Manchester United (NYSE:MANU) has an open transfer window until Feb. 2nd. UEFA Financial Fair Play and FA rules will shape any decisions the club makes during this window -- with both bodies requiring break-even tests, read on to learn how Manchester United fares with these rules.

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Source: Manchester United

Transfer spending and the break-even tests
In my previous article, I took an in-depth look at how the wage uplift rule will likely result in little action from the club during the current transfer window. The break-even rules will also play a role, but the club's solid financial performance the past few years should minimize their effect.

UEFA Financial Fair Play  
Manchester United is currently sitting third in the Premier League. Assuming the team does not implode, chances are they will qualify for the Champions League or Europa League next season, so UEFA FFP rules will apply.

UEFA FFP rules are based on a break-even test of the past three seasons, while also monitoring any overdue payables. Potential penalties for failing to abide by the guidelines include, in order: a warning, withholding of prize money, fines, prohibition on registering new players for UEFA competitions, and ultimately, exclusion from European competitions. Manchester United does not have any overdue payables, so that leaves the break-even test itself.

For next season, the break-even assessment is based on aggregate financial information for the seasons ending 2013, 2014, and 2015. Clubs can spend up to €5 million more than they earn per assessment period (three years). However, clubs can exceed this level to a certain limit -- if it is entirely covered by a direct contribution from the club owner(s) or related party.

The loss limit allowed to be covered by club owners for 2015 to 2016 is €30 million. In the years following the 2017 to 2018 season, the limit will be lower, with the exact amount still to be decided. The fines for non-compliance can be hefty -- crosstown rivals Manchester City were fined £49 million last year.

Also, it should be noted that in order to promote investment in stadiums, training facilities, community development, and youth development, all such costs are excluded from the break-even calculation. The break-even calculation is also pre-tax and does not include exceptional items. 

While the team does not release the FFP calculations, we can make some basic assumptions about youth development costs and training facilities to estimate the numbers. I have the combined youth development and training facility costs at about £12 million. The club was in good standing in 2013 and 2014, and I estimate it will be close to break-even in 2015.

Even if the combined youth development and training facility expenses were £0 a year, meaning £12 million would be added back to total relevant costs for each year below, the club would still be well above break-even for the three year period.

 

2013

2014

2015 (Estimate)

Total Relevant Revenue

£372.4

£440.2

£405.2

Total Relevant Costs

£355.2

£373.8

£403.0

Break-Even

+£17.2

+£66.4

+£2.2

Source: Manchester United 2014 20-F and author estimates

Based on my assumptions and projections for this year, Manchester United is approximately £85 million over the UEFA break-even threshold for the three-year period ending 2015.

Given the team's big transfer signings last summer, the fact that Manchester United will be close to break-even this year is quite remarkable. Keep in mind the club missed out on £40 million to £50 million of revenue when it failed to qualify for the Champions League.

Manchester United has managed to grow revenue versus two years ago due to lucrative sponsorships -- up from £152.4 million in the season ending 2013 to an expected £210 million this season. The most notable partnership this season is the Chevy kit sponsorship, which will bring in roughly $70 million a year for seven years. Also notable, Manchester United was able to keep its old kit sponsor, Aon, as the training kit, training facilities, and preseason sponsor for £15.5 million a year, down just £4.5 million a year from their previous arrangement.

Looking forward to next season, Adidas will be taking over the club's retail sales from Nike for £75 million a year on a 10-year agreement. That's more than double what Nike was paying Manchester United the past 13 years and will provide room for major signings starting this summer.

FA break-even test 
The FA break-even test, under the FA's "profitability and sustainability" rules, comes into effect next season and will be based on the past two seasons (or the current season and the past two seasons, if the first test results in a loss).

Like the UEFA version, the FA break-even test is pre-tax. The FA break-even test differs from the UEFA rules as follows:

  1. There are no exclusions for investment, development, or exceptional items.
  2. The allowed loss is up to £15 million over the current season and past two seasons combined.

If the break-even test results in losses above £15 million, then the club must provide secure funding. If the break-even test results in losses above £105 million, then fines, player transfer restrictions, and Premier League point deductions may be imposed.

Thankfully, the club was profitable in 2014, so there is room to maneuver for 2015.

While I estimate there will be a £25 million pre-tax loss, they will still be well over the break-even mark for the two-year period.

 (in millions)

2014

2015 (Estimate)

Profit before tax

£40.5

(£24.9)

Break-even result over two-year assessment period

 

£15

Source: Manchester United 2014 20-F and author estimates

Window of opportunity this summer
As we can see, it is not the break-even tests that are holding Manchester United back. The Premier Leagues wage uplift rule will put a hold on major purchases during this current window unless the club parts with a big player.

As the team writes in its annual report, "we already operate within the financial fair play regulations, and as a result we believe we are in a position to benefit from our strong revenue and cost control relative to other European clubs and continue to attract some of the best players in the coming years."

Manchester United is in a great position to make large investments in players this summer, as the club's off-field financial performance is as strong as the team's current on-field performance.

Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, and what is success in life. Dan has also written recently on Manchester United transfer news, 5 things Manchester United management wants you to know, and why Ron Baron is betting big on Manchester United. He has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.