Chelsea face a two window transfer ban ahead of the new season.
Sherwood told Premier League Productions: “Who's going to be there next year? Is Eden Hazard? [Gonzalo] Higuain's not going to be there. Kovacic? There's so many uncertainties with Chelsea. It's exciting times.
“I think what they need to do, especially with the embargo - I know they're going to appeal it but as it stands they get two blocks, they cannot buy players in the next two windows. They're going to have to find a different way.
“They've got the best academy in the Premier League bar none. Them kids are ready to play.
“Do not block up the pathway with average players like Kovacic and people like that, don't do that.
“Go and spend your money on the make-the-difference player, like a Van Dijk what Liverpool did.
“I think it will be very positive if they go that way. At least they'd have an identity going forward, it's a complete contrast to what they've done over the last 10 to 15 years."