In football, administration seems to be more and more common. But what is it and why does it happen?
Every club’s individual situation is different, but the pattern is usually fairly similar.
Usually, a club will have had a few successful seasons- in Leeds United’s case, that involved a third-place finish in the Premier League and a run to the Champions League semi-finals the season after that. Having achieved that success, the club will strive to keep themselves at that level (or get even better).
However, a club of Leeds United’s size and stature will not earn enough money to buy and pay players to keep themselves at that level without the prize money obtained from being in it. They finished fourth the season they finished in the semi-finals and so missed out on Champions League prize money, so they were left with a problem of having a lot of highly-paid players which they couldn’t really afford to pay on the revenue they were getting. So it was necessary to take out loans to pay the players and hope they got back into the Champions League again to pay them off: they didn’t. Instead, they started to sell off their players and slid down the league, eventually getting relegated in 2004. Now they had the additional problem of not receiving the Premier League TV money, getting only parachute payments instead.
Selling off players wasn’t enough, and they sold their training ground and stadium as well to raise extra revenue. Poor performances on the pitch didn’t help, and the club was relegated in 2007. After this was more or less a certainty, the club entered administration.
Administration occurs when a business’s finances are so bad that there is a large doubt as to whether a business can pay off its debts. The business’s board will call in some independent administrators to negotiate debts with their creditors on their behalf, and hopefully arrange a CVA- an agreement with the debtors that means they will write off some of the debt in return for certain restrictions, or better yet, find new owners who can afford to pay the debt.
Without this, there is a possibility that the creditors may issue a winding-up order, where they will request that the company effectively gets shut down and sold off (liquidated) with the money used to pay off any debt owed. This is the fate that befell Gretna and Airdrieonians in Scotland, and Newry City in Northern Ireland- no club in the English League system has been liquidated since Maidstone United in 1992 (though it did happen to Conference side Chester in 2010).
Leeds’s entry into administration was seen as a bit cynical since the 10-point deduction made no difference to them after relegation was confirmed. There was also an issue with the Taxman contesting the CVA proposed in summer of that year, meaning that a resolution was delayed and that Leeds would still start the season in administration, something not allowed by the Football League- when a takeover was imminent, they agreed to let Leeds start the season with a 15 point deduction. They got promotion the following season, but are still financially uncertain, largely thanks to dodgy ownership.
To date, only one club in the English Premier League, Portsmouth, has gone into administration while in that division- after a few successful seasons, including an FA Cup win, they again stretched themselves a bit too far in terms of paying for quality players. In 2010, they were deducted nine points and were relegated, though not without an appearance in the FA Cup final that season.
In Scotland, before Rangers decided paying taxes was too much of a hassle, Gretna were the club that exemplify this the most: they were almost exclusively bankrolled by Brooks Mileson, which meant that when he became ill and died, the club had no means to support itself. It entered administration and received its end of season prize money for finishing last early, but to no avail: the club resigned from the league and was liquidated.
Such cases point as a warning sign for clubs who “punch above their weight” and expect to stay in that position, but there are some good examples of where this hasn’t happened. In their first seasons in the top flight, both Burnley and Charlton Athletic were relegated immediately. However, neither overspent despite their new found riches and their immediate relegation did not cause a problem: both clubs were able to keep most of their players, and indeed Charlton won promotion back to the top flight immediately, where they stayed for a few seasons. Burnley returned to being a mid-table Championship side, but now look good for a third promotion to the Premier League, and will look to establish themselves at least as a yo-yo club.
And that is the right strategy- a club like Burnley that wants to be successful needs to grow itself and establish itself at higher levels rather than spending recklessly. Either that, or find a Sheikh.