Benfica: Where does the money come from?

When Benfica supremo Luis Filipe Vieira announced in October that the club would not only retain its major players but also invest during the January transfer window, he sent two signals to the footballing world:

i) That the current squad is not good enough to achieve the club’s ambitious goalsii) That the club's financial health is good

Interestingly, neither of the above statements are true.

Benfica have the best crop of players in 15 years with a mix of established players (Aimar, Cardozo and Luisão) and up-and-coming starlets (David Luiz, Di Maria and Ramires) and boast strength in depth to compete on all fronts.

While that alone does not guarantee silverware, it certainly helps to create a winning formula.

Because Vieira is known to suffer from ‘Foot-in-the-Mouth’ syndrome, nobody took his words very seriously.

Yet last week, according to the Portuguese press, Benfica agreed a €5 million fee for Flamengo defensive midfielder Airton and are close to tieing up a deal for U20 Brazilian striker Alan Kardec.

Like Arsène Wenger, I am usually against recruiting reinforcements in January; the market is inflated (because good players are not allowed to leave on the cheap in the middle of the season) and there is the risk that new signings fail to meet expectations or disrupt the dressing room.

But even if keeping the faith with the current crop is the right thing to do, most people would understand if the Eagles were in the market for a new left-back, their weakest link at present.

Instead, they are about to sign a defensive midfielder and are looking to bring in another striker.

It would be unfair to comment on Airton as I have not seen him play, but even if he happens to be a cracking player, what impact will he make this season?

Unless manager Jorge Jesus changes formation, he will find it difficult to dislodge Javi Garcia from the starting XI.

Still, regardless of the decision at sporting level, the real question here is whether Benfica can afford these investments or any others.

Hitting the net profit?

Several blogs ago, I mentioned I was sceptical about Benfica’s balance sheet due to the hefty amounts of money being spent without the support of a solid revenue structure.

It wasn’t, therefore, a big surprise when it was reported that the club is technically bankrupt (i.e. having negative equity capital).

That is not a new situation in Portugal, but being €12 million in the red should at least be a warning sign to the management of any organisation.

Benfica invested around €25 million in the summer and should the Airton deal go through that figure will rise to €30 million.

The question people are now asking is: how can they invest so much without selling their most-prized assets and without playing Champions League football?

The answer is sadly very simple: by borrowing against future revenues. Here are two examples of the strategy adopted by the club.

Some months ago, Benfica agreed a 12-year sponsorship deal with Sagres, a well-known Portuguese beer brand that also lends its name to the league.

The amount per year was rumoured to be huge, but how can we know whether the Benfica brand won’t be worth more in three-four years?

We can’t, and that’s why such lengthy deals are usually struck, not to get more money, but to get money faster.

More recently, the club decided to create the Benfica Stars Fund.

Basically, like in any other investment fund, people put their money in some assets – in this case the Benfica players Ã¢Â€Â“ they deem attractive with hopes of getting a profit at a later stage.

In other words, the club ‘sells’ fractions of its own players at the expense of future sales.

Again, they get the money faster, but they might get a lower amount. Here’s the most interesting bit.

The day Benfica managed to raise €22 million from their Stars Fund was, by sheer coincidence, the same day they had to pay that same amount in old debt.

Now what does that tell you?

Learning from past mistakes

Gambling on Champions League football to pay loans was the main reason why Leeds United – once one of the most exciting teams in the football world – fell into a downward spiral that ultimately condemned them to League One.

Leeds faced a common situation in other businesses: their actual growth rate exceeded the sustainable growth rate and the club needed to pay its huge debt.

In football, performances can affect the whole business side of a club.

If a team is playing badly, its players lose value, less people will go to the stadium and merchandising sales will be lower.

If the Eagles fail to reach the Champions League this year, not only will they lose out on UEFA's millions but they will also miss out on deals for players who wish to showcase their skills in European football's elite competition.

For the sake of their future, Benfica better keep on delivering.

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