Tiran Gunawardena

how football transfers actually work: club to club negotiations

Tiran Gunawardena
how football transfers actually work: club to club negotiations

Inside Reevaldo's transfer: Part 1

As we saw in our last post, Reevaldo has been transferred from Maracanã to Paddington United. But how did that happen exactly, and what did the negotiations look like?

The sports law team at Mills & Reeve have been involved in countless international transfer negotiations and have sat on both sides of the table. So, we thought it might be useful to show how a typical deal gets done, from start to finish. Don't miss the inline footnotes --> 1 <-- which contain links to useful documents as well as additional insights on industry practice.

The first thing to keep in mind is that in any transfer, there are often several negotiations taking place concurrently, between:

  • the buying club and the selling club
  • the buying club and the player’s agent (now called 'intermediaries')10 regarding the player’s personal terms
  • the buying club and the player’s intermediary regarding the intermediary’s commission

This will be the first of four posts taking you inside the transfer and contract negotiations between Paddington United, Maracanã, and Reevaldo. Here, we focus on how two clubs, thousands of miles away from each other, begin negotiating over a player and what actually goes on when clubs are engaged in transfer negotiations.

With a highly sought-after player like Reevaldo, Maracanã’s executives have been fielding enquiries from their counterparts at clubs all over the world for months now.

In accordance with Article 18(3) of the FIFA Regulations on the Status and Transfer of Players,
2
the would-be selling club (“selling club”) must first give permission to the would-be buying club (“buying club”) to speak to the player regarding his potential move.
3

However, in practice, we are aware that buying clubs (via intermediaries) sometimes gauge a target player’s interest in playing for the buying club before any formal approach to the selling club is made.

The selling club will only give permission to the buying club once the parameters of a transfer deal are agreed to between the clubs, so this is the first key negotiation to take place.

If we recall the drawn-out transfers of Cristiano Ronaldo, Gareth Bale, and the ‘failed’ David de Gea transfer, the selling club is in the ‘driver’s seat’ in these initial negotiations. If the selling club is not interested in selling one of its contracted players, they cannot be compelled to sell, even if the player ‘puts in a transfer request’.

If a player is looking to move and his club is a willing seller (at the ‘right price’, most clubs will be), his agent will make enquiries to clubs he knows that could potentially offer the player what he wants from a footballing and financial perspective.

Here, Paddington’s director of football, Fred Peason, initiates discussions by contacting Reevaldo’s agent, Jacó Moreno. Peason enquires about whether Maracanã is actually willing to sell Reevaldo, whether Reevaldo would consider playing for Paddington, and to convey Paddington’s interest formally to Maracanã. Peason also enquires whether Moreno would facilitate communications between the clubs.


27 June 2016

From: fred@paddingtonunited.com
To: jaco@jmsports.com

Hi Mr. Moreno,

My name is Fred Peason and I am the director of football at Paddington United.

As you likely already know, we’ve been interested in Reevaldo for some time. Now that we’ve been promoted and as Reevaldo has turned 18,4 this is the first opportunity we’ve had to enquire about making a formal offer. Do you know if Maracana is truly looking to sell him this summer, and what would Reevaldo think about playing for our club?

I look forward to chatting soon.

Best,

Fred

Sent from my iPhone


28 June 2016

From: jaco@jmsports.com
To: fred@paddingtonunited.com

Prezado Senhor,

Yes, Maracanã is willing to sell Reevaldo, but FYI, a third party owns 30% of his economic rights so that will have to be taken care of.

Reevaldo is aware of Paddington’s interest, but many clubs wish to sign him. If Paddington could meet the offers on the table, guarantee that he’ll be a regular first team player, convince us that Paddington is committed to staying up in the PL and do a deal quickly with Maracanã, then let’s discuss things further.

Grato,

Jacó

Enviado do meu iPhone


30 June 2016

From: fred@paddingtonunited.com
To: jaco@jmsports.com

Further to our phone call yesterday, we’re excited about the possibility of bringing Reevaldo over.

As discussed – we don’t have any fluent Portuguese speakers nor do we have any experience with TPO and the Brazilian market, and if you would be able to help facilitate this with Maracana, we’d like to hire you as our intermediary or consultant on this deal.

We would also like some insight into the interest from other clubs.

Would this be possible?

Best,

Fred


30 June 2016

From: jaco@jmsports.com
To: fred@paddingtonunited.com

Ola Fred,

I am okay with my representing you in the transfer negotiations with Maracanã, and as long as you are okay with my representing Reevaldo on personal terms, I am happy to act for you.

- Jacó


The Reevaldo pursuit is Paddington's first foray into the South American transfer market. Given the club's lack of experience with third-party ownership and their Portuguese-language skills similarly lacking, Peason asked Moreno to act as the club's intermediary while they try to negotiate a deal with Paddington.

Now you may be wondering how Reevaldo's agent can also represent Paddington. Isn't that a conflict of interest?

Well, yes it is, but provided that Moreno discloses this conflict to both Reevaldo and Paddington and they both consent to this arrangement, it is permitted.

In fact, so-called ‘dual representation’ happens all the time - have a look at the most recent list of Premier League transfers and the agents involved in each deal, and note how many cases of dual representation there are.

The club, player and agent will be in compliance with the FA’s Regulations on Working with Intermediaries as long as:

  • the intermediary has a pre-existing representation contract with the player lodged with The FA,
  • both the club and the player are aware of the conflict of interest,
  • both the club and the player are aware of the full particulars of the proposed dual representation5
  • both the club and the player are given the opportunity to seek independent legal advice,
  • both the club and the player consent to dual representation in writing, and
  • the relevant paperwork is submitted to The FA.

After Paddington contacted Maracanã directly (with Moreno providing translation services), Maracanã expressed a willingness to sell Reevaldo as long as their valuation of the player was met.

It was decided that Paddington’s executives, Fred Peason and chief executive officer Kara Downey, would travel to Rio de Janeiro to engage in face to face negotiations with Maracanã on the weekend of 8-10 July.

The meetings were scheduled to coincide with Maracanã’s home match against rival club, Praça on 9 July, in what would be Reevaldo’s last match for Maracanã.

Prior to the meeting with Maracanã, Moreno informed Peason and Downey that he heard from his contacts that Inter Parma was no longer interested, but FC Lisbon was also negotiating with Maracanã over Reevaldo. Moreno said he heard that FC Lisbon had submitted its last and best offer: €8 million plus a ten percent sell-on fee.

Moreno also mentioned that scouts from mega-clubs Piemonte and Salford United had been spotted at Maracanã matches recently, so it may be advisable for Paddington United to act fast in order to avoid a bidding war that they would surely lose.


How clubs calculate transfer fees

There is no exact science to how clubs decide how much to buy and sell players for, as it ultimately depends on market forces. However, some criteria that a buying club might consider when making an offer are:

  • The age of the player - careers typically peak in the mid-twenties and finish in the early thirties.
  • The time remaining on the player's contract - the closer the player is to his final contract year, at which state he will be a 'free agent', the lower the transfer fee.
  • Playing position - a striker will normally command a higher fee than a defender, for example.
  • International - there is a premium paid for national team players, especially English players.
  • Commercial value - is this the next David Beckham or Cristiano Ronaldo, whose off-pitch value to the club may boost the club's commercial revenue?

After dinner and pleasantries, the negotiations began in earnest, led by Paddington CEO Kara Downey and Maracanã chairman, Joao Pedro. The head of CSI, the investor in Reevaldo’s economic rights, was also present.6

Wait a second, isn’t third-party ownership banned?

Indeed, it is. The ban came into force in 2015, but third-party ownership agreements entered into prior to May 2015 were “grandfathered in.” These deals will continue to remain in place until whenever the agreement reaches its natural expiration date.7

Having an €8 million bid from FC Lisbon on the table and being fully aware that Salford United and Piemonte were scouting the club, Maracanã asked for £12 million.

Downey knew that FC Lisbon were having some financial difficulties, and as such, wouldn’t be in a position to pay the entire €8 million fee up front. As it happens, FC Lisbon’s €8 million bid was structured as €3 million up front, and then five €1 million payments over the next three years.

Downey, also knowing that Paddington would receive their share of the revenues from huge new TV deal later in the year and were already seeing record season ticket sales and new sponsorship opportunities, counter-offered slightly more favourable financial terms than Lisbon, at £8 million (€9.36 million). Paddington also offered to pay the full £8 million in one lump sum.

Why is the instalment schedule important?

Many clubs rely on transfer sales to help pay for club expenditures and will often prefer to accept a slightly smaller fee paid in full immediately than a larger fee that won’t be fully realised until two or three years from the date of sale (and which may be at risk if the buying club encounters financial trouble and defaults on future payments).

Maracanã also wanted to benefit in the future should Reevaldo’s new club sell him, and mandated that a sell-on clause be included in the deal.

After quite a bit of back and forth - negotiations were protracted as CSI, the third-party owner, were originally unwilling to sell their interest in Reevaldo for anything less than £2.4 million (which Paddington finally agreed to) - the clubs and CSI reached an agreement on a club to club transfer fee:

  • a £6 million basic transfer fee, payable in full immediately,8
  • an additional £5 million in potential add-ons, and
  • Maracanã also receives 20% of the profit made from a future sale of Reevaldo by Paddington.

However, Paddington made sure that the transfer was conditional upon Reevaldo successfully passing a medical examination as well as securing a UK work permit. Moreno provided Paddington with background on the number of appearances for Maracanã in both the league and in the Copa Libertadores, and both clubs were fairly confident that Reevaldo would be able to secure a work permit through the FA’s Exceptions Panel.9

This is the end of the first of our four posts detailing the negotiations that went on behind the scenes that led to Reevaldo being transferred from Maracanã to Paddington.

Once the clubs agree to terms on a transfer, lawyers are often brought in to draft the key contracts involved - the transfer agreement, the player's employment contract, the intermediary documentation, and potentially a separate image rights deal.

In our next post, we’ll show you the actual transfer agreement between Paddington and Maracanã.


  1. Pretty cool, right?




  2. Article 18 governs special provisions relating to contracts between professional footballers and clubs.




  3. This does not apply when the player is in the last six months of his playing contract. Then, a player is free to agree terms with a new club with a view towards a free transfer once the player's contract with his current club expires.



  4. In accordance with FIFA's Article 19, it is generally prohibited for clubs to engage in international transfers of players under the age of 18. There are exceptions to this rule, but Reevaldo does not meet the necessary criteria to trigger an exception.

    For an accessible article on Article 19 and how clubs have been sanctioned for violating this regulation, see this ESPN article written by one of our sports lawyers.



  5. Including the full amount of the fees paid to the agent.



  6. In South America, the practice of companies / individuals investing in players with a view to profiting from their future transfers was commonplace.

    However, this practice, called Third-Party Ownership or Third-Party Investment (because there is investment from a third party outside of the club), was banned by FIFA from May 2015 under Article 18ter of the FIFA RSTP.

    In England, third-party ownership has been banned for many years. In practice, this means that clubs have to buy out the interests of third-party owners prior to the expiry of the player’s initial playing contract with the club (see Premier League Rule U.39).



  7. However, these deals cannot be extended beyond the original expiration date.

    The governing FIFA regulation on the third-party ownership (TPO) is Article 18ter, and we will be discussing Reevaldo's TPO issues in greater depth in a later post.



  8. While Paddington will pay the full £6 million immediately, the transfer fee will be amortised over the length of Reevaldo's contract in the club's financial accounts. So, if Reevaldo signs a five-year contract, the transfer will will be amortised at £1.2 million per year over the next five years, rather than recorded £6 million this year.

    The £5 million in potential add-ons are classified as contingent liabilities and will come due on the club's accounts in the year when the add-on is triggered.

    Recognising how clubs calculate player costs is fundamental to a basic understanding of the transfer market and for more, see this Wall Street Journal article written by one of our sports lawyers.



  9. Stay tuned for a forthcoming post focusing specifically on Reevaldo’s and Paddington's efforts to secure a work permit.



  10. We will be using both terms, agent and intermediary, interchangeably.