Due Diligence when buying a football club

Manchester United recently sold a minority stake in the club to INEOS, owned by Sir Jim Ratcliffe. The Freidkin group recently acquired Everton FC. Every year we see new instances of clubs being bought or sold.

But what are the key considerations that investors need to take into account when purchasing a football club, whether that be a minority stake or the club in totality?

The due diligence process is effectively a deep-dive into the club’s books and stability; an investigation into the clubs affairs and activities to ensure that no misrepresentation has taken place and that there are no hidden liabilities.

 

What do they need to look for?

A club’s key assets are usually its people, its property, and its commercial contracts, but there are some key questions that need to be addressed before going through with the purchase, which LawinSport helpfully summarise below:

• Stadium and training facilities - are they owned outright, or subject to a lease (what terms are in the lease)? Are there any third-party rights in relation to the property? Does the property have all the licences and authorisations it needs to operate as a football ground? Are there permitted alternative uses for generating revenue? Are there plans to develop the property? If so, has planning permission been obtained?

• What bank and other debt does the club have? When do these loans mature? Is the debt to be repaid on the acquisition? What guarantees have been given by or on behalf of the club?  What are the terms of each of those loans and guarantees? What is the impact of relegation on such loans?

• What are the principal terms of the player and management contracts? What are the termination dates for each of those contracts? What outstanding obligations are there in relation to transfer fees? What is the position on image rights?

• What commercial contracts and sponsorship agreements does the club have? What is the duration of those contracts? What are the termination rights? What is the impact of relegation on such contracts?

• What is the extent of the registration of the club's intellectual property rights (its logo)?

What happens if the potential buyer is not happy with what they find during due diligence?

They may:

• Walk away
• Renegotiate the purchase price
• Ask for remedial action before purchase
• Seek protection via warranties and indemnities within the Share and Purchase Agreement

 

What does the process look like if everyone is happy?

• The owner and the buyer negotiate and agree the basic terms for the acquisition set out in a heads of agreement. Usually, the acquisition is conditional on completion of satisfactory due diligence by the buyer; and the seller will provide any necessary documentation and information to the buyer. Then the heads of agreement are signed, and the seller will provide the documentation necessary in a virtual data room so that the buyer and their advisors can go through all the documentation. This documentation is almost always confidential and thus is only supplied to those listed on the heads of agreement or otherwise agreed.

• Sellers will sometimes ask for proof of funding from any potential buyer; and can even insist on a deposit before giving the buyer access to the virtual data room.

• The buyer and their team review all the documentation to see whether there are any concerns. 

• Both parties’ lawyers will prepare and negotiate the sale and purchase agreement, setting out mechanisms for the transfer of shares.

• If due diligence completes and both parties are happy, they will sign the documents and complete on the sale/purchase.

• The relevant parties will also need to communicate with the Premier League or the EFL as there are certain owner and directors’ tests that they need to satisfy. For example, the EFL Owners' and Directors' Test, where a buyer will have to prove they are not subject to any disqualifying events.

 

This process can take 2-3 months or even longer depending on the complexities.