One of the common themes from AC Milan’s mercato so far is that they have shifted to giving new signings a four-year deal as opposed to the five-year contracts they used to hand out to younger players.
Milan have today closed the deal for Youssouf Fofana who will be the fourth signing of the Rossoneri mercato after Alvaro Morata, Strahinja Pavlovic and Emerson Royal. The four signings have one thing in common, the length of their contracts.
As the lawyer Felice Raimondo points out, the Milan management have made a very precise and reasoned choice to give their new additions a four-year contract with the club holding an option for a fifth year.
By doing this, the transfer fee paid is amortised quicker than with a fixed five-year contract and thus there is the possibility of generating more significant capital gains in a short time.
With the ‘4+1’ formula, after two years the club have already amortised 50% of the transfer fee, and after three years it is 75% but two years from contract expiry (with the option that can be exercised).
There is even the possibility of offering three-year deals with a two-year option to players who could accept this solution for their first contract with Milan. In that case, after two years 66% of the transfer fee would be amortised.
As a working example to illustrate, Milan paid €20m for Pavlovic. With a five-year deal, after three years there would have been €8m residual value, whereas with a four-year deal it would be €5m. If he were sold on (as long as not for a very low fee), it would be an extra €3m capital gains.