Relegation. Nothing quite does more to damage a football club's
long-term financial health than the dreaded drop.
As the Premier League has grown to become more lucrative and financially rewarding,
so too has the prospect of relegation become more imperious.
But what does relegation really do to a football club's finances?
And why do clubs fear the drop so much?
We've spoken in previous TIFO videos about the things that matter most
financially for a football club – revenue, wages, transfer effectiveness,
and debt or financial leverage.
Now, let's look at how relegation has impacted each of these key financial health indicators
using some famous relegated clubs as a guide.
We'll start with revenue.
Relegated Premier League clubs typically see reductions of 50-70%
in revenue in the subsequent season.
Fulham's revenue dropped by 58% in the 2019-20 season post-relegation,
and Norwich and Watford's revenues each dropped by 52% the following season.
The biggest driver of this is TV, or broadcasting, revenue.
The average broadcasting revenue, including facility fees for Premier League clubs,
is about £125 million, with the bottom clubs, the relegated ones,
earning roughly between £100 and £110 million.
By contrast, the average TV revenue in the Championship is between £5 and £6 million.
That's a £100 million drop-off.
But there is a consolation prize.
Relegated clubs receive parachute payments from the Premier League,
meaning they earn a portion of what they earned in the previous season
in their first, second, and third seasons after getting relegated.
The parachute payment in year one post-relegation amounts to 55%
of broadcast revenues earned in the previous season.
This drops to 45% in the second year and about 20% in the third year.
For clubs that were promoted and immediately relegated,
the parachute payments apply only for the first two years.
So it's no surprise, given the magnitude of these payments,
that recently relegated clubs often become the top earners in the Championship
and, many would argue, have an unfair advantage.
The other side of that issue is that relegated clubs still suffer a vast drop in revenue,
which forces whole-scale financial remodelling.
On top of this, both match date and commercial income see a decline, too.
Sponsors are less attracted to a club that isn't playing in the Premier League
and match day attendances and ticket prices both generally reduce.
But the bulk of the impact is caused by the TV revenue.
Wages are perhaps the most complicated issue and are inextricably linked to
transfer effectiveness, so we'll address both of these jointly.
Most Premier League clubs pay high wages to attract the best players
in order to stay in the Premier League.
This, in turn, means that those dropping out suddenly have very high wage bills
and are about to see a sharp revenue drop as well.
As an example, Everton's wage bill has consistently hovered between 90 and 95% of revenue.
If Everton were relegated, they would see 50-70% revenue decline
and the wage bill become unsustainable at roughly double the club's revenue.
This would inevitably mean a fire sale of multiple players in order to lighten the
wage bill and it's unlikely that Everton would have got fair value in those deals,
given their desperation.
A good example is West Ham in 2002-03.
Post-relegation, they lost multiple top players,
either to expired contracts or below fair value sales.
Players are also likely to want to leave,
either because they consider themselves too good to play in the Championship
or because they have relegation clauses in their contracts and would therefore
see a sizeable wage decrease if they stay.
This exacerbates the problem and severely impacts transfer effectiveness.
UEFA's wage bill guideline of 70% of revenue exists for a reason,
and multiple Premier League clubs are dangerously above that level,
none more so than Everton, who have the highest wage bill as a percentage of revenue
in the Premier League.
Finally, we'll come to debt and financial leverage.
Perhaps the best example of a relegation-induced debt crisis is Leeds United's relegation in 2003-04,
so much so that it led to the coinage of the popular phrase
doing a Leeds to describe financial mismanagement.
Leeds reached a Champions League semi-final in 2001,
but their transfer spending was far exceeding other Premier League clubs
and was almost entirely funded by debt.
Their debt level rose from £9m to £21m, £39m, £82m and then,
ultimately, £119m in the season before they were relegated.
After failing to qualify for the Champions League in 2002-03,
multiple key players had to be sold because debt repayments needed to be made
and they didn't have the Champions League TV money to do that.
As a result, many players had to be sold at below market value.
Their weakened squad could not survive in the Premier League.
Leeds were relegated and debt burdened.
Their financial woes carried on for almost 15 years,
including 10 and 15-point penalties in successive seasons
and a second relegation down to League One.
It took multiple ownership changes, smart recruitment,
and Marcelo Bielsa's exceptional coaching to restore their Premier League status.
So, ultimately, how much does relegation cost a football club?
Well, clearly, the answer varies by club, but it's safe to say
it typically leads to a 50-70% revenue decrease,
followed by changes in squad structure and personnel, and impacts the value of players sold.
Debt burden can make things considerably worse, too.
It's no wonder, then, that managers like Sean Dyche and Sam Allardyce,
widely known as relegation specialists, are in such demand at this time of the season.
Whatever their cost, there's an argument that it's usually worth paying.
What do you think?
Would you like to see more videos like this one?
Leave us a comment below and don't forget to subscribe to our channel.
