Madrid fans have been waiting for a summer spending spree like this for a long time, and watching Los Blancos drop mega money deals for Eden Hazard, Luka Jovic and Ferland Mendy probably brings the same pleasure to Madridistas as scratching an itch that’s been annoying you for the last four years. Naturally though, there is always an impending cloud ready to rain on your parade, and for big spending giants such as Real, that cloud generally takes the form of Financial Fair Play (FFP).
Nine years since its inception, FFP remains among the most confusing elements of a fan’s summer transfer experience. The UEFA document explaining the rule is 90 pages long, and is written like the author started it an hour before it was due. Short of reading the actual document (because I don’t have a death-wish), I have spent the last few weeks researching Financial Fair Play to see if it’s something we should be worried about.
How Financial Fair Play works
Being such a long document, there is more than one way to explain Financial Fair Play rules — however, the “break even” rule specifically is the one that Real Madrid will concern itself with the most this summer. There are some caveats to the break even rule which we shall discuss later, but, the basic gist of it is that football clubs must balance their books over a three year monitoring period (with the current monitoring period being the 2017/18, 2018/19 and 2019/20 seasons). As already mentioned, there are several caveats to this rule that are important for Madrid. The first is that FFP does not include spending on infrastructure or youth development as among the expenses Madrid must balance. Hence, Real Madrid’s new stadium costs will not have an impact on their FFP status at the end of next season.
Another caveat is that although the rule does demand clubs to break even, UEFA does allow teams to make a certain amount of loss each year. It’s a little hazy as to how much exactly a club can lose each season, but Real are entitled to a loss between 30 and 45 million provided that the club owner injects equity (money) into the club afterwards, something Florentino Perez has done with Real in the past.
Where do Real Madrid stand with FFP?
Before getting into Real Madrid’s case, its important for you to understand the most important and often forgotten to FFP’s break even rule, is player amortization.
When a football club makes a transfer, the media often report the transfer fee as the cost of the deal. For example, Real Madrid paid a reported base fee of 100 million on Eden Hazard this summer. Although football clubs do pay out in lump sums like that quoted for Hazard, FFP demands teams to amortize the cost of the transfer, spreading the expense over the course of a player’s contract. The amortization of a player often includes his annual wages as well so instead of Hazard costing Real Madrid 100 million this summer, the Belgian will actually cost 40.8 million over the next five seasons — 20 million for his transfer fee and 20.8 million for his wages.
As important as it is to understand how amortization works for when a player is bought, it is also important to understand how it works when a player is sold. Take Theo Hernandez as an example. Real Madrid bought him from Atletico Madrid for a fee of 24 million, with the Frenchman reportedly earning 1.728 million a year on a six year deal. That brings his amortized cost to 5.728 million a year. Real Madrid sold him this summer to AC Milan for 20 million, with just 4 million of his transfer fee off the books. The fee AC Milan paid for him cleared the outstanding 20 million left on Real Madrid’s books meaning the club will now record 5.728 million euro annual profit improvement as they no longer have to record the amortized cost of the transfer, and they no longer have to pay Theo’s wages.
Let’s take another example, this time using Alvaro Morata. Real Madrid forked out 30 million for Morata on a reported five year deal. Presuming the wages he earned at Chelsea were the same at Real Madrid, that would bring the Spaniard’s amortized cost to 10.727 million a year. Real Madrid sold Morata to Chelsea for 66 million with 24 million of his transfer still on the books, hence, Real will record a 52.727 million annual profit improvement on the Morata deal as they recorded a 42 million profit on his transfer, can clear his amortized transfer fee off the books and no longer have to pay his wages.
Its a complicated system which can make one’s head spin, however, it’s important that you understand it because it’s the reason Real Madrid probably won’t have an issue with FFP this season. Often under-appreciated, Real Madrid have a really firm grasp of its expenditures with players signing long contracts (Vinicius’s contract is a reported 7 years) with extremely reasonable wages (Brahim Diaz is supposedly making just 331,000 a year from his six year deal). The long contracts and well managed wage structure means Real amortized costs each summer should be manageable. Real have spent a lot of money this year, but it’s likely no where near the 300 million being reported (my suspect calculations have it at around 84 million for this summer). They’ve also undoubtedly made a profit on the players they’ve sold this season which should carry them over the line with FFP next summer.
Given that I don’t work in football finance and I’m not an accountant (a point demonstrated by the cobwebs in my bank account), everything you read here should be taken with a pinch of salt. However, even if you don’t want to believe my questionable maths, all one needs to do is look at how healthy an organization Real Madrid is and has been financially since Florentino Perez took over. It is unlikely that Real’s board would spend what it has without keeping its FFP commitment in mind given that many of them are former players with the club’s best interests at heart or associates of Perez, who is one of the best and savviest Spanish businessmen around.