How Leicester City & Reading's financial failings show the way English football is run is not sustainable

It’s been 22 years since the collapse of ITV Digital came close to tearing the English game to pieces. 22 years since an inflated rights package encouraged EFL clubs up and down the league ladder to spend money which would never arrive, with disastrous consequences for many teams. 22 years since the frailty of English football’s financial model was exposed. Sadly, the current financial situation across the English league forces one to wonder how much was learned from that debacle.

Yesterday, Leicester City released their financial results for the 2022/23 season, in which they were relegated to the Championship. The club posted a pre-tax loss of £90m. £206m was spent on wages, with a total income, including the sale of James Maddison, of £177m. The club has been charged over an alleged breach of the Premier League’s profit and sustainability rules as a consequence and may face a points deduction next season.

Leicester are the only Premier League team believed to have spent more on wages than they earned last season, but several clubs ran it close – both Everton and Nottingham Forest, who have been deducted points already for their own breaches, spent over 90% of their annual revenue on their wage bill.

Meanwhile, down in the Championship, clubs are spending huge amounts in an attempt to buy their way to promised land of the Premier League. The three clubs who made it up to the top tier in the wake of the 2021/22 season, Fulham, Bournemouth and Forest, racked up combined losses of £158m in their successful pursuit of promotion.

A report from business consultancy firm LCP which looked at the finances of English football in the 21/22 season concluded that 63 of the 92 clubs in the Premier League and EFL recorded annual losses, with a combined deficit of £1.2bn. Meanwhile, data analytics firm Statista estimated the combined debt of clubs from the Premier League and Championship at the end of the season at a staggering £4.32bn.

In other words, while the spotlight is firmly on Leicester’s astonishing overspending right now, they represent the merest tip of the iceberg. There are a great many clubs up and down the football pyramid spending well beyond their means. And as the collapse of ITV Digital demonstrated more than two decades ago, a business model which accepts accumulated debts as standard puts those clubs operating under it at grave risk.

ITV Digital had promised the EFL clubs a total of £315m over three years in return for exclusive broadcast rights – but when it went broke having spent far more than it could earn in the face of competition from the more established Sky Sports and the uptake on digital technology proving slower than anticipated, £185m had still not been paid to the clubs. 14 EFL sides went into administration over the following two years.

It would be unfair to suggest that the clubs who found themselves in financial difficulties were all guilty of overspending at that time. They had been promised the money, and many spent it in advance on infrastructure projects such as stadium improvements. But the fact is that they spent it before they had it in their bank accounts, and when the rug was pulled from under them, it created a brutal ripple effect.

Clubs that had been profitable found themselves desperately trying to support substantial losses, but also unable to sell players as all of the teams they could do business with were stuck in the same boat. It took years for that boat to right itself. Arguably, given the perilous financial state of so many clubs in the modern game, it never really did.

The lesson from the ITV Digital saga should have been that spending beyond existing means is too great of a risk – but that has plainly not been taken on board. Debts continue to spiral, and a great many clubs are now almost entirely reliant on funding from wealthy benefactors.

Most such clubs need their owners to bankroll their continued losses and sustain their mounting debts. As long as they continue to do that, all is well. But clubs like Reading prove that this approach, tolerated for so long by the EFL, is fraught with danger.

When Royals owner Dai Yongge first purchased the club, he was guilty of ill-advised overspends. Now, with his interest apparently having waned and new laws in China restricting his ability to funnel money into overseas investments, Reading are in a parlous state. Despite their owner having once been valued at $26bn, wage payments have been missed repeatedly, debts are mounting, and the club have been docked points for three years in a row while fans protest from the stands and, in one case, on the pitch itself.

When Yongge was willing or able to finance his extravagant spending on the club, it wasn’t an issue, at least beyond the fact that it wasn’t being spent especially wisely. But when the tap was turned off, Reading were suddenly forced to try and continue paying wages and servicing an estimated debt of £220m (according to Deloitte) with money that they simply didn’t have. Yongge is now, mercifully, in negotiations to sell the club and put the fans out of their misery.

A similar situation could yet unfold at Blackburn Rovers. Their owners, the Indian farming and pharmaceuticals conglomerate Venky’s, have similarly propped the club up with regular cash injections which service mounting debt and otherwise unsustainable wages. Now, with the company embroiled in a complex legal case in India and with new laws restricting their ability to invest money outside of their home country, the club’s owners are fighting battles in the Indian High Court to be able to free up the funds necessary to keep the lights on. Should they fail in any of their various cases and appeals, the club may suddenly be asked to pay for its debts and wages without enough income to do so.

When clubs have gone under (or come close to it) in recent years, the tendency is to blame bad owners who, through incompetence or malice, have screwed up the financial situation and led their club towards ruin. And while that has certainly been the case in many instances, the fact is that even supposedly well-run clubs are at just as much risk if their owners are no longer able to keep the money coming.

An owner who finds their business interests elsewhere failing will put their club in a dangerous situation without any malevolent intent or necessarily any bad judgement on their part. And with the majority of Premier League and EFL clubs running on consistent losses, that’s a big risk for a great many teams.

Financial problems don’t necessarily have to be the fault of owners – be they fit and proper or otherwise. That’s another lesson of the ITV Digital affair. English football is run on the assumption that the golden goose will continue to lay its eggs, and that creates a continuous problem.

If the value of broadcast rights ever depreciates for any reason, the whole league would be in huge trouble. Should Sky Sports and other major broadcast partners run into entirely unrelated difficulties, the cord could be cut with minimal warning. There could simply be a broader economic crash, of the kind which seem to happen every decade or two regardless of what football is doing.

If the plug was suddenly pulled on the vast rights money that flows into the English game (albeit mostly to the very top) then the knock-on effects could be devastating. A business model based on accumulated debt is only manageable until the point where it suddenly isn’t. Football is sat atop a bubble which has expanded steadily for years – but that doesn’t guarantee that it won’t burst eventually.

It’s worth noting that even clubs that are widely praised as being well-run are often heavily reliant on funding from their owners. Brighton & Hove Albion, who yesterday posted a record post-tax profit of £123m, were mentioned in the LCP report as a club who were extremely reliant on their owner, Tony Bloom, to provide financial support. They have improved their financial position with some canny work in the transfer market, but that isn’t guaranteed as a permanent year-on-year solution. If the market slumped or Bloom’s own fortunes faded for any reason, even Brighton could theoretically be at risk.

The problem is that were most clubs to change the way they did business and actually spend entirely within their means, they would ensure the future of the club but also be at a massive competitive disadvantage. Even clubs that now operate at relatively limited losses often struggle to keep up at the higher echelons of the league ladder.

Take Rotherham United, who recently posted a relatively low pre-tax loss of £1.1m. Broadly seen as a sensibly-managed club, it is the fourth consecutive year in which they have posted a loss (the highest being £1.7m in 2021/22) despite having the smallest wage bill in the Championship. With resources limited in order to ensure the long-term stability of the club, they are currently rock bottom of the second tier, 18 points adrift of safety at the time of writing and all but certain to be relegated in the coming weeks. They are one of the most sustainably-run clubs in the Championship, and also comfortably the worst on the pitch.

For a club with ambitions of earning promotion to the Premier League, it is nigh on impossible to acquire good enough players and staff without spending more money than a second-tier side can sensibly generate – hence the substantial losses suffered by teams chasing promotion in recent years. Occasionally teams like Brentford demonstrate that it is possible to climb the ladder without high-risk spending, but they are few and far between and there is unlikely to be enough talent among the players, coaches and scouting staff available at a sustainable price point to make it possible for every club to follow their example, never mind the fact that it’s tremendously difficult for even one team to do so.

Owners have a responsibility to be careful stewards of their clubs, institutions which invariably existed for generations before they were born. But most would also argue that they have a responsibility to try and bring success to their club, and English football’s financial model is set up in such a way that it is almost impossible to do that without throwing caution to the wind.

To correct course would take the entire pyramid recognising the danger and agreeing a new way of doing things. A salary cap based on a club’s revenue might perhaps work. But it would need the Premier League and EFL to work together, and as recent failed discussions over a new financial deal between the two bodies demonstrated, the top flight clubs have no interest in sacrificing their financial stranglehold on the game for the sake of a sustainable league ladder. Neither do the top clubs in the EFL, the handful who benefit from parachute payments or large support bases, want to level the playing field when they sit rather closer to the top end. There is too much self-interest in the game to solve this problem without outside intervention, of the sort which the government’s proposed regulator may or may not undertake.

This is not an issue that is coming home to roost for many clubs yet. Leicester may endure a points deduction for their overspending, Reading are close to the edge until Yongge sells up, and Bury are one of a few clubs to have gone under entirely in recent years, but most clubs tick over atop an expanding pile of debt without much apparent concern. For now, all is mostly well. But eventually, perhaps many years from now, something will go wrong. Another ITV Digital, another credit crunch, another disaster. And English football looks far from prepared.