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Sport special: Image is everything for the modern sports star

Date: 28 Oct 2011

Citywealth

With the Olympics fast approaching and the size of endorsement deals for the World’s top sportspeople getting ever bigger, why should an athlete or sports star worry about bad behaviour? The answer is simple – bad behaviour, which damages the athlete’s “brand” can seriously impact on their earning potential.

All endorsement contracts have a “termination clause,” and when you are negotiating on behalf of a sports star it is the advisor’s role to make the grounds for termination as narrow as possible. In most cases the starting point would be an indictment or conviction for a crime. When this happens the endorsing company typically wants the ability to walk away from the endorsement contract immediately, and to have no further involvement with the athlete in future for fear of damage to their own brand. Should this happen, the player will receive a notice of termination stating that the endorsing company is terminating the contract forthwith. A payment will be made up to the date of termination and both parties walk away.

However, with the sums of money involved and the increasing potential for brand damage, we are seeing more and more companies looking to keep their options open. In addition to termination clauses on the grounds of charges and convictions, companies are now seeking to include clauses in relation to failed drug tests and any public statement which advocates discrimination on the grounds of sex, race or religion. More recently, with the increasing proliferation of social networks, you will also see the inclusion of termination clauses where public statements are deemed to be disparaging of the product itself.

These are clear examples of when a company may have a right to terminate. The more difficult situations occur when there has been no breach of the contract but there is serious risk of brand damage. The best recent example of course is Tiger Woods, and the situation where his behaviour off the course was viewed as being damaging to a number of the brands that had previously not simply endorsed him, but effectively made him their brand champion, such was his wholesome family image. Whilst his alleged behaviour was clearly seen as morally wrong, quite often this will not lead to an automatic termination. It then becomes a negotiation between the parties to work out the best route forward. Some companies will want no further association with the athlete and look to negotiate an early exit from the contract. This may involve a settlement being paid in order to bring the contract to a premature end or to reduce the financial terms.

Where no clear breach has been committed, the player’s agent or manager will have a number of decisions to make based upon the actual circumstances of the case. Do they try to preserve a relationship by agreeing to a reduced retainer, or do they make a clean break and try to get as much money from any settlement as is possible? The loss of an endorsement contract will impact not only on the player’s personal income, but also the player’s representatives who will normally receive a percentage of any deal that they negotiate. The representative will also then need to decide whether to continue to work with the athlete – the damage could be so great that they also walk away. It would be unusual for an agent or manager to leave a player in these circumstances and if they did, there would always be someone else willing to step into their shoes.

Financial implications, and the bounce back

Clearly, the loss of a significant endorsement deal will have financial implications for any sportsperson. Management therefore need to work quickly to minimise the financial impact.

The big question is how to react if things do go wrong. If there is a straight forward case for termination of the contract then this is usually clear in the contract – and there will be a termination clause under a contractual notice period. If the breach is not so clear, it should be established how quickly the players’ reputation can be rebuilt. These situations are never clear cut and it will often depend on how the athlete reacts once they are exposed to the public. Do they immediately apologise, or do they try to deny the rumours and seek comfort behind a super injunction? In today’s society it is the public who ultimately make the decision, as their reaction will eventually be fed back to the endorsing company and dictate its decisions. Public reaction should never be underestimated.

However, where an athlete shows contrition, accepts culpability and looks willing to try and make amends, they can often win over the public all over again – successfully re-building an image can make an athlete even more marketable.

What is clear is that high profile athletes can earn enormous amounts of money in a short period of time, but this can end very quickly – not just through injury but by the athlete’s behaviour. Consequently, it is of vital importance that the sportspeople are properly managed financially, to ensure they are well prepared for retirement. Appropriate corporate structures can help to mitigate or defer tax liabilities if income is put aside for retirement.

The tax affairs of internationally mobile sportspeople are often very complex, and it takes time and care to ensure filing and payment obligations are met across a multitude of jurisdictions. The UK in particular has a draconian approach to the taxation of non-resident sportspeople, being one of only two countries in the World (the US being the other) to seek to tax non-resident sportspeople on a proportion of their endorsement income on top of prize money earned in the UK. The tax man typically argues that a sportsperson’s “image” has no value, and that endorsement contracts purely relate to performance on the pitch. Many endorsers, in the wake of various recent incidents, would certainly seem to disagree with this. In many cases in fact, the image appears more important to the brand than the athlete’s performances.

www.saffery.com

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