Transfer fees have sky-rocketed in the past few years but that hasn't stopped big clubs from spending the amount of money a player is deemed to be valued. It’s a funny thing this football market.
The various contract clauses and the middlemen that command high agent fees make it a big headache for teams to finalised deals and get the targets they want within a limited time frame.
A few managers could be considered experts at getting the players they want, primarily on first name basis. People like Jose Mourinho and Pep Guardiola have created a brand of their own to make the big names flock to them.
But it’s the owners who still write out the paycheques that eventually allow high-class managers to make high-quality signings. What leaves people dumbfounded, is the amount debt the big clubs accumulate year on year with the spending pattern of the club does not reflect that.
Clubs with a huge fan base and unrivalled brand image though will not face financial barriers of any kind when it comes to transfers as long as debt financing exists. So let’s divulge a little more into the crux of this system.
What is debt financing?
Clubs have several sources of income, but there are three that make up a huge chunk of that income. Transfer fees, ticket revenue and the most important of them all TV revenue, is what keeps the wheels of a football club turning.
But at the end of every financial year the club still announce debt. Manchester United, Real Madrid are the names that head the beginning of the any list when the word debt comes about but they also turn out to be the highest spenders.
This is where debt financing deals the decisive hand in helping a club get who they want for whatever ridiculous money they demand. But only the biggest clubs in the world are able to lure lenders of this particular domain.
There are primarily two mainstream sources of financing its operations – Equity and Debt financing. In the case of equity the investors have a stake in the club they are pumping the money into.
In debt financing, it’s a very straightforward lending and interest mechanism. Clubs will borrow from lenders under certain criteria and a pay-back model that is agreed upon beforehand.
Why is it so easy for big clubs to attract lenders?
Banks or firms that practice this form of lending have stringent rules of about who they lend to. The routine credit checks and background information is the norm that is followed like with any other type of lending but the difference lies in leverage.
How a bank decides if a club is worthy of lending to is measured by the brand value the club have built over the years. Manchester United and Real Madrid have reached a stage in their development as a company where they can take on debts and still be confident of sustainable turnover which will eventually pay back those debts.
This state of financial might has been possible because of an ever-growing and dedicated fan base. It’s basically we the fans of the club who make it simple for them to receive a huge amount of funding.
United had three not so great seasons after the departure of Sir Alex Ferguson, but declared huge profits every time. Why?, because their brand never took a hit. It’s the fans who make the brand and sustain it for decades to come.
Lenders already know this and are confident a club like Manchester United will never have a bubble burst. The United image can be placed on the same pedestal as the tech giant Apple.
Apple have a dedicated customer base that will most likely not waver. Any product they put out almost instantly becomes a huge hit. The dedicated fanatics refuse to change their allegiance to an Android or Microsoft product.
Madrid and United exemplify this very phenomenon but to an even higher resonance level. It's this assurance of bounce-back-ability that ensures the big fish can always get the funds they need to buy the best in the business.
How Jose Mourinho’s spending spree has benefitted the club
Several managers including the likes of Arsene Wenger and Jurgen Klopp have criticized the amount of money Jose has spent in this transfer window, especially the transfer of Paul Pogba for 100 million.
The move has been discussed in length in many quarters by many high profile people but at the end of the day, Pogba really is worth the amount of money that was spent. Not because of what he brings on the pitch but what that implies for the club’s growth in general.
You might think this so called rash spending will scare off investors, but whether United are successful or not this season, the number of fans would have grown in number, simply because of the name on the back of that No 6 shirt.
There is one source of income that I forgot to touch upon before, which is merchandise sales. We’ve seen what the Ronaldo and Bale transfers have done for Real Madrid’s finances and it’s having a similar effect on United.
Keller’s brand pyramid
Keller’s brand pyramid is the epitome of measuring and growing the brand of any organization. Now don't worry, there will not be a 10 line paragraph on what this model means and it’s application, but rather how United and Madrid have managed to become excellent examples of this concept.
The goal of building a powerful brand image is to make sure your company earns a cult following. Not everyone in the world know who Manchester United are, but the ones who know it should stick to the club through thick and thin.
This sort of unwavering support will guarantee the club never fails to enter any period of decline financially. The association of United with success is something most will know but for the Ultras of the club, it is a feeling that has become synonymous with any other human emotion.
When a club achieves this kind of recognition it;s Brand becomes almost indestructible in nature. This very important connection and popularity yielded will is the reason why the biggest clubs in the world will almost never fall into the chasm of bankruptcy.
