After a long time, the M&A market with sports clubs in the Czech Republic, especially football clubs, came back to life with a recent change of shareholders in several clubs. This trend seems far from over, as more clubs from the first and second football divisions remain up for sale by their current owners, both private persons and public entities (municipalities).
This trend is further boosted by successful tenders organized by the League Football Association (an association of professional football clubs participating in the first and second divisions) with respect to broadcasting rights, league brand name and betting rights, which multiplied guaranteed incomes for football clubs in both divisions. Also, additional funds flowed into clubs successful in UEFA competitions as well as to other clubs based on UEFA solidarity payments.
Czech football clubs are thus, after years of their owners, mostly Czech businesspeople, funding them partly as a hobby and partly as an influential tool at the local level, in a situation where they can have balanced financials and become standard business companies in the sport/entertainment sector.
The business potential of clubs is still far from being exhausted, as the fan base and business opportunities, compared to some countries of similar league size and club quality, can still substantially increase. This mix makes professional Czech football clubs an interesting target for potential investors, including those building a multi-club ownership structure across Europe for player development and talent scouting, and will further boost M&A activities in this sector.
Purchasing a sports club involves assistance from various advisors, among other legal professionals who will help facilitate the acquisition process, which typically involves the following steps:
– The club owner and the potential buyer negotiate and agree on the basic terms of the acquisition (percentage of shares, price mechanism, timing). These terms are typically outlined in a non-binding document such as a letter of intent (memorandum of understanding or heads of terms). This document may contain a (binding) exclusivity clause guaranteeing the potential purchaser that the seller will not negotiate the deal with other potential investors for a certain limited period of time. Usually, the acquisition is contingent upon the buyer completing satisfactory due diligence (legal, tax, financial, sport) and the seller agreeing to provide the relevant documents and information to facilitate this due diligence process.
– Following the execution of the letter of intent, the seller provides the necessary documents and information to the buyer, usually via a virtual data room (preferably prepared in advance by the seller in cooperation with the club’s management and its legal and financial advisers). This information includes financial, operational, and legal details about the club and its business.
Ideally and assuming a fully cooperative seller and management team of the club, the due diligence process takes about a month. A legal due diligence report may be acknowledged as a comprehensive and descriptive summary of findings (which might be helpful for an investor who has no experience with the local market) or, which is now more common, as a “red flag” report that focuses solely on critical issues. In any case, having access to the management of the club to clarify issues found in the disclosed documents is very important as, in some cases, the football practice does not always match up with the content of the documentation.
– Once the due diligence is completed to the satisfaction of the buyer, it is time for the preparation and negotiation of an acquisition agreement and adjacent documentation (escrow agreement, corporate documentation, etc.). Typically, the liveliest discussions between parties relate to various warranties and indemnities to protect the buyer against risks identified during the due diligence process.
– Unless a merger clearance is necessary, which is pretty unusual, signing and closing, together with corporate changes in club governing bodies, will be the last step of the acquisition process.
Although the above principles do not differ from a standard acquisition process in other sectors, there are some peculiarities to be considered when conducting a legal due diligence process of a sports club and when structuring the acquisition deal arising out of specificities of the sports industry. The acquisition of a football club provides a nice example of these peculiarities.
First, keeping a management continuity in the acquired club is critical due to the importance of the personal relationships of mangers. The Czech football world is fairly small in terms of key decision makers, and club representatives usually have strong connections with other key persons, such as team staff, players, associations and league representatives and other club managers, agents and other persons active in this industry.
It is therefore important to motivate the management team of the acquired club to pursue their mission under new investors, and this either via financial motivation or by keeping the management in the ownership structure with a possible future phase out via option rights (or at least by motivating them financially and linking a part of the purchase price to such continuity).
When it comes to the legal due diligence process, the process shall focus on key assets of the club, so attention is typically directed to the following areas:
- Stadium and Training Facilities: Understanding the ownership or leasing arrangements of these properties is crucial. Some clubs are direct owners of real estate, others are lessees of facilities. The lease terms can significantly differ from one club to another and possible state aid issues shall also be carefully considered if the real estate is owned (and leased) by public entities.
- Debt obligations and litigation: It’s important to understand the debts the club carries, their maturity dates, and whether they need to be settled upon acquisition. In practice, some overdue payables which are not claimed by the creditors due to specific relationships with the seller of the club might become the subject of such claims immediately upon acquisition.
- Contracts: Analysing the key terms of player, staff and management contracts is crucial. This includes understanding termination dates, bonus structures, and outstanding transfer fee obligations. Contracts with agents need to be carefully checked as well as these might contain specific provisions which will materialize only in the future and under specific conditions and might not be properly reflected in the accounts of the club. Older transfer agreements are also important as these might contain specific provisions which will apply later (sell on fee clauses, etc.)
- Commercial Agreements: Investigating the club’s commercial contracts, particularly sponsorship agreements, is essential. Certain advertising spaces are contracted via league association (for league sponsors) which also typically takes care of a master agreement with a broadcaster. Some agreements might stipulate a change of control clause and it is not extraordinary to find some exclusivity clauses in sponsorship agreements (under which the club is not allowed to promote competing products). In practice, clubs usually use template sponsorship agreements, which however differ in the case of main sponsors who often impose their own templates, so a thorough review of these agreements in terms of sponsors’ rights and duties clauses, the duration and termination conditions of contracts, contractual penalties, options, and any other advertisement restrictions is recommended. Some agreements are specific, such as contracts with a technical sponsor (supplier of kits) or a betting partner.
- Intellectual Property: One should assess the extent to which the club’s intellectual property—mainly its logo—is registered as a trademark. It is also worthwhile checking if the club monitors the possible misuse of its trademarks (which happens often) and the rights of the club with respect to the intellectual property of players (which is usually dealt with in the players’ contracts).
Acquiring a professional football club in the Czech Republic might be an interesting business opportunity for an investor looking to participate on a dynamic market with strong potential. An investor should carefully structure the deal with the aim of maintaining management continuity and ensuring the necessary legal and financial checks within the acquisition process. There are certain legal peculiarities which need to be checked (and addressed within the acquisition documentation, if appropriate) compared to a standard M&A transaction.
