcy laws.

The UK’s Insolvency Act of 1986 transformed a procedure known as ‘administration’. Now when a company went into administration, an independent insolvency practitioner was called in and charged with finding a way to keep the business running, while repaying as much money as possible to the creditors. After the new law came in, stricken football clubs typically entered administration, struck deals with creditors and then swiftly emerged from administration. That’s what Tranmere and Rotherham did in 1987, for instance. For most clubs, financial collapse was becoming something of a breeze.

True, Aldershot FC was liquidated in 1992, but supporters simply started a new club almost identical to the old one. The ‘new’ Aldershot Town FC has a badge that shows a phoenix in flames. Aldershot went into administration again in 2013, but now play in the National League, the fifth tier of English football. Other tiny British clubs that folded – Maidstone United, Newport County, Accrington Stanley – were also eventually resuscitated and now stumble on somewhere in the semi-professional or professional game. Accrington Stanley’s rebirth was surely the most drawn-out: it resigned from the Football League in 1962 with debts of £63,000, got liquidated in 1966, was newly created by fans in 1968 and returned to the Football League in 2006, its brand still very much alive, probably even enhanced by the drama. ‘Above the turnstiles now, the welcoming sign is, “The Club that Wouldn’t Die”,’ Accrington’s then chairman Ilyas Khan told us proudly in 2012.

The new British law was so kind to insolvent companies that ever more companies decided to enter insolvency. Some did it just to wipe off their debts. The method became more popular even as the economy improved. Company insolvencies in the recession of the early 1980s had run at an average of around 10,000 per year. In the boom period between 1994 and 2001 they ran at 16,000 per year. Football clubs, too, loved the new law: more of them went insolvent in the 1990s boom than in the early 1980s bust. They rarely even needed to bother to create a new ‘phoenix’ company anymore. Clubs would run up unpayable debts, go insolvent and, hey presto, months later would be fine and signing expensive players again. Better-run rivals complained that insolvency and phoenixing were giving the culprits an unfair advantage. In 2004 this argument prompted the league to introduce a ten-point penalty for clubs that went into administration. Still, it hasn’t proved a huge deterrent.

There’s something else to note about these near-death experiences: they almost only happen to small clubs. Big clubs almost never go bust.

Yes, there was a great kerfuffle in 2010 when Portsmouth of the mighty Premier League entered administration. The club had been on much the same journey as Bristol City thirty years earlier, just with larger sums. It had overspent on good players, won an FA Cup and ended up in trouble.

On the one hand, Portsmouth’s story was all too familiar: football club goes bust and after many premature reports of its demise is reborn. The shared fan angst about their club disappearing has a useful psychological function: it’s a communal ritual that gives people a chance to join together to affirm their love of the club. After administration, Portsmouth slid down the divisions and spent a few miserable years bumping along in League Two, the bottom tier of English football. In summer 2017 they celebrated an emotional promotion to League One, and were then taken over by Michael Eisner, former chief executive of Disney. Like almost every English professional club that has ever existed, Portsmouth still exist.

Yet in another way, Portsmouth’s story is exceptional. They are the only club in the Premier League ever to go into administration. The other sixty-six cases of insolvency in English football from 1982 to 2010 involved teams in the lower divisions. That is something that doomsayers should note. They often complain about the debts of rich clubs, such as Manchester United. They ask how Chelsea would survive if Roman Abramovich falls under a bus.

In fact, though, big clubs are not the problem. Across Europe, lower-tier teams live on the edge of insolvency, while the top-tier teams, even though they too mostly lose money, seldom become insolvent. The highest risk of all in most countries is for recently relegated teams. We have been able to identify about a dozen Western European clubs that have disappeared from professional football during the post-2008 economic crisis: UD Salamanca, Lorca and CD Badajoz in Spain, Evian Thonon Gaillard in France, Haarlem, Veendam, AGOVV and RBC Roosendaal in Holland, FC Brussels and Beerschot in Belgium, MyPa in Finland and Gretna in Scotland. (Vanishing clubs are more common in poorer Eastern Europe, where almighty sugar daddies come and go, and especially common in Ukraine, where the Russian invasion hit several clubs very hard.)

None of the Western European clubs vanished after gambling tens of millions to compete with the big boys. Rather, they were midsized to tiny outfits (Badajoz in its 107 years of existence never once made it to Spain’s top division) that had soldiered on gamely through the years. When the crisis hit, they were overwhelmed by their relatively puny debts. Haarlem, for instance, owed a fairly manageable €1.8 million when they folded in 2010. It’s just that hardly anybody was interested enough to fight for the club’s life. Anyway, several of the defunct clubs were immediately re-founded in a slightly different form. Gretna 2008 now plays amateur football in Scotland, as do RBC and AGOVV in Holland. Unionistas de Salamanca, the successor club to the one that died, now plays in Spain’s third tier. MyPa are in the Finnish fourth division.

Perhaps because English professional clubs are older established brands than most continental teams, even the littlest among them survived the crisis. But if people are determined to worry about clubs going bust, it’s the Accrington Stanleys they should worry about, not the Chelseas. And they probably shouldn’t worry too much about the issue at all. If European football clubs really did collapse beneath their debts, there would now be virtually no European football clubs left. ‘We must be sustainable,’ clubs say nowadays, parroting the latest business cliché. In fact, they are fantastically sustainable. They survive even when they go bust. You can’t get more sustainable than that. Match-fixing, say, is a much bigger problem for European football than bankruptcy. The near immortality of football clubs makes you wonder exactly what problem UEFA’s rules on ‘financial fair play’ are meant to solve.

Michel Platini, from 2007 until his ban from football in 2015, was always worrying about clubs’ debts. But it’s precisely because clubs are practically immortal that they have such large debts. They know from experience that they can take on whatever debt they like, and survive. If things go wrong, they simply don’t repay their debt, the old directors walk away, and new ones come in promising to sweep up the mess (while also buying shiny new Brazilian centre-forwards). A club like Bayern Munich, which shuns debt, is in fact missing a trick. Bayern could easily borrow a few hundred million euros to make itself invincible against human opposition in the long term. Even if it flushed the money down the toilet and then said ‘Nanananana’ to the lenders, the club would survive. Right now Bayern is a marvellous self-sustaining debt-free business. But the point of a football club isn’t to have nice accounts – after all, the clubs with horrible accounts survive, too. The point of a football club is to win trophies. From 1976 to 2017, Bayern won the Champions League just twice. That’s a meagre return for the biggest club of Western Europe’s biggest football country.

Once again, the comparison between football clubs and ‘real’ businesses breaks down. When clubs get into trouble, they generally ‘do a Leeds’, a manoeuvre named in honour of the spectacularly badly run Leeds United of the early 2000s. ‘Doing a Leeds’ means cutting your wages, getting relegated and competing at a lower level. Imagine if other businesses could do this. Suppose that Ford could sack skilled workers and hire unskilled ones to produce worse cars, or that British Airways could replace all its pilots with people who weren’t as well qualified to fly planes. The government would stop it and, in any case, consumers would not put up with terrible products.

Football clubs have it easy. Recall that almost every English professional club has survived the Great Depression, the Second World War, recessions, corrupt chairmen, appalling managers and the post-2008 crisis. By contrast, economic historian Les Hannah made a list of the top one hundred global companies in 1912, and researched what had become of them by 1995. Nearly half the companies – forty-nine – had ceased to exist. Five of these had gone bankrupt, six were nationalized and thirty-eight were taken over by other firms. Even among the businesses that survived, many had gone into new sectors or moved to new locations.

What made these non-football businesses so unstable was, above all, competition. There is such a thing as brand loyalty, but when a better product turns up, most people will switch sooner or later. So normal businesses keep having to innovate or die. They face endless pitfalls: competitors pull ahead, consumers’ tastes change, new technologies make entire industries obsolete, cheap goods arrive from abroad, the government interferes, recessions hit, companies overinvest and go bust, or simply get unlucky.

By contrast, football clubs are immune from almost all these effects:

A club that fails to keep up with the competition might get relegated, but it can always survive at a lower level. Some fans lose interest, but clubs have geographical roots.

A bad team might find its catchment area shrinking, but not disappearing completely.

The ‘technology’ of football can never become obsolete, because the technology is the game itself. At worst football might become less popular.

Foreign rivals cannot enter the market and supply football at a lower price. The rules of football protect domestic clubs by forbidding foreign competitors from joining their league. English clubs as a whole could fall behind foreign competitors and lose their best players, but foreign clubs have financial problems and incompetent management of their own.

Governments are not about to nationalize football.

Clubs often overinvest, but this almost never destroys the club, only the wealth of the investor. At worst, the club gets relegated.

A club’s revenues might decline in a recession, but it can always live with lower revenues.

In most industries a bad business goes bankrupt, but football clubs almost never do. No matter how much money they waste, someone will always bail them out. This is what is known in finance as ‘moral hazard’: when you know you will be saved no matter how much money you lose, you are free to lose money.

There is a strange parallel here between professional football and communism. When we ask, ‘Why do football clubs almost always survive?’ we are echoing the great question asked about communism by one of our favourite economists, the Hungarian János Kornai. He grew up in Hungary, briefly worked for a communist newspaper despite knowing that the system was all nonsense, and after making his way to the West tried to answer the question: Why exactly did communism not work?

Kornai’s answer could be summed up in four words: ‘the soft-budget constraint’. Imagine that you are a tractor factory in communist Hungary. Each year the state gives you a budget. But if at the end of the year you’ve overspent the budget and haven’t made any profits, the state just gives you a bit more money to make up the difference. In communism, bad companies were propped up forever. In other words, the ‘budget constraint’ on communist firms was soft. If they wanted to overspend their budgets, they could. The obvious consequence: unprofitable overspending became rife.

As scholars such as Wladimir Andreff and Rasmus Storm have noted, Kornai’s ‘soft-budget constraint’ applies beautifully to football clubs. Like tractor factories in communism, clubs lose money because they can. They have no need to be competent. The professional investors who briefly bought club shares in the 1990s got out as soon as they discovered this.

Luckily, as we’ve seen, society can keep unprofitable football clubs going fairly cheaply. The total revenues of European professional clubs for the 2014–2015 season were €19.6 billion (about £15 billion), according to the business advisory firm Deloitte. For comparison: over about the same period, the struggling supermarket chain Sainsbury had annual revenues of £23.8 billion. The two-bit losses of football clubs hardly matter when set beside the enormous love they command. These tiny businesses are great enduring brands. Creditors dare not push them under. No bank manager or tax collector wants to say, ‘The century-old local club is closing. I’m turning off the lights.’ Society swallows the losses and lets even a Bristol City soldier on. In a sense, these clubs are too small to fail.

Unlike most businesses, football clubs survive crises because some of their customers stick with them no matter how lousy the product. Calling this brand loyalty is not quite respectful enough of the sentiment involved. To quote Rogan Taylor, a Liverpool fan and Liverpool University professor, ‘Football is more than just a business. No one has their ashes scattered down the aisle at Tesco.’