Manchester United  (NYSE: MANU.US)  has an open transfer window until 2 February. 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.

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.

^{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.

^{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.

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Dan Dzombak has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Manchester United  (NYSE: MANU.US) spent £150 million last summer on transfers. With the transfer window back open until Feb. 2nd and the rumor mill in full swing, it’s a good time to look at how the various FA and UEFA rules on spending and costs could affect the club. Making some basic assumptions, my analysis shows Manchester United doesn’t have much room to maneuver in this transfer window.

With Victor Valdes recently signing on with a free transfer, the most popular rumors now revolve around:

• Ron Vlaar from Aston Villa
• Ilkay Gundogan and Mats Hummels from Borussia Dortmund
• Raphael Varane from Real Madrid
• Kevin Stootman from Roma
• Paul Pogba from Juventus

Besides a transfer of Ron Vlaar — which is possible, particularly if Aston Villa wants some money instead of letting him go on a free transfer at the end of the season — the rest of the players are surely needed by their respective clubs and would be too expensive for Manchester United to acquire.

Financially, there are four things for the club to consider when looking at transfer spending moving forward: UEFA’s Financial Fair Play (FFP) regulations and then Premier League’s home grown talent rule, wage uplift rule, and break-even rule.

Break-even tests

UEFA FFP and the Premier League break-even rules are similar. While UEFA FFP regulations don’t apply this season, assuming Manchester United qualifies for European play in 2015, this season’s decisions will matter.

Manchester United revenue is expected to drop £40 million to £50 million just from missing out on the Champions League this season. At the same time, expenses have risen after the club signed multiple players. However, the steady increase in revenue from sponsorships, which should rise nearly 25% this season to £170 million as a result of the notable $70 (£46) million a year Chevy kit sponsorship, means the club will be close to breakeven this season.

With both break-even rules measured over a three year period — Manchester United has been profitable the past two years — basically any spending during this transfer window won’t affect either break-even test for next year. You can read more about Manchester United transfers, financial fair play, and the break-even tests in my upcoming article.

Homegrown talent 

The next rule teams need to keep in mind for transfers and squad composition is the homegrown talent rule, which requires teams to have 8 “homegrown” players in order to have a full 25-man roster of players over the age of 21. Without getting into all the details, Manchester United is well above that threshold with 11 qualifying players, so the roster is unaffected.

Wage uplift

The Premier League’s wage uplift rule is the one area that may impact the team during this transfer window. While fans are hoping for a big money signing announcement, this seems unlikely under the wage uplift rule unless another player is transferred out at the same time.

The wage uplift rule was started as part of the Premier League’s “short term cost control” — it compares the total player wages ending in each season against the benchmark year. The 2012 to 2013 season currently serves as the benchmark, and the rule applies to the seasons ending in 2014, 2015, and 2016.

When you compare player wages to the benchmark year, they can either:

• Be £4 million per year higher than the benchmark year. So for the 2014 to 2015 season, that means they can only be £8 million above the wages in the 2012 to 2013 season,
• Or wages can be higher than the rule if the increase is funded by the club’s “own revenue,” which includes essentially all revenue besides Premier League TV money and includes profit from player sales.

For Manchester United, total “own revenue” was £301 million in the 2012 to 2013 season. With the team not making the Champions League, I expect “own revenue” including profit from player sales to be around £315 million to £325 million for this season. So Manchester United’s player wages are allowed to be £14 million to £24 million above the 2012 to 2013 level.

There are two things to note:

1. It is remarkable that Manchester United’s own revenue is up despite the approximate £50 million hit the club is taking from not making the Champions League. This shows how exceptional the organization is when it comes to generating commercial and sponsorship revenue.
2. The “wage uplift rule” applies only to player wages, not staff wages.

The mistake I’ve seen a few analysts make is to simply pull wages from the annual report, but that number includes all the wages and social security costs for the club’s 800-plus employees and 2,300 temporary staff, in addition to the 49 players on the first team squad.

So we have to make some adjustments to estimate the player wage uplift.

Club wages and salaries were £158 million in the 2012 to 2013 season. At the end of last season, Manchester United added 16 coaching, 13 commercial, 22 media, and 78 other staff for a total of 126 new employees compared to the 2012-2013 season. Using the club guidance for wages and assuming the employee numbers are unchanged, we can back out the social security costs and some other small costs, so my estimate of wages and salaries is £175 million to £182 million for the 2014 to 2015 season.

So the total wage uplift is £17 million to £24 million. However, we need to back out the added non-player employees’ wages. Assuming an average £60,000 salary across the 126 employees, we get £7.5 million.

That means player wages rose around £10 million to £17 million. To summarize:

^{Source: Manchester United 20-F, FQ4 2014 guidance, and author estimates.}

With the player wage increase estimated at £10 million to £17 million and “own revenue” up only £14 million to £24 million, that leaves little room for a major signing, unless there is also an accompanying sale or player loan.

Manchester United transfers going forward

While the January transfer window is limited, things look good for this summer, regardless of whether the club makes the Champions League or not. The £75 million a year Adidas deal will provide a big boost to revenue starting next season, and the club will surely add more sponsors to increase revenue between then and now. In the meantime, Ed Woodward and the Glazers have invested the club’s finances well over the past eight years, and they should continue to do so going forward.

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Dan Dzombak has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

WASHINGTON, DC —  Warren Buffett, Steve Jobs, and Bill Gates have all attributed their success to one factor. In fact, this one trait is behind the success of all people that have performed massively better than the average person. Read on to find out what the trait is and how you can put it into practice in your own life and investing.

The most important factor for success

According to Alice Schroeder, in 1991 when Bill Gates’ dad asked Buffett and Gates what the most important factor for their success was, they both gave the same answer, “focus.”

Gates’ focus was illustrated in Walter Isaacson’s new book The Innovators, as well as Gates’ fellow Microsoft co-founder Paul Allen:

One trait that differentiated the two was focus. Allen’s mind would flit between many ideas and passions, but Gates was a serial obsessor.

“Where I was curious to study everything in sight, Bill would focus on one task at a time with total discipline,” said Allen. “You could see it when he programmed. He would sit with a marker clenched in his mouth, tapping his feet and rocking; impervious to distraction.”

Steve Jobs was the same way; he was relentlessly focused on attacking problems searching for the best answer. Apple’s founding marketing philosophy had three main tenets the second of which is focus:

In order to do a good job of those things we decide to do we must eliminate all of the unimportant opportunities.

Focus was key for Buffett as well, Schroeder writes: “He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion.”

Why is this so important?

In life and investing, you need to be relentlessly focused on your goals if you want to have better than average results.

Differentiation

To stick out from the crowd, you need to do something better than everyone else. There’s no standard definition of what “better” is though. McDonald’s does low prices and quick drive through service while Chipotle does massive burritos with a great service culture. They both have been wildly successful as they focus on doing one thing well.

What gets companies and people into trouble is when they try and do too much, leading to mediocrity.

McDonalds has been suffering lately as its menu has grown to accommodate so many different items that is has gotten unwieldy, leading to a confusing menu and longer wait times.

Apple was a disaster with 350 different products before Jobs came back in 1998. He refocused the business around the customer experience, simplifying Apple’s focus to just 10 products. Everyone knows the rest of the story.

Successful investing

Like success in life and business, to be successful in investing, you need focus and time if you want to do better than average. As Warren Buffett has explained,

“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

Just getting to average performance is hard enough. While by definition, the average investor cannot do better than average, the average investor would do nearly 80% better if he or she simply earned the average market return. Most investors would be better off in index funds.

Source: Dalbar

The first key part to be successful is to learn the mistakes that hold people back and avoid them. For investors these include being too active, overconfident, loss-averse, taking on debt to invest, and making rash decisions based on daily market movements, among others.

The second part is to know what your goals are and have a process where you constantly learn, think independently, and quickly try and figure out when you are wrong. You need to go put in the effort so that you can evaluate a selection of businesses and build a circle of competence, that is a set of businesses and industries that you can understand and can independently evaluate. Only then will you be able to select businesses whose values are misjudged by the market, providing an opportunity for you to profit. To get to that point, Buffett suggests:

Read 500 pages like this [annual reports, trade journals, etc.] every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.

Most people don’t do this. The key is to realize the limits of your knowledge, you can’t know and be good at everything. For this reason, most people shouldn’t try and invest in stocks to beat the market since they can’t put in the time and focus.

However, by learning about investing and how to evaluate businesses you build knowledge that will help you understand your job better, your industry better, and everyday life better. As Buffett has said,

“I am a better investor because I am a businessman and I am a better businessman because I am an investor.”

Investing is a lifelong journey, not a sprint. If you are willing to put in the time and focus, a commitment to learning how to invest will pay dividends for the rest of your life.

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Dan Dzombak has no position in any stocks mentioned.The Motley Fool owns shares of Apple.

WASHINGTON, DC — There are many different paths to success in investing. I can give you examples of successful value investors, growth investors, macro investors, traders, bond investors, real estate investors, and more. They all have one thing in common, though: Successful investors never give up.

The most important characteristics of the best investors are grit, self-discipline, and the ability to survive over the long term. Read on for more about how the best investors stay successful in investing and what you can learn from them.

Toughing it out
While there are countless books on how to get rich quick, make money easily, and attract success with positive thinking, the truth is that successful investing is hard.

Investing is simple in theory, but not necessarily in practice. Investing can be discouraging, gut-wrenching, and exhausting. Those who succeed are the ones who are able to stick with it.

Psychology research by Angela Lee Duckworth of the University of Pennsylvania has shown that “grit” (defined as the tendency to sustain interest in and effort toward a very long-term goal) and self-control (defined as the voluntary regulation of behavioral, emotional, and attentional impulses in the presence of momentarily gratifying temptations or diversions) are two of the keys to success in any endeavor. Investing is no exception.

Whether your strategy is index investing or a more active form of investing, those who succeed in investing are those who are able to compound their money over the long term by staying in the game and keeping control of their emotions. This goes for passive investors, traders, fundamental investors, or anyone investing. The market will jump around, there will be manias and panics, and there will be lots of noise, but in the long run the best strategy is to stick to your plan and stay in the market, which has averaged annual returns near 10% over long periods of time.

Notice how staying invested and taking advantage of compound interest can build your wealth exponentially, even given subpar returns:

While it may be scary to invest at times, it’s important to stay disciplined and stay invested. As John Griffin of Blue Ridge Capital wisely said, “The future is uncertain; it is always a difficult time to invest.”

Having a process to deal with market fluctuations is key to keeping your wits about you when everyone else is losing theirs. For passive investors this means dollar-cost averaging, continual rebalancing, or other forms of automatic investing. For value investors, it’s the idea that the market is there to offer you prices for your investments that may be completely different from their intrinsic value, and you don’t have to accept those prices all the time.

Everyone has a different way of understanding the markets and dealing with fluctuations. The important thing is to have your own process for sticking with it over time.

Survival
One of the popular sayings in business right now is that “failure is good.” It doesn’t work that way in investing. To be successful over the long term, you need to play it smart and avoid huge losses in your pursuit of big gains.

In good times, people often take risks with significant portions of their portfolio or use borrowed money to enhance “safe” investments. Either way, if your investments tank, everything you did before then doesn’t matter financially. As Berkshire Hathaway CEO Warren Buffett has said, “Over the years, a number of very smart people have learned the hard way that a long stream of impressive numbers multiplied by a single zero always equals zero.”

Buffett and his partner Charlie Munger are celebrities in the investing world. However, few people know that they used to have a third partner: Rick Guerin. Guerin was in a hurry to get rich and was borrowing money using margin loans to invest in the stock market. In the market downturn of the early 1970s, when the stock market dropped roughly 70%, Guerin got margin calls and was forced to sell all of his Berkshire Hathaway stock to Buffett at $40 per share to get money to pay back his debt. Those Berkshire Hathaway shares now trade for just over $200,000 each.

While we can’t avoid mistakes entirely, we can prevent mistakes that have the potential to ruin us. Borrowing money and taking significant risks for short-term rewards can work for a while, but it can also deal a serious blow to your finances that takes years to recover from.

Investing is a lifelong journey, not a sprint. A commitment to learning how to invest and sticking to it through thick and thin is key to the success of all investors.

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Dan Dzombak has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

^{This article was originally published on Fool.com}

WASHINGTON, DC — Manchester United (NYSE: MANU.US) has been weak in the field and in the stock market this year. On the field, the Premier League football team had a slow start to the season after last year’s seventh-place finish. The stock is up slightly in 2014, but it is down 6% over the last 12 months. One billionaire fund manager has raised his stake in the team even as the majority owners of Manchester United lower theirs. Read on to find out why Ron Baron is betting big on Manchester United.

Source: Manchester United.

Baron is CEO, CIO and portfolio manager of Baron Funds and Baron Capital Management. He is a noted growth fund manager whose Baron Growth Fund has returned cumulative average growth of 13.7% since its inception in 1994. The people at Baron Funds are long-term buy-and-hold growth investors with an average holding period of seven years.

According to the firm, Baron invests in businesses with business models that can’t be challenged and that feature big growth opportunities while having a value-oriented purchase discipline based on what they believe the company can earn over the next three to five years. His philosophy also stresses thinking long term and investing in management teams with integrity and similar long-term mind-sets; this is encompassed in his firm’s mission statement: “we invest in people.” Finally, Baron Capital emphasizes exhaustive research to understand businesses, management teams, and industries, and to manage risk.

A few weeks ago, Baron Capital Group revealed that it had upped its stake in Manchester United to 15,026,190 shares. That’s 37.8% of Manchester United’s publicly traded shares, or 9.2% of the company overall. Currently the company has 39,777,957 Class A shares, which each get one vote and are publicly traded. Another 124,000,000 Class B shares are not publicly traded and carry 10 votes each. So why has Ron Baron bought so much of Manchester United? Based on his investment philosophy, I believe three things attract him to the company.

1. “We invest in people”

The Glazer family has owned Manchester United since 2005. Most of its ownership is held by a holding company called Red Football, though various family members have stakes held in irrevocable trusts. The Glazers own 124,000,000 Class B shares and 11,000,000 Class Ashares, leaving the family with majority control, 82% of the economic rights, and 97.7% of the voting rights. How has the family done as stewards of the company?

The family had it relatively easy on the field for a few years as legendary manager Alex Ferguson led the team until the end of the 2012-2013 season. From 2005 he led the team to at least a top three finish every year, including four Premier League titles, a league cup win, and a title and two second-place finishes in the Champions League. After Ferguson’s retirement, last season Manchester United hired David Moyes, who was sacked after he led the team to a seventh-place finish, missing out on qualification for European competition. The club has now invested considerable sums in players and a new coach to resume its winning ways.

Off the field, the Glazers have been paying down the debt they used to purchase the team. More important, the family has increased and diversified the club’s revenue streams — particularly its commercial revenue, which has gone from 27% of the team’s overall revenue in 2007 to 42% last year.

Source: Manchester United.

The Glazers have done this by using Manchester United’s strong brand to their advantage, which brings me to the second reason Baron is betting big on Manchester United.

2. “Business models that can’t be challenged”

Soccer is unquestionably the most popular sport in the world. Manchester United claims it is the most-watched sports team in the world, with an estimated average live audience of 47 million people per game and a total of 659 million fans globally.

Manchester United is using that fan base to reap the largest sponsorship and licensing deals the world has ever seen. Beginning this season,General Motors‘  Chevrolet is paying $70 million annually through 2021 to be the team’s jersey sponsor. That’s well over double the price some of the world’s other most popular soccer teams are getting from their shirt sponsors.

Source: Manchester United.

This year, Manchester United also signed a 10-year deal with Adidas, starting at the end of this season, to handle the team’s wholesale retail, merchandising, apparel, and product licensing. The contract stipulates that Adidas will pay Manchester United a minimum 750 million pounds over the life of the contract. At current exchange rates that is over $1 billion over 10 years, a price that was too high for current kit sponsor Nike to accept.

Source: Manchester United.

The deal also stipulates that Manchester United will retain rights to its own retail stores, e-commerce site, monobranded products, and soccer camps.

3. Big growth opportunities
One key reason that cable cord cutting has not become a bigger trend is live events and sports programming. The value of sports content is high and rising. For instance, ESPN costs your cable provider 40 times as much as the average cable channel to provide to you. The value of contracts to broadcast the Premier League and Champions League are on the rise, and are expected to rise further after the current deals lapse in 2016 and 2018.

Source: Manchester United.

With the number of people watching soccer continuing to grow, especially in the U.S., the clubs that will benefit from the increased viewership the most are those with the strongest performance on and off the field. There’s a virtuous cycle as the clubs with the best off the field performance can invest in better players, enabling the club to perform well on the field, and bringing in a disproportionate number of new fans as more people start following the sport.

As long as Manchester United can resume its winning ways, the club’s off-field financial performance should reward shareholders for years to come.

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Dan Dzombak has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.