The Due Diligence Process in Buying a Football Club

The sale and acquisition of football clubs consistently attract significant media attention. From an outsider's perspective, the process often appears lengthy and bogged down by unnecessary delays. However, in reality, the completion of such transactions involves numerous intricate steps that the average fan may not fully understand.

One crucial step in this process is due diligence. Although the term "due diligence" is often used casually, in the context of M&A (mergers and acquisitions) transactions, such as the sale of a football club, it refers to a thorough investigation of the target business. In this case, it involves the prospective buyer gathering detailed information about the football club before committing to the purchase.

Due diligence is vital for several reasons. It ensures that the buyer understands exactly what they are acquiring, identifies potential risks, and provides an opportunity to renegotiate the price if necessary. Should the findings during the due diligence process reveal significant concerns, the prospective buyer retains the option to withdraw from the deal altogether.

Practical Steps

The process begins when a prospective buyer approaches the sellers to express interest in purchasing the football club. The two parties then negotiate and agree on the basic terms of the acquisition, which are outlined in a document called the Heads of Terms (HoTs). The HoTs are typically non-binding and will include a clause stating that the acquisition is conditional upon the buyer completing satisfactory due diligence.

Once the HoTs are finalised, the seller provides documentation and information to enable the buyer to carry out the due diligence process. Depending on the size and complexity of the football club, the volume of documents can be substantial. This documentation typically covers a wide range of areas, including legal, operational, and financial aspects of the club.

To streamline the process, the information is stored in a virtual data room, which is a secure online platform where documents can be easily uploaded, accessed, and reviewed by all relevant parties with authorised access.

In most cases, particularly in large acquisitions like the purchase of a football club, prospective buyers engage professional advisors, such as legal and financial experts, to review the documents stored in the virtual data room. These advisors meticulously examine the materials, identify potential areas of concern, and compile a detailed report for the buyer. This report highlights all findings and concerns uncovered during the due diligence process.

While the due diligence is underway, the buyer's and seller's legal advisors work on negotiating the Share Purchase Agreement (SPA). The SPA is a critical document that outlines the terms of the acquisition, including warranties, indemnities, and other key provisions. This negotiation forms a vital part of the acquisition process, ensuring clarity and protection for both parties.

What to look out for

While understanding the concept of due diligence is important, it is even more valuable to know what specific issues to watch for that could raise concerns for a buyer. The due diligence carried out on a football club will focus on the following areas:-

1.     Debt

• Outstanding loans and liabilities: A buyer will carefully examine the club’s existing loans, including their terms, interest rates, repayment schedules, and whether they are secured or unsecured. Large debts or complex loan structures could be a red flag, as they may present risk in the future.

• Player Contracts and Wages: In football clubs, a significant portion of debt may be tied to player wages and contract buyouts. If the club has high player wages relative to its revenue, it can create cash flow problems. A buyer would also examine any clauses in player contracts that may trigger additional payments, such as performance bonuses or long-term incentives.

• Unpaid taxes and Fees: Outstanding tax liabilities (corporate tax, VAT, payroll tax, etc.) can be a major issue. A buyer will want to ensure that the club is up to date with its tax payments and doesn't have any tax disputes pending with authorities. Large unpaid tax liabilities could lead to penalties or legal action.

2.     Stadium & Training Facilities

• Ownership and Lease Structure: The buyer will first determine how the club holds its property interests—whether the stadium and training facilities are owned outright by the club or whether they are leased. If the properties are leased, the buyer will scrutinize the terms of the lease, including lease duration (short-term vs long-term), rent and payment structure, renewal options, any restrictions on the use of the property and termination clauses (whether the lease can be terminated early and under what circumstances).

• Third-Party Rights: It is crucial to identify if any third parties hold rights to the properties, such as easements, access rights, or encumbrances that could limit how the club can use the property. This could also include rights granted to local authorities, other businesses, or community organisations.

• Charges: The buyer will need to assess if the properties are subject to any mortgages or charges that could pose a risk. Any such encumbrances could affect the club's ability to freely transfer or develop the properties.

• Alternative Uses: The buyer will assess whether the stadium and training facilities can be used for additional revenue-generating activities beyond football matches, such as: Hosting music concerts, conferences, or other events or corporate hospitality or event spaces. The buyer will examine the terms regarding these uses, including whether the club has already made any commitments to such events, whether there are any restrictions, or if the local authorities have imposed limits on such activities. Having alternative uses can significantly enhance the club's revenue potential.

• Licences and Authorisations: A crucial consideration for stadiums is whether the necessary licenses and authorisations are in place to operate legally. The buyer will look for: a valid spectators' licence (which grants permission for crowds to attend matches), fire safety certificates, ensuring the property meets required safety standards, health and safety certifications, and planning permission to operate as a football ground If any licenses or authorisations are missing or are due to expire, it could pose significant operational risks for the buyer.

• Environmental Considerations: The buyer will also assess any environmental concerns related to the properties. This may include whether the stadium or training grounds are in environmentally sensitive areas, potential environmental liabilities, such as contamination or the need for remedial work and compliance with sustainability or environmental regulations.

3.     Commercial Agreements

• Sponsorship Agreements: In reviewing sponsorship agreements, the buyer should focus on the duration of the contracts and their renewal terms, as well as any termination rights, particularly in the event of a change of control or relegation. It's important to check if the sponsorships are exclusive and how this may affect other potential deals. The buyer should also assess the impact of relegation, such as whether it reduces payments or allows sponsors to terminate agreements. The buyer should also identify any additional rights granted under the contracts, such as brand usage or access to club facilities.

• Media Rights: The buyer should look out for contracts that are heavily dependent on the club’s league status or performance, with clauses that may reduce payments or terminate agreements if the club is related.

• Third-party Rights: The buyer should assess whether the club has granted third parties the ability to sublicense or subcontract commercial rights and IP rights, which could reduce the club's direct control over its assets and lead to less favourable terms. They should also look out for agreements that grant exclusivity to certain parties, as these could limit the club’s ability to secure new deals or partnerships, potentially restricting growth opportunities.

• Potential Liabilities or Disputes: The buyer should assess whether the club is involved in any active or potential disputes with sponsors, broadcasters, or partners, which could lead to costly litigation or the loss of commercial agreements. They should also look out for any breaches of commercial contracts by the club, which could result in penalties, renegotiations, or termination of deals.

4.     Intellectual Property

• IP Ownership: The buyer must verify that the club has clear and uncontested ownership of its IP assets, such as its name, logo, player likenesses, and other trademarks. If there is any ambiguity or dispute over ownership, it could pose a risk, potentially leading to costly legal battles or restrictions on the use of the club’s IP in marketing and branding.

• IP Usage: The buyer should ensure that the club’s IP is being used in accordance with brand guidelines and contractual obligations. Any misuse or violations of these guidelines could result in legal action or reputational damage, affecting the value of the club’s IP.

• Conflicts with Commercial Goals: The buyer should assess whether any existing IP agreements conflict with future commercial strategies. For example, if the club is planning to expand its merchandising or media presence, but existing agreements restrict certain uses or partnerships, this could limit future growth opportunities.

Due to the extensive range of information needed during this process, it is common for the seller to not provide all the necessary documents upfront. As a result, the buyer’s advisors must communicate with the seller’s advisors to request additional documentation in order to complete the due diligence. This process can take anywhere from a few weeks to several months, depending on the amount of information needed and how efficiently both parties manage the exchange.

As mentioned earlier, this process is likely to uncover some concerns, but these can typically be addressed by the parties involved. In some cases, it may result in a renegotiation of the deal, such as a reduction in the purchase price. In more extreme situations, it could even lead to the deal being called off altogether.

In conclusion, the due diligence process is designed to ensure that the buyer has a comprehensive understanding of the club's position before committing to the purchase. It is crucial for the buyer to carefully consider the points outlined above before finalising the agreement. Additionally, it benefits the seller to be aware of the areas that may raise concerns for potential buyers and to address these issues proactively before putting the club up for sale.