Now that the days of unlimited spending are over, and knowing that Chelsea is now on a (very large) budget due to UEFA's financial fair play regulations, it's worth taking a look at transfer rumours through a fiscal lens.
In some cases, a player may be a good fit for the club tactically speaking, but it may not make a lot of financial sense for Chelsea to buy that player or for the player's club to sell that player.
Given that the Diego Costa rumours are heating up, it's worth taking a look at what the twenty-five year old striker will cost Chelsea on the FFP books.
Fortunately, a look at the numbers show that Diego Costa seems to be a very good fit for Chelsea not only on the pitch, but also on the balance sheet.
Let's assume that Chelsea will pay Atletico Madrid the reported £32m for Diego Costa's services.
Let's also assume that the transaction takes the form of a transfer fee and not a buy-out clause being triggered. This is an important distinction, as buy-outs are technically paid by the want-away player to his club, whereas transfer fees are paid by the purchasing club to the selling club. Of course, in reality, buyouts are paid by the purchasing club as well, but the purchasing club has to give the money to the player first. In Spain, this type of transaction can be subject to exorbitant tax rates, and can drive the price up by as much as 40%.
Of course, the tax can be avoided if clubs agree on a transfer fee, rather than the purchasing club being forced to trigger the buy-out clause.
As Graham Hunter explains, "behind the scenes, the buying club will say, 'OK, we'll give you 99.9999 percent of the buyout clause, but if we make it a purchase rather than an actual buyout then we won't have to pay extra tax on the whole move, and we'll do the same for you one day or we'll look well on your next move for one of our fringe players.'"
Given that Chelsea and Atletico Madrid already have a good working relationship stemming from the Thibaut Courtois loans, I expect that the tax issues will be avoided and the clubs will agree on a transfer fee (for more on the nuances of buy-out and release clauses, see Ian Lynam's piece in The Guardian and Daniel Geey's piece on his website).
For the purposes of FFP accounting, when a player is purchased, the transfer fee is amortised over the life of the contract. Amortisation is the process by which an expenditure is paid off over time, and the transfer fee will be spread out evenly over the assumed five-year deal.
Costa's £32m transfer fee, then, is amortised to £6.4m annually (£32m divided by the five years on Costa's new Chelsea contract).
Matt Law at The Telegraph reported a few weeks back that Chelsea would offer Costa £185k per week. This works out to about £9.6m annually.
The total FFP cost for Costa's services, therefore, would be £16m annually (£9.6m wages plus the £6.4m amortised transfer fee).
Chelsea can easily absorb the £16m annual FFP cost into its 2014-15 books and beyond.
Starting this year, Chelsea's annual revenue will increase by around £35m simply by virtue of the new adidas deal (rising from £20m to £30m annually) and the new Premier League broadcasting deal (which will provide each club with, on average, around £25m more per year than the previous deal).
In addition, John Terry (£9.1m), Samuel Eto'o (£7m), Frank Lampard (£6.5m), Ashley Cole (£6.5m), and Michael Essien (£5.4m) are all scheduled to come off the books at the end of the season. In total, £34.5m would be cleared off the FFP wage bill, although some of those players could come back next season on reduced wages. In addition, the FFP cost of Nemanja Matic will double from £3.7m to £7.4m next season, as will Kurt Zouma's, from £2.36m to £4.72m, reducing that £34.5m savings a bit.
Further, while the £34.4m FFP profit from the January sales of Juan Mata (£23.6m) and Kevin de Bruyne (£10.8m) will be recorded on the 2013-14 books, this lump sum will help defray any losses accrued during the next three of FFP annual checkpoints.
Put simply, Chelsea is in healthy financial shape as far as financial fair play is concerned and can certainly avail itself of the available talent in the transfer market.
For perspective on how Costa's £16m FFP cost compares to Chelsea's other players, here's the current top five biggest player costs on the 2014-2015 FFP books -
1. Fernando Torres - £18.46m
2. Eden Hazard - £16.66m
3. Willian - £10.82m
4. André Schürrle - £7.96m
5. Nemanja Matić - £7.4m
Costa would become one of Chelsea's most expensive player investments, but as mentioned, Chelsea can easily afford Costa, and signing him won't necessarily preclude the club from also signing Star Player #2 in addition to its usual attempt to sign every young prospect Michael Emenalo and Piet de Visser can find.
Chelsea is in dire need of a striker, and while I'm excited about the prospect of Romelu Lukaku getting a shot to contribute at Stamford Bridge next season, Chelsea needs an established scorer while Lukaku continues to develop. Samuel Eto'o has been a pleasant surprise, Demba Ba scored that unforgettable goal against PSG, and Fernando Torres, erm, tries hard, but few Chelsea fans will feel comfortable with those three plus Lukaku leading the line next season. Chelsea needs an established presence up top, and Diego Costa fits the bill.
