How And Why Do Football Transfers Devalue?

Even as far back as 2009, we have seen the football transfer window break records at a previously untouched astronomical level. Case in point, Cristiano Ronaldo’s mega move from Manchester United to Real Madrid for £80 million, following a two-year pursuit.

It was a move that made it the global transfer record for the then 25-year-old – one that the Spanish giants would go onto break, with another Premier League forward; Tottenham’s Gareth Bale for £85.3 million, four years later.

At the time, Los Blancos seemingly had more surplus than billionaire-owned Chelsea, who had made a name from their frivolous transfer windows. Ironically, the Blues would have signed both players, if they could have convinced them.

That period represented somewhat of a power-shift in global football – Real Madrid, during president Florentino Perez’s second reign spent well in excess of £1 billion on transfers and signing on fees.

Even six years after his blockbuster move, Ronaldo was still at the height of his powers, during a time where he led the club to four Champions League triumphs in the space of five years, between 2013 and 2018.

Having initially signed a six-year contract, he extended for a further six years in 2015, before securing a switch to Serie A champions Juventus in 2018 – for a staggering £105 million fee. An eye-watering amount for a 33-year-old. A business masterclass from Real Madrid.

As yet, unprecedented and an example of a player whose transfer fee in no way devalued, while it could be argued the club got more than a return on their investment during his time there, factoring in their success.

On an initial six-year contract, having signed for £80 million, the player would have been expected to de-value at a rate of £13.33 million per year; essentially meaning that if the club had decided to sell him after three years, the average fee they could have commanded would have been in the region of nearly £40 million in theory.

Transfers In The Recent Market

Regulation around Financial Fair Play (FFP) has become significantly stricter in recent years, especially concerning big-spending clubs which seemingly have the resources, with numerous accusations having been levelled around mismanagement in recent years.

Indeed, the most relevant case involves Manchester City, who are facing an inquiry that will investigate their activity dating back to at least 2013; with the club having spent hundreds of millions on players since.

Any guilty verdict could see the club hit with numerous sanctions, including heavy fines, points deduction or in the very worst case, relegation from the top flight of English football.

It is not the first time that the club have come under scrutiny surrounding FFP breaches – in 2020, the club had an allegation overturned that could have resulted in a two-year expulsion from European competitions surrounding FFP activity between 2012 and 2016.

However, over the last two years; certainly in the English Premier League (EPL), we have seen considerable sums spent in the market, raising major questions about the viability of this for certain clubs.

The EPL is undoubtedly the richest league in the world when taking into account the amount of revenue that every club receives in media revenue and sponsorship deals, plus prize money for league finishes. Even then, some of the fees that have been spent by clubs still raises questions about some clubs finances.

Arsenal, despite having billionaire backers, are a club that has spent well over £200 million over the past four transfer windows. How much of this can be related to revenue remains to be seen; some could be a loan or, indeed, a gift from the owners.

One argument is that, Chelsea’s new owner, Todd Boehly may have written everything off that he has given the club since the summer, which has seen them spend over £300 million on players, however, it could be the case that financial projections predict that this could be generated in revenue over the next couple of years in order to balance the books. Similarly, this could be the case with Arsenal, or what they have spent, could be classed as surplus (profit generated over the last few years).

The Transfer Devaluation Process In Football

As briefly covered in the case of Ronaldo, the value of a player often decreases based on their fee and the length of the contract that they have signed. Like buying a brand new car, where the depreciation process starts as soon as you drive it out of the showroom, a similar, but not exact process occurs here.

This is the mathematical formula that statistical sites use to work out a player’s value, which will change with every passing year, unless and until a new contract is signed.

Despite this, though, this is not as ‘black and white’ as it may seem. Buying clubs often use this as a guide to help them understand what opening offer to make, and indeed to work out exactly what a player is worth.

For example, if a player is bought for £100 million on a five-year contract, their value will depreciate at £20 million per year, which means that this can essentially be written off and, as a result, will be deducted from FFP calculations. Should that player be sold in the last year of their contract for £50 million, it means that the club makes a profit of £30 million. In terms of depreciation, £80 million is accounted for, with £20 million left on the books and £30 million in excess as profit.

Quite often, a player will sell for considerably above their market value, because numerous variables are taken into account. These include, achievements at their current club in addition to age of the player – the fee is representative of further return on investment (ROI).

While Ronaldo is an extreme case, where Real Madrid essentially made over 100 percent in profit, there are more modest examples.

A Classic Recent Case Of The Transfer Devaluation Process

In 2018, Chelsea signed Brazilian-born Italy midfielder Joginho from Napoli for £50 million, with the then 26-year-old signing on a five-year deal. In theory, he would have depreciated by £10 million per season – arguably, one mistake by the club was to not offer him an extension after the first three years.

Last December, the club had registered interest in offering the player, who had helped them to win the Champions League and FA Cup during his tenure at Stamford Bridge, a new deal.

However, as time in the January transfer window started to run out, rivals Arsenal expressed interest in the player, who had less than six months remaining on his contract. In theory, the 31-year-old had a market value of £5 million. On paper, probably at least five times that when considering he could enjoy three more years playing at the highest level, his effectiveness and career achievements.

A deal was struck for £12 million – not a bad price for Chelsea, they still made a £7 million profit on a player, whose time was nearly up, though, it represented a masterstroke from Arsenal.

Having signed an initial 18-month contract with the option to extend for one more year, it would mean the player’s value would still be £8 million in the summer of 2023 factoring in the devaluation process. As a Premier League winner, that could add substantially more onto his value, however, the Gunners would still likely be able to command at least £15 million, if they decided he was just a short-term fix.

With Arsenal also having had a £70 million bid rejected for Brighton’s 21-year-old Moises Caicedo, the Jorginho deal was not only a world class alternative, but is a great example of a club’s short-medium term financing strategy – a transfer that represented significant value, also saving them a considerable outlay that would have been included on this year’s balance sheet.

How Effective Can This Process Be For A Club’s Financial Strategy?

When it comes to the balance sheet of a football club, it is often transfers that can make a difference between being in the black or in the red for that financial year.

One of the reasons why Ronaldo sold for the amount that he did – even at the age of 33 – was not just because of his predicted ROI on the football pitch and past results, but also the potential ROI off it. The player for Real Madrid was a huge commercial asset, in terms of representing the sponsorship deals that the club could attract, in addition to merchandising. His fee would have taken this account and it is likely that the club’s commercial success suffered a short-term blip following the Portuguese player’s departure.

The £105 million transfer fee would have accounted for a substantial cushion until the club could restrategise its off-field business model for the years that followed.

Deals over the last 10+ years

As you can see from the table above, there are some landmark examples of players whose transfer value has either decreased or increased. Arguably one of the biggest cases is that of Antoine Griezmann, who by all accounts is still an effective player.

Barcelona had a period where they adopted an almost scattergun approach to their transfer policy, paying over-inflated prices for players – point in case Griezmann. They paid Atletico Madrid an eye-watering £107 million in 2019, before the player returned last September for a fee just over £16 million, representing a significant error of judgement from the Catalan club.

James Rodriguez is another example of a big-spending club that effectively got it wrong. After a successful World Cup in 2014, where the player starred and won the Golden Boot for Colombia, Real Madrid paid AS Monaco £63 million in the transfer window that followed. However, he didn’t appear to fit into manager Zinedine Zidane’s plans and his game time was limited. After a couple of seasons on loan at Bayern Munich, the player then moved to Everton for a snip at £20 million in 2020 – a notable loss of £43 million for the Spanish outfit.

It will certainly be interesting to see how the next few transfer windows unfold and to what extent FFP affects clubs. What is clear is that many need to adopt a more sensible fiscal policy to transfers and be confident that they will be able to balance their books.