Franchise Brands
Annual Report 2019

Plain-text annual report

F r a n c h i s e B r a n d s p l c a n n u a l r e p o r t a n d a c c o u n t s 2 0 1 9 BUSINESS builders annual report and accounts 2019   BUILDING Scale Franchise Brands is focused on building market-leading service businesses in selected customer segments using primarily a franchised model. We give our franchisees the support, specialist expertise and tools they need to grow their businesses. if they grow, we grow. For More inForMation Visit WWW.FranchiseBrands.co.uK STRATEGIC REPORT 01 02 04 08 10 12 highlights at a Glance chairman’s statement strategy and Business Model strategy in action B2B review − Willow pumps − Metro rod B2c review − consumer services 18 Financial review environmental, social and Governance 21 our Values 22 24 corporate responsibility 24 − stakeholder engagement 26 − developing inspiring leaders 28 − training apprentices 30 − Franchisee engagement principal risks and uncertainties 32 16 GOVERNANCE Board of directors chairman’s introduction to Governance corporate Governance directors’ remuneration report directors’ report directors’ responsibilities statement 34 36 37 41 43 45 FINANCIAL STATEMENTS 51 46 52 50 independent auditor’s report to the Members of Franchise Brands plc consolidated statement of comprehensive income consolidated statement of Financial position company statement of Financial position consolidated statement of cash Flows 53 54 company statement of cash Flows consolidated and company 55 statement of changes in equity notes forming part of the Financial statements Five Year Financial summary (unaudited) company information notes 77 78 56 76 strategic report Governance Financial statements Financial hiGhliGhts operational hiGhliGhts reVenue +24% adJusted eBitda* +29% £44.0m 2018: £35.5m £5.2m 2018: £4.0m proFit BeFore taX +14% £3.3m 2018: £2.9m diVidend per share +42% 0.95p 2018: 0.67p adJusted earninGs per share* +29% 4.34p 2018: 3.36p proForMa incoMe stateMent GearinG** 1.41x 2018: 1.24x • Metro rod’s Vision 2023 strategy continues to drive our organic growth. • Metro rod’s system sales growth accelerated to 14% in 2019. • 45% of Metro rod franchisees achieved annual sales above £1m. • continued investment by Metro rod franchisees in capacity. • acquisition of Willow pumps to expand Metro rod’s range of services to the commercial market. • creation of B2B division with Metro rod, Metro plumb and Willow pumps. • creation of B2c division to facilitate future acquisitions and maximise efficiencies. • improved franchise recruitment in the combined B2c networks. “adjusted” items are before amortisation of acquired intangibles, acquisition-related costs, and the share-based payment expense. * ** pro-forma income statement gearing is calculated by dividing adjusted net debt by pro-forma adjusted eBitda (including Willow pumps for 12 months). Franchise Brands plc annual report and accounts 2019 01 at a Glance A GROWING Portfolio Franchise Brands’ portfolio of market-leading businesses grew in 2019 with the acquisition of Willow pumps. the Group currently has a combined network of almost 450 franchisees across five franchise brands in the uK. the addition of Willow pumps represented an important step in expanding Metro rod and Metro plumb’s range of services to the commercial market. the Group is now organised into two divisions: B2B and B2c. this divisional organisation is designed to provide a greater focus and structure to support the strategic development of our B2B and B2c brands. 02 Franchise Brands plc annual report and accounts 2019 B2B Founded in 1983, commercial drainage specialist Metro Rod is the leading provider of drain clearance, repair and maintenance services. these services are provided by 42 franchisees across the uK. Metro Plumb provides plumbing services and has 3 independent franchisees. Metro rod serves national business customers across a range of sectors, including facilities management, retail, hospitality and insurance, as well as public sectors such as social housing and education. sYsteM sales adJusted eBitda* £41.3m £3.2m Franchisees 45 see pages 14 and 15 * divisional adjusted eBitda excludes Group overheads, and is stated before share-based payment expense. strategic report Governance Financial statements B2B B2C Founded in 1997, Willow Pumps is a leading pump supply, installation and servicing business, with a below-ground and above-ground capability. Franchise Brands acquired Willow pumps in 2019 to help expand Metro rod and Metro plumb’s range of services. Willow pumps designs, supplies and installs pumping stations. it also has a high-quality service and maintenance client base and a growing above-ground capability. ChipsAway, Ovenclean and Barking Mad each provide a high level of service to retail customers of a similar cohort, in the areas of car paintwork repairs, domestic oven cleaning and dog home boarding. all our B2c brands are well established with a long trading history. our B2c brands benefit in particular from the Group’s shared support services. this allows our B2c management team to focus on growing their networks and supporting their franchisees. reVenue £3.8m Gross MarGin 33% adJusted eBitda* £0.5m Gross proFit £5.5m adJusted eBitda* £2.5m uK Franchisees 404 see pages 12 and 13 see pages 16 and 17 Franchise Brands plc annual report and accounts 2019 03 chairman’s statement BUILDING Momentum 2019 has seen us successfully build the business both organically and by acquisition. organic growth has been driven by an acceleration in the rate of system sales growth at Metro rod and Metro plumb and a recovery in the rate of franchise recruitment in the newly formed B2c division. We are also very pleased to have acquired Willow pumps, which has allowed us to begin expanding the range of services that we offer to both Metro rod and Metro plumb’s commercial customers, and thereby take an important step in servicing their complete “Water in. Waste out.” requirements. Stephen Hemsley executive chairman 04 Franchise Brands plc annual report and accounts 2019 METRO ROD in 2018 we launched our Vision 2023 strategy for Metro rod, which centres on the development of franchisees as entrepreneurs and the corresponding systems they needed to grow their businesses. the essence is to return the franchisees to the front and centre of their businesses, help them grow local sales, reduce their reliance on over-complicated manual systems and lessen the intervention from the support centre. the initiatives that we put in place to help deliver our Vision 2023 strategy have been embraced by our franchisees and the support centre team and have resulted in system sales growth in 2019 of 14% (2018: 8%). this represents a compound annual growth of system sales of 12% during the nearly three years that we have owned the business. the franchisees have become less reliant on the support centre and under the guidance of peter Molloy, the Managing director of Metro rod and Metro plumb, have developed a more entrepreneurial approach to growing their businesses. this has resulted in almost half of the franchisees achieving annual turnover of more than £1 million in 2019, which we believe is the critical threshold that facilitates the investment in people and equipment that will further accelerate their growth. investment has been a significant feature of 2019 with our franchisees investing in both people and equipment, including 20 additional sales and marketing executives, 55 additional engineers and 44 additional vehicles. i am also particularly pleased to welcome our first eight apprentices who joined our newly launched itol-accredited apprenticeship scheme. our apprentices will be key to growing our capacity in the coming years. as anticipated, some franchisees were not willing, or indeed able, to embrace the challenge of Vision 2023 and we have agreed amicable exits whereby these businesses have been sold to new, ambitious franchisees who see the opportunities we are creating. this has resulted in four businesses changing hands during 2019. We have also recruited franchisees for the two vacant territories in cumbria and northern ireland where we previously had to sub-contract work won from national accounts. these new and driven franchisees will be one of the key engines for growth in 2020. adJusted eBitda £5.2m 2018: £4.0m strategic report Governance Financial statements WILLOW PUMPS We acquired Willow pumps, a leading pump supply, installation and servicing business with an above and below-ground capability, in october 2019. it has subsequently exceeded our expectations in its first three months of ownership. there was a strong strategic rationale for the acquisition, as it furthers Metro rod’s Vision 2023 ambition of expanding its range of services to the commercial market, to provide a full range of drainage, pump and plumbing-related services on a national basis. pumps are an engineered solution and the acquisition of this high-quality well-established business represents an optimal way for the Group to enter this specialist market at scale. the deal structure incentivises the Willow pumps management team, which continues to be led by ian lawrence, to work with Metro rod and Metro plumb franchisees to develop this aspect of their business whilst continuing to grow Willow pumps as a complementary dlo within the Group. to introduce Metro rod and Metro plumb franchisees to the substantial opportunities in the pump sector, three “discovery days” were held at the Willow pumps premises in Kent towards the end of 2019. practical demonstrations of above and below-ground pump installation and maintenance were provided, as well as opportunities to informally meet with Willow pumps’ excellent management team and discuss ways of working together. the opportunity was enthusiastically embraced by our franchisees and already around 20% of their engineers have been trained in the basic skills they will need to safely work on pump maintenance. in 2019, the Group began operating two Metro rod territories as direct labour organisations (“dlos”). Following the acquisition of Willow pumps, it was decided to transfer responsibility for the Kent & sussex territory to their field service team, both to improve the local management of this business and also to give Willow pumps a direct insight into the operations of a Metro rod territory. While there are still a number of strategic and operational improvements to be made to expand our service offering and achieve our Vision 2023 strategy, one of the most important milestones in 2020 will be the full roll-out of the new works management system (“WMs”). although this project is three to six months behind our initial schedule, good progress was nevertheless made in 2019 in relation to the practical completion of the software development and the successful roll-out of the system to seven of the smaller Metro rod and Metro plumb franchisees. We expect to have completed the roll-out of the new WMs by the end of 2020, with improvements in efficiency and productivity expected to become apparent in the second half of 2020. METRO PLUMB & KEMAC Metro plumb’s sales continued to grow in 2019 but it remains reliant on one principal customer. the franchised territories are also predominantly operated by Metro rod franchisees, or as dlos under Kemac. there remains a significant opportunity to create a national plumbing business to service the needs of commercial customers, but our current structure is not ideally suited to the development of this. We have therefore decided to begin franchising Metro plumb separately from Metro rod and invite any Metro rod franchisees who wish to exit the Metro plumb business the opportunity to sell that franchise to new franchisees. this will enable new ambitious franchisees to have a single focus on developing the Metro plumb business and expanding the customer base more actively, whilst our Metro rod franchisees can focus on the significant opportunity to grow their businesses. Franchise Brands plc annual report and accounts 2019 05 chairman’s statement continued Metro rod sYsteM sales £41.3m 2018: £36.4m 06 Franchise Brands plc annual report and accounts 2019 B2C DIVISION in order to facilitate future acquisitions and to ensure maximum overhead and operational efficiency, the B2c brands – chipsaway, ovenclean and Barking Mad – have been formed into an integrated division of the Group, the B2c division. as a result, the overheads of these businesses will no longer be separately attributed to the individual brands, and henceforth our reporting Kpis for this division will be franchisee recruitment, gross profit generated from each brand and eBitda after divisional overhead. tim harris has been appointed Managing director of this division and rachel stewart, deputy Managing director. the strong franchise recruitment performance at chipsaway combined with a reduced number of leavers resulted in net franchisee growth of 17 across the B2c division (2018: net 10 reduction). this resulted in growth of the combined B2c networks to 404 franchisees (2018: 387). With 205 franchisees, chipsaway continues to be the largest B2c brand, generating 74% of the B2c gross profit before divisional overhead (2018: 70%). the creation of strong functional teams within this division, for example in the areas of marketing and franchise recruitment, will facilitate future complementary acquisitions. in considering such acquisitions we will focus on the incremental gross profit that such opportunities offer, and take a view on the existing overhead that we will need to retain. this will be particularly relevant when considering the large number of smaller opportunities that we are presented with in the B2c franchise environment where the founder often wishes to retire. PEOPLE AND INCENTIVISATION the strong progress being made by Franchise Brands is a tribute to the hard work of both our franchisees and the employees of the Group. i would like to thank them for their support and continuing passion for our business and emphasise that this is just the start of what i hope will be a long and successful journey for us all. in a business where we are asking our team to help build our franchisees’ businesses and wealth, it is important that we reward colleagues with both attractive remuneration packages and a stake in our business. in 2019 we have continued to grant share options but have now reached the limits available under the attractive eMi share option scheme. these options include those granted to key team members at Willow pumps, where the performance criteria are the same as those of the earn-out element of the acquisition consideration. therefore, we will be introducing new share incentive schemes in 2020 that will not only allow us to continue granting options, but also incentivise team members to purchase shares in the company with their own money. in this way, we will ensure our team really has “skin in the game”, just like our franchisees. OUTLOOK the Board is pleased to report that trading in 2020 has started well, with job intake at Metro rod, Metro plumb and Willow pumps up on the same period in 2019, and a strong start to the year for franchisee recruitment in the B2c division. We continue to selectively seek acquisitions that expand the range of services that Metro rod, Metro plumb and Willow pumps can offer to the commercial sector, in pursuit of our ambition to offer a “Water in. Waste out.” service. this may involve further acquisitions of dlos where these can be used to profitably expand the offering of Willow pumps, Metro rod and Metro plumb. the B2c division will focus on the acquisition of franchise businesses which are complementary to our existing brands and customer base, and where we can leverage our existing B2c divisional structure. We also continue to consider the acquisition of entirely new franchise systems, however, we are not anticipating being competitive in the market for larger businesses at a time when private equity is willing to pay very full multiples and gear such purchases to levels that are not acceptable for a publicly-quoted company. We will selectively consider opportunities for smaller or underperforming franchise systems which have the potential to be earnings enhancing and where we consider we have the management resources and expertise to grow such businesses to a meaningful size and scale. Whilst we have not seen any impact from the covid-19 virus, we will continue to monitor the situation over the coming weeks. We have put in place plans which seek to mitigate the risk of any impact that the virus may have on our employees, franchisees, customers and suppliers. overall, we look forward to 2020 with considerable confidence, given the Group’s strong start to the current year and the clear opportunities for growth we see across both our B2B and B2c divisions. in particular, we look forward to increasingly realising the benefits of our Vision 2023 strategy and our investment in new capabilities, capacity and a broader range of services for our commercial customers. Stephen Hemsley executive chairman strategic report Governance Financial statements Franchise Brands plc annual report and accounts 2019 07 strategy and Business Model GENERATING Growth Franchise Brands is focused on building market-leading businesses in selected customer segments, using primarily a franchise model. our focus is on established brands which can benefit from our shared support services, specialist sector expertise, management experience and group resources. the acquisition of Willow pumps, a direct labour organisation (“dlo”), represented an important step in expanding Metro rod and Metro plumb’s range of services to the commercial market. the creation of a B2B and B2c division provides a greater focus and structure to grow our portfolio, support our franchisees and develop our businesses. 08 Franchise Brands plc annual report and accounts 2019 GroWinG our portfolio acquisitions are a central part of our growth strategy. dlos with specialist expertise or capabilities, are within scope as acquisitions if they help leverage the range of services of our franchise business, for example, Willow pumps. strategic report Governance Financial statements GroWinG our portfolio b u s i n e s s builders deVelopinG our businesses We develop our businesses through our shared support services such as technology, marketing, franchise recruitment and finance, as well as our management expertise and experience and group resources. We aim to take our businesses from “good to great”. supportinG our franchisees We give our franchisees the support, specialist expertise and tools they need to grow their businesses. We held discovery days at Willow pumps so Metro rod and Metro plumb franchisees could discuss the pump opportunities and meet the Willow pumps team. Franchise Brands plc annual report and accounts 2019 09 strategy in action BUILDING Our Portfolio the longer-term aim of the B2B division is to be able to serve our valued commercial customers with a “Water in. Waste out.” range of drainage, pumps and plumbing- related services on a national basis. MARKET OPPORTUNITY there are approximately 2.2 million commercial addresses in the uK and they all have a “Water in. Waste out.” requirement. Water enters the premises to be filtrated and pressurised and waste needs to be efficiently removed from the building, often with the assistance of pumps. commercial customers also have a regular need for drainage and plumbing services, for example to remedy blockages or leaks, or prevent future drainage emergencies via a pre-planned maintenance programme. METRO ROD AND WILLOW PUMPS Following the addition of Willow pumps to the group, Metro rod can offer its national account customers a combined drainage and pump service. Willow pumps benefits from the significantly expanded Group service delivery, including Metro rod and Metro plumb, of around 450 dedicated engineers, who operate from 47 depots nationwide. coMMercial addresses in the uK 2.2m (2019) pre-planned maintenance above-ground pumps (fresh water) cleaning blocked drains drain surveys and sewer inspection drain repair 10 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements Gutter clearance asset mapping plumbing Boiler inspections tanker services Below-ground pumps (waste water) Fats, oils and grease management robotic cutting septic tank management private sewers adoptable pump stations Franchise Brands plc annual report and accounts 2019 11 B2B review ACQUISITION OF Willow Pumps 12 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements our acquisition of Willow pumps represented an important step in expanding Metro rod and Metro plumb’s range of services to the commercial market. Founded in 1992, Willow pumps has a below-ground (waste water) and above-ground (fresh water) capability. the acquisition of Willow pumps, a highly- respected business and one of the leaders in the market, represents an optimal way for Metro rod to enter this specialist market at scale. the below-ground scope of work involves the design, supply and installation of pump stations. these can range from adoptable pump stations on new housing developments to private systems. the design is carried out in-house and Willow pumps is therefore able to provide its customers with a complete end-to-end service. Willow pumps also carries out routine servicing and maintenance work with customers in the hospitality, retail and housebuilding sectors. the growing above-ground capability includes cold water booster sets, storage tanks, and pressurisation units within its offering. Willow pumps will benefit from a significantly expanded delivery capability through Metro rod and Metro plumb. in total, the Group has around 450 dedicated engineers who work out of 47 depots across the uK, including two Willow pumps depots. Metro rod will also benefit from the opportunity to supply its wide range of drainage services to Willow pumps’ customers. nuMBer oF enGineers nuMBer oF tanKers 47 11 Franchise Brands plc annual report and accounts 2019 13 B2B review continued GROWTH OF Metro Rod commercial drainage specialist Metro rod provides a range of drain clearance, repair and maintenance solutions on a 24/7/365 basis across the uK via 42 depots. Metro rod has over 400 engineers who are highly skilled and trained to the highest industry standards. they use the latest equipment and technology to deliver permanent drainage solutions to our customers. We are trusted by brand names such as aXa, Mitie, Bupa healthcare and the national trust and work to exacting service level agreements. Metro rod serves national business customers across sectors including facilities management, retail, hospitality and insurance, as well as a public sectors such as social housing and education. Metro plumb provides a focused range of largely emergency plumbing services, and has three independent franchisees. the acquisition of Willow pumps has allowed us to begin expanding the range of services that we offer to both Metro rod and Metro plumb’s commercial customers. 14 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements sYsteM sales +14% £41.3m PERFORMANCE IN 2019 system sales are the total aggregate sales of the Metro rod network to third party customers. system sales growth accelerated in 2019 as a result of our Vision 2023 strategy and the investment being made in the business. adJusted eBitda +19% £3.2m PERFORMANCE IN 2019 adjusted eBitda was driven by the 15% growth in our Management service Fee (“MsF") income, as our franchisees continue to invest in further capacity and capabilities, whilst overheads remain relatively fixed. Metro rod and Metro pluMB Franchisees 45 PERFORMANCE IN 2019 Four Metro rod franchise businesses were sold to new, ambitious franchisees who see the opportunities we are creating. We also recruited franchisees for the vacant territories of cumbria and northern ireland and Metro plumb franchisees for oxford and Maidstone. Franchise Brands plc annual report and accounts 2019 15 B2c review B2C DIVISION Consumer Services established in 1994, chipsaway is the uK’s leading and longest-established mobile car paintwork repair specialist focusing on sMart (“small to Medium area repair technology”) repairs. chipsaway has 205 franchisees in the uK. it also has a presence in ten countries outside the uK through master franchise arrangements. chipsaway franchisees primarily serve private consumers, and operate from branded vehicles which are mobile workshops, or car care centres. our sMart repair process uses mostly water-based formulations. established in 1994, ovenclean is the leading and longest established oven cleaning business in the uK and has a network of 112 franchisees. ovenclean franchisees are able to clean all domestic oven brands and models, including electric ovens, gas ovens, range-style ovens, microwaves, and also hobs, extractor fans, and barbecues. ovenclean employs an environmentally friendly, no added caustic, system which helps ensure customers benefit from a safe and hygienic environment. Franchisees recruited in 2019 nuMBer oF Franchisees Franchisees recruited in 2019 nuMBer oF Franchisees 35 205 14 112 PERFORMANCE IN 2019 chipsaway performed well in 2019. 35 new franchisees were recruited and fewer franchisees left the network. this allowed us to grow the network from 201 to 205. the car care centre we established incorporating the latest advanced driver-assist systems also had a good profitable first year of operation. chipsaway continues to be our largest B2c brand generating gross profit of £4.08m. PERFORMANCE IN 2019 Franchise recruitment at ovenclean in 2019 was below our expectations, with only 14 new joiners. however, notwithstanding the slower level of recruitment, the franchisees remained busy, performing over 80,000 jobs during the year, and the system grew from 106 to 112 franchisees. in 2019 ovenclean generated a gross profit of £0.69m. 16 Franchise Brands plc annual report and accounts 2019 B2C DIVISION Consumer Services strategic report Governance Financial statements established in 2000, Barking Mad is a leading provider of dog home boarding services (dog holidays) and has 87 franchisees. as well as marketing to dog owners, the franchisees recruit dog-loving host families who can take in and look after a dog when the owners are away from home. customers enjoy peace of mind with a professional service which focuses on the individual needs of every dog. Franchisees recruited in 2019 nuMBer oF Franchisees 16 87 PERFORMANCE IN 2019 Barking Mad’s performance in 2019 benefited from the mid-year appointment of rachel stewart as Managing director and the reorganisation of the business. 16 new franchisees were recruited, and with a reduced number of leavers we were able to grow the number of franchisees in the network from 80 to 87. in 2019 Barking Mad generated a gross profit of £0.73m. Franchise Brands plc annual report and accounts 2019 17 Financial review SUMMARY STATEMENT OF INCOME Statutory revenue Franchisee payments Fee income other cost of sales Gross profit other administrative expenses Adjusted EBITDA depreciation & amortisation of software Finance expense Adjusted profit before tax tax expense Adjusted profit after tax amortisation of acquired intangibles share based payment acquisition-related costs tax on adjusting items Statutory profit in 2019 we have continued to benefit from Metro rod’s accelerating rate of growth, and the acquisition of Willow pumps, which have contributed to an increase in adjusted eps of 28% to 4.34p. Chris Dent chief Financial officer 2019 £’000 44,013 (19,612) 24,401 (8,019) 16,382 (11,200) 5,182 (755) (357) 4,070 (687) 3,383 (260) (238) (296) 121 2018 restated £’000 35,470 (17,330) 18,140 (5,011) 13,129 (9,126) 4,003 (447) (340) 3,216 (604) 2,612 (216) (139) – 68 2,710 2,325 change £’000 8,543 (2,282) 6,261 (3,008) 3,253 (2,074) 1,179 (308) (17) 854 (83) 771 (44) (99) (296) 53 385 % 24% 13% 35% 60% 25% 23% 29% 69% 5% 27% 14% 30% 20% 71% 100% 78% 17% the results for the year ended 31 december 2019 include our newly-acquired business, Willow pumps, for the three months since acquisition on 7 october 2019. the 2018 numbers have been re-stated following accounting changes to leases as a result of our adoption of iFrs16, details of which can be found in the notes to the Financial statements. STATUTORY REVENUE statutory consolidated revenue increased 24% to £44.0m (2018: £35.5m) with the additional revenue coming from Metro rod and our dlos, including £3.8m from Willow pumps. statutory revenue is made up of several different income streams that have different accounting policies and is not, therefore, a Kpi that management tracks on a consolidated basis. 18 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements FEE AND DIRECT LABOUR INCOME Fee and direct labour income are one of the Kpis used by management to track the business, and, as shown in the table below, this increased by 35% to £24.4m in 2019 (2018: £18.1m). 2019 2018 change £’000 % £’000 % £’000 % MsF income 11,207 46% 10,107 56% 1,100 11% area sales 2,006 product sales 912 8% 4% 1,513 894 8% 5% 493 33% 18 2% direct labour 9,097 37% 4,564 25% 4,533 99% naF 1,179 5% 1,062 6% 117 11% Fee Income 24,401 100% 18,140 100% 6,261 35% Management service Fee (“MsF”) income received from our franchisees is based on fixed monthly fees or a percentage of the franchisees’ sales. our strategy is to increase sales-related MsF income to improve the quality of our earnings and align ourselves with the interests of our franchisee communities so that both parties benefit from the growth in system sales. We continue to incentivise Metro rod franchisees to grow their own businesses through a series of MsF discounts and schemes designed to encourage sales growth and investment in a wider range of equipment and people. the 11% increase in MsF income has been driven primarily by a 14% increase in system sales (the gross sales made by our franchisees) at Metro rod and Metro plumb, to £41.3m in the year (2018: £36.4m). this drove a 15% increase in MsF from these brands. the size and scale of our Metro rod franchisees’ businesses continues to evolve as they invest in new capacity and capabilities, such as increasing the number of tankers in the network from 30 to 49. Fees generated from the sale (or re-sale) of franchise territories have seen a strong upturn in 2019 compared with 2018, growing by 33%. this increase was not only due to improved franchisee recruitment at our B2c division with 65 new franchisees recruited (2018: 57), but also as a result of the successful launch of the franchise re-sale activity at Metro rod and Metro plumb. this increased re-sale activity allows exiting franchisees to realise value from their business, and Franchise Brands to recruit new, motivated franchisees to grow the territories more actively. dlo sales increased by 99% in the current year to £9.1m (2018: £4.6m). dlo sales arise from three principal areas: Willow pumps, the Metro rod corporate businesses (Kemac, Metro rod exeter and Metro rod Kent & sussex) and the chipsaway car care centre. Much of this growth (£3.8m) has been derived from the addition of Willow pumps to the Group for the last three months of the year. Franchisees pay a monthly contribution into their respective national advertising Funds. these funds are used exclusively to promote the system sales of those brands. the Group does not make any profit from these activities. any surplus or shortfall within an accounting period is carried forward on our balance sheet. TRADING RESULTS – ADJUSTED EBITDA With the creation of our B2B and B2c divisions, the Board reviews the numbers on the following basis: B2B – Franchisor B2B – dlo B2c 2019 £’000 3,184 492 2,533 2018 £’000 2,683 – 2,368 Group overheads (1,027) (1,048) change £’000 501 492 165 21 change % 19% 100% 7% 2% Adjusted EBITDA 5,182 4,003 1,179 29% our B2B division consists of operations where we are primarily operating as a franchisor (Metro rod and Metro plumb), and operations where we are operating as a dlo (Willow pumps). as the margins of these two types of operations are fundamentally different, we show them separately, although strategically they form one division. adjusted earnings before interest, tax, depreciation, amortisation and share-based payments (“adjusted eBitda”) at B2B-Franchisor increased by 19% to £3.2m in the year (2018: £2.7m) principally driven by the increase in the Metro rod MsF income. adjusted eBitda at B2B-dlo was £0.5m (2018: £nil) and arose exclusively from Willow pumps in the three months of our ownership, post acquisition. the business enjoyed particularly strong trading at the end of the year, a performance that exceeded expectations at the time of the acquisition. adjusted eBitda at our B2c division (chipsaway, ovenclean and Barking Mad) increased 7% in the year to £2.5m (2018: £2.4m) due to improved franchisee recruitment. the B2c division continues to be strongly cash generative, supporting the Group’s debt- servicing capacity. Group overheads remained prudently controlled at £1.0m and, as a result, adjusted eBitda for the Group increased by 29% to £5.2m (2018: £4.0m). EARNINGS depreciation and amortisation costs increased 53% to £1.0m (2018: £0.7m) as a result of our investment at our dlos, the addition of the assets at Willow pumps, and continuing software development at Metro rod. the share-based payment charge increased 71% to £0.2m (2018: £0.1m) as a result of the new share options granted at the end of 2018 and during 2019, including share options granted at the time of the acquisition of Willow pumps. the finance charge of £0.4m increased 5% in the year (2018: £0.3m) as a result of the higher net debt position following the largely debt funded acquisition of Willow pumps. the finance charge does not solely represent bank interest, but also includes interest on leases. interest cover remains strong, with the interest charge being 14.5 times covered by adjusted eBitda (2018: 12.0 times). Franchise Brands plc annual report and accounts 2019 19 Financial review continued statutory profit before tax increased 14% to £3.3m (2018: £2.9m). the tax charge for the year at 17% (2018: 19%) was lower than the statutory rate of 19% due to the tax relief on the exercise of share options during the year. as a result, the statutory profit after tax increased by 17% to £2.7m in the year (2018: £2.3m). Basic earnings per share increased by 16% to 3.48p (2018: 2.99p) and diluted earnings per share increased by 16% to 3.42p (2018: 2.95p). during 2019, we repurchased 338,700 ordinary shares for a total consideration of £268,000, taking the total number of shares in treasury to 538,700. 513,700 of these treasury shares were then used to satisfy the exercise of share options, resulting in a balance of 25,000 ordinary shares in treasury at 31 december 2019 (2018: 200,000). We issued a further 569,633 ordinary shares to satisfy share option exercises and 1,212,121 as part of the consideration for the acquisition of Willow pumps. this resulted in the total number of ordinary shares in issue increasing to 79,513,787 at 31 december 2019 (2018: 77,732,033) and a basic weighted average number of ordinary shares in issue and not in treasury of 77,948,178 (2018: 77,687,101). adjusted earnings per share (eps), adjusted for the acquisition- related items and the share-based payment charge, increased by 29% to 4.34p in the year (2018: 3.36p), as set out in the table below: 2019 £’000 eps p 2018 £’000 eps p Statutory profit after tax 2,710 3.48 2,325 2.99 amortisation of acquired intangibles share-based payment charge acquisition-related costs 260 238 296 0.33 0.31 0.38 216 139 – 0.28 0.18 – tax effect of adjusting items (121) (0.69) (68) (0.09) Adjusted profit after tax 3,383 4.34 2,612 3.36 FINANCING AND CASH FLOW the Group generated cash from operating activities of £4.7m (2018: £3.2m) resulting in a cash conversion rate from adjusted eBitda of 90% (2018: 79%). expenditure on new equipment for the dlos (£1.0m), the fit-out of our car care centre at Kidderminster (£0.1m), and the capitalised element of our it investment (£0.7m) totalled £1.8m (2018: £0.6m). this included the purchase of a new tanker for Willow pumps (£0.3m), which took the number of tankers in the corporate fleet to 12 (2018: 1). during the year we repaid £2.5m of our loan balances but renegotiated our facilities with our bank at the time of the acquisition of Willow pumps. at the year-end our term loans totalled £6.3m (2018: £5.4m), we had utilised £3.0m of our £5.0m revolving credit facility (“rcF”) (2018: £2.5m) and had cash in hand of £1.7m (2018: £2.9m). We also put in place a £2m overdraft facility for Metro rod. this resulted in available cash and facilities of £5.7m (2018: £5.4m). cash term loan rcF loan fee hire purchase debt Adjusted net debt other lease debt Net debt 2019 £’000 2019 £’000 change £’000 1,682 2,940 (1,258) (6,401) (5,435) (3,002) (2,514) 129 (1,588) 110 (72) (966) (488) 19 (1,516) (9,180) (4,971) (4,209) (1,899) (936) (963) (11,079) (5,907) (5,172) the acquisition of Willow pumps has introduced a significant level of hire purchase debt onto the Group balance sheet, as Willow pumps has financed the recent expansion of their tanker fleet using hire purchase facilities. in addition, the Group, as part of the new accounting standard on leasing, has recognised obligations in relation to operating leases. as our banking arrangements determine our interest rate margin and covenant compliance using net debt before operating lease obligations, we use adjusted net debt as our Kpi, as shown in the table above. shareholders' funds at 31 december 2019 were £27.8m (31 december 2018: £24.4m) against adjusted net debt of £9.2m (31 december 2018: £5.0m), resulting in capital gearing of 33% (31 december 2018: 20%). on an income statement basis, our ratio of adjusted net debt to adjusted eBitda on a statutory basis was 1.77 times (2018: 1.24) and on a pro-forma basis (including Willow pumps for a full 12 months) was 1.41 times. We consider such ratios to be prudent, giving us the capacity to consider further debt funded acquisitions, although as a policy we would not gear beyond an adjusted net debt to pro-forma adjusted eBitda ratio of more than 3 times. DIVIDEND the Board is pleased to propose a final dividend of 0.65 pence per share (2018: 0.46 pence per share), taking the total dividend for the year to 0.95 pence per share (2018: 0.67 pence per share), an increase of 42%. the cost of the proposed final dividend is £517,000. the total dividend for the year is 3.7 times covered by statutory profit after tax and 4.6 times covered by adjusted profit after tax. it is the Board’s intention to continue with our progressive dividend policy, reducing the cover as we reduce our net debt. subject to shareholder approval at the aGM on 28 april 2020, the final dividend will be paid on 25 May 2020 to shareholders on the register at the close of business on 11 May 2020. STRATEGIC REPORT the strategic report (which includes all the content from pages 1 to 33 inclusive) was approved by the Board on 4 March 2020 and was signed on its behalf by: Chris Dent chief Financial officer 20 Franchise Brands plc annual report and accounts 2019 environmental, social and Governance strategic report Governance Financial statements Franchise Brands is committed to sustainable growth and seeks to incorporate environmental, social and governance (“esG”) considerations into the principles and policies that guide our business. Below we set out our commitment to esG and some practical examples of this commitment. Environment Social Corporate Governance We are committed to reducing our environmental impact, continually improving our environmental performance and supporting our customers in reaching their environmental goals. Our people are our most important asset and we want to provide a great overall working environment which is underpinned by strong cultural values. We believe that good corporate governance is vital in supporting our Company’s growth strategy and in turn its long-term success. • Metro rod, Willow pumps, chipsaway and ovenclean have an environmental Management system that is externally audited and accredited to Bs en iso 14001. • We appreciate the benefits of diversity and inclusion. • 45% of our senior management team is female and 1 out of 4 of our Managing directors is female. • compliance with the 10 key principles in the Qca corporate Governance code for small and mid-sized companies. • We aim to employ environmentally- friendly processes where possible. • chipsaway’s sMart repair process uses mostly water-based formulations and ovenclean employs a no added caustic system. • We are committed to investing in our people through training and development. • the “developing inspiring leaders” programme was launched in 2019, and we are pioneering this with 12 women from across the business. • independent Board members. • independence of audit and remuneration committees. • 72% of chips away franchisees are • We proactively support employee • annual review of Board effectiveness. trained to iMi nVQ3 level repair eV and hybrid vehicles. • our investment in audio/video technology allows us to communicate more efficiently with less travel. • our it investment in the ‘cloud’ means we can support environmentally positive technology such as Microsoft azure. • our support centres aim to maximise energy efficiency and environmental impact. • Willow pump’s new premises has sensors fitted to increase the efficiency of heating, cooling and lighting. Metro rod’s support centre sources electricity from a renewable energy provider. wellbeing and mental health. • starting in 2018, we have trained 45 staff and some franchisees in mental health awareness. • We believe in training for the future. • the Metro rod apprenticeship scheme, accredited by itol, was launched in 2019. an industry first, apprentices complete a two-year level 3 advanced apprenticeship while they are working in the business. • annual training for all employees in anti-Bribery and corruption and Gdpr. • 1 out of 9 Board members is female. • Julia choudhury appointed as Board director with overall responsibility for esG. Franchise Brands plc annual report and accounts 2019 21 our Values LIVING Our Values at Franchise Brands we have five guiding principles that inform the way we work with each other, support our franchisees and serve our customers and the communities in which we operate. 22 Franchise Brands plc annual report and accounts 2019 We demand integrity We empower our people We are challenging of ourselves We are fair We work as a team strategic report Governance Financial statements We are professional in everything we do and treat people with respect. nothing is more important to us than acting with integrity at all times. We empower our people and expect them to take ownership of a situation and to be accountable for their actions and the results they generate. We set high standards, are demanding of ourselves, are prepared to challenge the norm and have a relentless focus on continual improvement. We consider that fairness and transparency are essential to creating high-trust working relationships with each other, and with our franchisees, partners, suppliers, and customers. We place a huge amount of importance on teamwork between our colleagues and our franchisees to create a dynamic business which delivers impressive results. We are inclusive, encourage ideas and innovation and welcome diversity. Franchise Brands plc annual report and accounts 2019 23 corporate responsibility STAKEHOLDER Engagement 1 Employees OUR COMMITMENT TO SECTION 172 as a progressive, principle-led Group, we place huge importance on working constructively and in partnership with all our stakeholders to create value which benefits everyone. We place particular importance on directly engaging and communicating with our employees, franchisees, customers, suppliers and shareholders. For examples of how the Board has discharged its decision making responsibilities during the year, please see page 37. 24 Franchise Brands plc annual report and accounts 2019 2 3 4 5 Franchisees Customers and local communities Suppliers Shareholders strategic report Governance Financial statements ` Franchise Brands employs some 250 employees in four principal locations. ` the Board and senior management team actively engages with our teams to understand areas of importance to them, the potential for development opportunities and to communicate on Group strategy and performance. ` We engage through a combination of visits, management forums, events, presentations, conferences, communications bulletins and videos. see pages 26 and 27 ` We encourage a regular and open dialogue with our franchisees so we can provide them the support they need to grow their businesses. ` Franchisee engagement takes place in a variety of formats, from one-on-one meetings to seminars and events, conferences, training courses, forums, surveys and online communications platforms. ` our engagement with franchisees takes place at every level of Management and our support centre teams. see pages 30 and 31 ` We encourage the widest range of potential customer engagement so we can make sure we provide the highest possible service. ` Management and our account executives conduct one-on-one meetings with our large customers to review our performance against Kpis and receive feedback on our service delivery. ` We encourage reviews, performance ratings and direct feedback from individual customers and commission external surveys to assess quality and levels of satisfaction. see pages 28 and 29 ` our objective is to source the highest possible quality of products, equipment and services for our franchisees and customers. ` robust reviews take place to ensure a supply-chain free from slavery and human trafficking. ` Meetings are held with our Management and technical teams to review supplier offerings and experience demonstrations of equipment. ` our franchisees and suppliers engage at the expos we organise at our annual conferences and directly through visits. ` Franchise Brands has a number of institutional and retail shareholders who we regularly engage with. ` the Board meets regularly with institutional investors, and exhibits and presents at events attended by retail investors. We also provide content to retail financial news websites. Franchise Brands plc annual report and accounts 2019 25 corporate responsibility continued DEVELOPING Inspiring Leaders We have designed the developing inspiring leaders programme to help our high-potential leaders to successfully embrace the opportunities and challenges arising from greater leadership roles within Franchise Brands. this innovative, inspiring and personalised programme provides our future leaders with the opportunity to: broaden their understanding of the Group, and themselves; deepen and expand their competencies and capabilities; improve their knowledge of key business functions; be enthused by new thinking and ideas and build and strengthen their ability to lead. the learning environment we have designed is engaging, collaborative and experiential. training and development is provided via curated content that is digitally delivered as well as workshops and training sessions, external events and mentoring and coaching from the Franchise Brand’s leadership team. We are pioneering our developing inspiring leaders programme with 12 women from across the business. 26 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements Franchise Brands plc annual report and accounts 2019 27 corporate responsibility continued TRAINING Apprentices in 2019 we launched the Metro rod apprenticeship programme to help provide our franchisees with a qualified and highly-skilled engineer resource by developing young talent. an industry first, the Metro rod apprenticeship programme has been designed in conjunction with the institute of training & occupational learning (“itol”). Metro rod apprentices complete a two-year, work-based, level 3 advanced apprenticeship, with training and development taking place while they are working in the business, meaning they can earn while they learn. tailored mentoring and development is provided by experienced drainage technicians and business owners, who help our apprentices develop the necessary skills, confidence and experience. the formal training is built on a suite of specialist training courses that have been itol-accredited and certified. in time, apprentices will have the opportunity to develop into a senior drainage engineer, a manager or even a business owner. 28 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements Franchise Brands plc annual report and accounts 2019 29 corporate responsibility continued FRANCHISEE Engagement our franchisees are the backbone of our business and it is their dedication, ambition and entrepreneurial spirit that allows us to grow. We engage with our franchisees on multiple levels. We welcome franchisees and key members of their teams to our annual brand conferences and award dinners. Franchisees attend specialist events, such as the discovery days at Willow pumps, so that they can learn about new opportunities and meet people from across the business. the chairman’s dinner, for our largest Metro rod franchisees with annual sales of over £1m, allows us to celebrate and recognise the success of our franchisees. We support our franchisees through individual visits and meetings, seminars and training courses. We also engage with them through specialist franchisee forums and our digital and online platforms. regular surveys, including those we commission from external parties, help us obtain useful feedback on key issues and the support services we provide. 30 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements Franchise Brands plc annual report and accounts 2019 31 principal risks and uncertainties the directors confirm that the Board regularly reviews the process for identifying, assessing and mitigating any significant risks faced by the Group, and regularly reviews the impact of any significant risks faced by the Group on the prospects of the Group. Below is a summary of current principal risks and uncertainties which may be subject to change following any review. STRATEGIC RISKS increasing decreasing no movement MARKET RISKS IMPACT MITIGATION FRANCHISEES • the ability of the Group to attract and retain franchisees with the appropriate attitude, expertise and skills, in available and suitable locations, cannot be guaranteed. this may have a detrimental effect on trading performance and growth. • Franchisees could default on their obligations under their respective franchise agreements or underperform, or affect the integrity of the brand, all of which could negatively impact the Group’s performance, reputation and prospects. • Metro rod and Willow pumps have a number of large customer relationships, where reactive services are being provided nationally through framework agreements. the loss of a number of these large customers, and/or a significant reduction in the amount of reactive work that is provided, could have a detrimental impact on system sales and hence profits. CUSTOMERS • the Group has an experienced franchise marketing and recruitment capability. Kpis are monitored on a regular basis for all Group businesses in order to ensure a suitable number of new enquiries are being received to achieve the recruitment targets. • the Group provides a comprehensive range of training and support services to its franchisees with the objective of achieving high standards. it monitors performance and compliance where required through the franchise support and operations teams and through regular inspections and audits. • no one customer accounts for a significant proportion of sales. • Both brands have long-standing relationships with many of these customers, and also their end- customers, and are able to be very responsive to changing requirements and customer feedback. FINANCIAL RISKS IMPACT MITIGATION ABILITY TO CONVERT PROFITS TO CASH • Metro rod has a large number of customers within the facilities management sector. this sector has had two well-publicised failures in recent years (carillion & interserve). there is a risk that we will be unable to collect amounts due. • Both Metro rod and Willow pumps have positive working capital requirements which grows as our sales increase, which could limit our ability to grow. • the B2c division relies on the receipt/collection of ongoing monthly payments from franchisees. • the Group continually monitors the financial position of its key customers. in the current year we have hired an operations controller (Finance) to improve our working capital management. • Factors likely to affect a franchisee’s ability to make payments are monitored by Finance on a monthly basis. any material concerns are raised with the department manager who will investigate and direct help to individual franchisees. although the risk of an individual franchisee failing is high, with 404 uK franchisees our overall risk is reduced. OPERATIONAL RISKS LEGAL RISKS IMPACT MITIGATION CHANGES IN LEGISLATION • legislation and regulations that impact the business • the Group closely monitors regulatory and legal may change and/or new legislation and regulation may come into effect which could have an adverse effect on the Group’s franchise model and business. • in particular, the Group could be impacted by changes in health and safety regulations, franchising legislation, employment law, data protection and other legislative areas. developments to determine its response and to ensure ongoing compliance with its obligations. • the Group works closely with third parties to ensure that it meets its obligations, including independent environmental and health and safety consultants as well as legal advisers. 32 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements OPERATIONAL RISKS (CONTINUED) OPERATIONAL RISKS IMPACT MITIGATION DEPENDENCE ON KEY PERSONNEL • loss of key personnel, either at executive level, or in • each of the executive directors and a number of other relation to key skills, could have adverse consequences for the Group. key personnel are shareholders in the company. • all employees in key positions are participants in the • the inability to recruit additional skilled and company’s long-term incentive plan. experienced personnel in a competitive market for suitably qualified candidates may impact the performance of the business. • the Group encourages and supports employees to undertake training to expand existing skills where necessary. HEALTH AND SAFETY • Metro rod and Willow pumps operate in sectors where the health and safety risk is higher than the Group’s other brands due to the nature of the equipment used and the locations in which the services are carried out. Metro rod and Willow pumps have good long-term health and safety records; however, a serious incident could have adverse consequences to their businesses. • the chemical compounds used to carry out chipsaway repairs and ovenclean processes are compliant with current health and safety regulations, however, should regulations change, compliance with new regulations could result in increased costs for the Group’s franchisees which may impact their viability. • Metro rod and Willow pumps have developed health and safety systems and processes the objective of which is the creation of a safe environment. • a point of work risk assessment is inbuilt into our works management systems and must be completed prior to work commencing. • Franchisees and employees are provided with health and safety training and are audited for compliance through a number of inspections. Metro rod and Willow pump’s processes are the subject of independent review and accreditation. all health and safety Kpis are carefully monitored and assessed on a regular basis. • the Group closely monitors industry developments that may result in a change to the regulation of products used in the chipsaway repair and ovenclean process. in such an event the Group will work with key suppliers with the objective of ensuring compliance and managing cost. • all brands hold iso certification. INFORMATION TECHNOLOGY • the Group’s business is dependent on network and • the architecture of the Metro rod systems has recently information systems, the internet and other technologies. shutdowns or service disruptions could adversely affect the Group. • the Group is dependent on products, technologies and services provided by third parties in order for customers to use its services, as well as to deliver, measure and report advertising. been restructured and the systems are now hosted using the Microsoft cloud. they are backed up regularly and there are standard processes in place to restore critical services. however, Metro rod’s business is very reliant on these systems. • For the other Group brands, the most critical systems are also externally hosted and regularly backed up. their operation is monitored closely by a third party professional services company. annual penetration tests are conducted. • the it department continually reviews the suitability of the Group’s systems and identifies any legacy or aging systems that need to be replaced. EXTERNAL SUPPLIERS (EXCLUDING IT) • the Group relies on certain other suppliers, without whom the Group’s revenue generation, efficiency of operations and cash flow may not be optimised. • the Group maintains good working relationships with its key suppliers to ensure the supply of the highest quality products and services at all times. • the Group cannot guarantee that service and products delivered from third parties will remain of a high quality in the future and be provided without interruption. • the Group continually assesses the quality and value of the products and services supplied and have identified alternative suppliers for all key products and services should alternatives be required at any time. Franchise Brands plc annual report and accounts 2019 33 Board of directors Stephen Hemsley Chris Dent Peter Molloy Executive Chairman Chief Financial Officer Managing Director, Metro Rod stephen co-founded Franchise Brands in 2008 and has led the development of the business since then, including the ipo and the acquisitions of Metro rod and Willow pumps. stephen is a chartered accountant by training and spent nearly ten years with venture capital company 3i as investment director. he was until recently non- executive chairman of domino’s pizza Group plc. during his 21-year involvement with domino’s, he took the company from a market capitalisation of £25m to almost £1.5 billion. stephen was appointed as a director of the company on 15 July 2016. chris has substantial accounting and financial experience from his time in the profession and as a Finance director of private and publicly quoted companies. chris began his career at deloitte llp where he spent ten years within audit, corporate finance and transactional accounting services. he subsequently spent four years as Finance director of aiM-quoted 7digital Group plc. chris is a Fellow of the institute of chartered accountants of england and Wales. he was appointed as chief Financial officer of the company on 17 July 2017. peter has over 35 years of management and commercial experience. peter joined Metro rod in 2003 and was promoted to the position of commercial director in 2005. prior to joining Metro rod, he was Managing director of solaglas replacement Glazing, part of the saint-Gobain Group, with national responsibility for the network branches, field engineers, call centre and sales and marketing. peter was appointed Managing director of Metro rod in september 2017, and a director of the company on 21 March 2018. Tim Harris Julia Choudhury Colin Rees Managing Director, B2C Division Corporate Development Director Chief Information Officer tim is a seasoned franchise professional with over 25 years’ experience of successfully developing automotive, commercial and domestic franchise businesses in both international and uK markets. tim joined the Group in 2008. he led the brands through a period of increased profitability and international reach and is now Managing director of the B2c division. prior to joining the Group, tim held senior sales positions at a number of franchisor companies. he was appointed as a director of the company on 15 July 2016. Julia has over 30 years of commercial, finance and investment experience. Julia joined the Group in 2008 and has a particular focus on corporate development, which includes acquisitions. Between 1997 and 2005, Julia held a number of senior management roles at aXa investment Managers including Managing director of the uK operation. her early career was spent in corporate finance and investment management with BZW. she was appointed as a director of the company on 15 July 2016. colin is a highly experienced it professional. he was appointed to the new position of chief information officer in april 2017. colin was previously director of it at domino’s pizza where he was responsible for all it systems. he previously held a number of senior it roles at easyJet including head of software delivery. colin started his career at argos plc and held a number of positions over a ten year period. he was appointed a director of the company on 21 March 2018. 34 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements COMMITTEE MEMBERSHIP A audit committee R remuneration committee AR aiM rules compliance committee denotes committee chair Nigel Wray David Poutney Non-executive Director Independent Non-executive Director nigel co-founded Franchise Brands in 2008. he is an entrepreneurial investor in both public and private companies. currently he is a substantial shareholder and director at chapel down Group plc and is a significant investor in a wide-ranging number of aiM quoted companies, as well as a number of private companies. he is a former director and was a significant shareholder in domino’s pizza. he was appointed as a director of the company on 15 July 2016. david is ceo of dowgate capital limited and has over 40 years of finance and investment experience. From 2001 to 2016 he was director and head of corporate Broking at numis securities limited. Between 2014 and 2016, he was an executive director of numis corporation plc. in his 20 years as a corporate broker, david has been involved in the listings of over 30 companies and advised many through extended periods of growth. he was appointed as a director of the company on 15 July 2016. A R AR Rob Bellhouse Mark Peters Independent Non-executive Director Company Secretary Mark spent over 30 years in the legal profession, which included 17 years with sherrards solicitors llp where he was senior partner. Mark has particular expertise in real estate, investment, business development and management and has performed company secretarial duties for Franchise Brands since 2008. rob is an experienced company secretary with strong commercial experience gained over 30 years in listed companies, with a strong focus on governance, compliance and risk management activities. rob has been company secretary of a number of listed companies including domino’s pizza (on an interim basis), lonmin and Greene King and was voted 2014 icsa company secretary of the Year. he was appointed as a director of the company on 15 July 2016. A R AR Franchise Brands plc annual report and accounts 2019 35 chairman’s introduction to Governance Franchise Brands is an aiM-quoted company and we have chosen to follow the Qca’s corporate Governance code for small and mid- size quoted companies (the “code”) as we believe that this provides an appropriate governance framework for a Group of our size. 36 Franchise Brands plc annual report and accounts 2019 We believe that good corporate governance is vital in supporting our company’s growth strategy and in turn its long-term success. the Board of directors has chosen to apply the Quoted companies alliance (the “Qca”) corporate Governance code (the “code”) as it believes that this provides an appropriate governance framework for a Group of our size and should help support our growth and success. We seek to comply with the code’s principles and application wherever possible, but there can be circumstances where the interests of the company and its shareholders are better served by departing from the code’s requirements. in these circumstances we will seek to explain the divergence. corporate governance plays a crucial role in helping to preserve value for shareholders, by providing a process for decision- making which should ensure that all major decisions are considered in good time, that the Board is provided with good- quality briefing materials which cover all relevant factors and that our deliberations consider the risks, as well as the opportunities, in the issues before us. it is for these reasons that the Board is committed to achieving high standards of corporate governance. the Qca code requires us to provide an explanation for any departures from the principles or application of the code. as a result, the remainder of this report explains how we have applied the code during 2019. Further information on the Group’s governance practices, the business model and strategy can be found in the company overview, strategic report and Governance sections of this annual report and accounts. in addition to choosing to apply the new edition of the Qca code, Franchise Brands is a member of the Qca in order to support the work it does in promoting good corporate governance. OUR COMMITMENT TO SECTION 172 as a Board we continue to uphold the highest standards of conduct and make decisions for the long-term success of the business. the disclosures set out on the following page demonstrate how the Board has arrived at three principal decisions for the year. We define principal decisions as both those that are material to the Group, but also those that are significant to any of our key stakeholder groups: employees, franchisees, customers and local communities, suppliers and shareholders. in making the following principal decisions the Board considered the outcome from its stakeholder engagement as well as the need to maintain a reputation for high standards of business conduct and the need to act fairly between the members of the company. this statement of commitment to section 172 forms part of the strategic report. Stephen Hemsley executive chairman corporate Governance strategic report Governance Financial statements The acquisition of Willow Pumps The creation of the B2B and B2C divisions Increase of the dividend Board decisions Employees • external growth provides greater opportunity and security for employees. • creates a greater level of focus and structure for employees. • as most employees are share option holders or shareholders, this is beneficial to them. Franchisees • optimal way to expand the range of services to both Metro rod and Metro plumb’s commercial customers. • Franchisees from across the • no direct impact on franchisees but Group’s brands benefit from a more focused range of support services. a good indication of the Board’s confidence in the business and health of the company. Customers and local communities Suppliers • Benefit from an increased range of “Water in. Waste out.” services. • ability to provide a more focused customer offering. • opportunity to benefit from deepening relationships with key suppliers. • provides more opportunity for suppliers across the Group’s brands. Shareholders • the Board considered the acquisition would be significantly earnings enhancing. • Facilitates future acquisitions and maximises efficiencies. • no direct impact on customers but a good indication of the Board’s confidence in the business and health of the company. • no direct impact on suppliers but good indication of the Board’s confidence in the business and health of the company. • Board’s intention to continue with our progressive dividend policy, reducing the cover as we reduce our net debt. QCA PRINCIPLE 1 QCA PRINCIPLE 2 STRATEGY AND BUSINESS MODEL MEETING SHAREHOLDER NEEDS Franchise Brands is focused on building market-leading businesses in selected customer segments, using primarily a franchise model. We currently have a combined network of almost 450 uK franchisees across five franchise brands. our focus is on established brands which can benefit from our shared support services, specialist sector expertise, management experience and group resources. the acquisition of Willow pumps, a dlo, represented an important step in expanding Metro rod and Metro plumb’s range of services to the commercial market. the creation of a B2B and B2c division provides a greater focus and structure to grow our portfolio, support our franchisees and develop our businesses. Further information around our strategy and business model can be found in the strategic report. the executive chairman, the chief Financial officer, and the corporate development director regularly meet with the institutional shareholders and provide the Board with feedback from those meetings and other communications with shareholders. the Board is provided with research notes from sell-side analysts plus insight into shareholders’ views from the company’s brokers and nominated adviser. the Group welcomes the personal investment in its equity that many employees and franchisees have made, as well as our retail investors. We regularly update the investor relations section of the Group’s website with the aim of providing useful information for all investors, but particularly our retail shareholders. We use our annual report to provide shareholders with details of the Group, operations, performance, strategy and policies. the Group also exhibits and presents at events attended by retail investors and subscribes, and provides content to, retail financial news websites. all directors are invited to attend the aGM at which there is an opportunity for shareholders to ask questions formally, and the directors are available following the meeting for informal discussions. Voting at the aGM is by poll, with the results being announced in the meeting. Franchise Brands plc annual report and accounts 2019 37 corporate Governance continued QCA PRINCIPLE 3 QCA PRINCIPLE 5 MANAGE OUR RESPONSIBILITIES TO WIDER STAKEHOLDERS MAINTAIN A WELL-FUNCTIONING BOARD the Board has a clear understanding of the Group’s key stakeholders (which includes our employees, franchisees, customers and communities, suppliers, shareholders, regulators, and banks) and understands that the success of the company depends on maintaining a positive relationship with each of these groups, particularly its franchisees. there are good relations with all of the stakeholder groups. the Group’s core business as a franchisor has minimal direct impact on society or communities in general terms, but the Board understands the importance of these issues. Management actively solicits feedback from employees and franchisees (both formally and informally) and maintains strong relationships with suppliers. in the current year this has included management visits to franchisees, one-to-one meetings by the senior executive with employees, as well as more formal surveys carried out by independent firms. customer reviews, ratings and feedback for all our consumer brands are received regularly and action taken where required. each of our underlying franchise networks have potential environmental impacts which have been considered and minimised. We aim to employ environmentally-friendly processes where possible. chipsaway’s sMart repair process uses mostly water-based formulations and ovenclean employs a no-added caustic system. Metro rod and Willow pumps have highly developed health and safety systems and processes which take into account the potential health and safety risk from the nature of the equipment used and the public locations in which the services are carried out. Metro rod and Willow pumps also ensure that they dispose of waste responsibly and safely. QCA PRINCIPLE 4 RISK MANAGEMENT the risk Management section on pages 32 and 33 details the key risks to the business, how these are mitigated and the change in the identified risk over the last reporting period. the Board is embedding risk management principles to drive proactive management of, to better enable us to execute and deliver our strategy. as such, the Board regularly reviews its risk management framework, which determines the extent of exposure to the identified risks that the company is able to bear and willing to take. any changes to the risk profile of the group will be discussed at Board meetings, and the risk management framework updated. the Board formally reviews the risk framework bi-annually. the Group does not currently have an internal audit function, but will consider the introduction of this as the Group grows. the company is controlled by the Board of directors. the Board comprises six executive directors and three non-executive directors, two of whom (rob Bellhouse and david poutney) are considered to be independent. peter Molloy and tim harris are the Managing directors of the two largest operating components of the Group and sit on the Board of directors, and they are responsible for the operational leadership of their respective businesses. the Group holds Board meetings at least six times each financial year and at other times as and when required. during the current year the Board met eight times. all directors (or their proxy) attended all meetings. stephen hemsley, the executive chairman, is responsible for the running of the Board. the Board is responsible to the company’s shareholders for: • setting the Group’s strategy; • Maintaining the policy and decision-making process through which the strategy is implemented; • checking that necessary financial and human resources are in place to meet the strategic aims of the Group; • providing entrepreneurial leadership within a framework of good governance and sound risk management; • Monitoring performance against key financial and non-financial indicators; • overseeing the systems of risk management and internal control; and • setting values and standards in corporate governance matters. the role of the non-executive directors is to: • challenge constructively and help develop proposals on strategy; • satisfy themselves as to the integrity of the financial reporting systems and the information they provide; • satisfy themselves as to the robustness of the internal controls; • ensure that the systems of risk management are robust and defensible; and • review management performance and the reporting of such performance to shareholders. all directors receive regular and timely information on the Group’s operational and financial performance. detailed strategic Board papers are sent out in advance of Board meetings, and the Board receive the monthly management accounts detailing the performance of our brands. the directors’ contracts provide that they must each devote such time to the company as is required to fulfil their duties. 38 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements QCA PRINCIPLE 6 QCA PRINCIPLE 8 ENSURE DIRECTORS HAVE NECESSARY, UP-TO-DATE SKILLS PROMOTE A VALUE-BASED CORPORATE CULTURE Franchise Brands has five guiding principles that inform the way we work with each other, support our franchisees and serve our customers and the communities in which we operate: • We demand integrity: We are professional in everything we do and treat people with respect. nothing is more important to us than acting with integrity at all times. • We empower our people: We empower our people and expect them to take ownership of a situation and to be accountable for their actions and the results they generate. • We are challenging of ourselves: We set high standards, are demanding of ourselves, are prepared to challenge the norm and have a relentless focus on continual improvement. • We are fair: We consider that fairness and transparency are essential to creating high trust working relationships with each other, and with our franchisees, partners and suppliers. • We work as a team: We place a huge amount of importance on teamwork between our colleagues and our franchisees in creating a dynamic business which delivers impressive results. We are inclusive, encourage ideas and innovation and welcome diversity. an externally conducted survey has been undertaken to ascertain the views and attitudes of the franchisees of Metro rod, the Group’s largest business. this included a number of questions providing insights into the culture within that business and the Board has discussed the survey’s findings. having directors drawn from a range of backgrounds, with a cumulatively wide range of relevant skills and experiences, helps us to take decisions in the interests of all shareholders and which take into account the interests of a wide range of stakeholders. details of the skills and experience of the Board, which cover sector, financial and public markets skills and experience, can be found on pages 34 and 35. Where new Board appointments are considered the search for candidates is conducted, and appointments are made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender. the Board recognises that as the Group evolves, the mix of skills and experience required on the Board will change, and Board composition will need to evolve to reflect this change, with due regard for the benefits of diversity on the Board, including gender. directors are provided with access to the company’s nominated advisor who provide briefings on necessary legislation and regulations from time to time. directors are supported to ensure their skills remain up to date, including training courses and continuing professional development. QCA PRINCIPLE 7 EVALUATE BOARD PERFORMANCE a Board performance self-evaluation was undertaken in november 2018, the results of which have been discussed by the Board. each director was invited to complete a questionnaire providing a quantitative rating and justifying narrative on ten strategically aligned questions, with two further questions to identify any improvement opportunities. overall, the Board felt that it was functioning effectively, with a good balance and blend of skills and experience around the Board table and that meetings were held in a constructive spirit. the evaluation identified two opportunities to enhance the Board’s effectiveness. one was to ensure that its meeting agendas and discussions focussed on strategic considerations, with operational outcomes reported by exception. the second was to have specific ‘deep dives’ into key strategic issues, including both risks and opportunities. Both have been adopted by the Board. since the company joined the aiM market in august 2016, there has been an evolution in the Board’s composition, with the most recent changes to the directorate being in april 2019. While there is no formal succession plan in place, four Managing directors run the Group’s brands and two of these individuals sit on the parent company Board. three are experienced operators of franchised businesses and whilst it is not our plan to consolidate these businesses any further, we have significant resilience in our senior management team. Franchise Brands plc annual report and accounts 2019 39 corporate Governance continued QCA PRINCIPLE 9 MAINTAIN FIT-FOR-PURPOSE GOVERNANCE STRUCTURES audit committee the role of the audit committee is to monitor the quality of internal controls and check that the financial performance of the Group is properly assessed and reported on. it receives and reviews reports from the chief Financial officer, other members of management and external auditors relating to the interim and annual accounts and the accounting and internal control systems in use throughout the Group. the members of the audit committee are david poutney (chairman) and rob Bellhouse. the executive chairman and chief Financial officer are invited to attend all meetings, with other senior financial managers invited to attend when necessary. the external auditors attend meetings to discuss the planning and conclusions of their work and meet with the members of the committee without any members of the executive team present after each meeting. the committee is able to call for information from Management and consults with the external auditors directly as required. the objectivity and independence of the external auditors is safeguarded by reviewing the auditors’ formal declarations, monitoring relationships between key audit staff and the company and tracking the level of non-audit fees payable to the auditors. the committee met twice during the year, to review the 2018 annual accounts and the interim accounts to 30 June 2019. the committee reviewed, with the independent auditor, its judgements as to the acceptability of the company’s accounting principles. in particular, the committee discussed the application of the new accounting standards for 2018 (iFrs9 and iFrs15) and the new accounting standard for 2019 (iFrs16). the committee reviewed and discussed the auditor’s comments on improvements which could be made to the internal controls. in addition, the committee has discussed with the auditor the firm’s independence from company management and the company, and considered the compatibility of non-audit services with the auditor’s independence. in the current year these services included due diligence work which Bdo performed in relation to our acquisition of Willow pumps. 40 Franchise Brands plc annual report and accounts 2019 remuneration committee the role of the remuneration committee is to review the performance of the executive directors and make recommendations to the Board on matters relating to their remuneration and terms of employment. the committee also makes recommendations to the Board on proposals for the granting of share awards and other equity incentives pursuant to any share award scheme or equity incentive scheme in operation from time to time. the members of the remuneration committee are: rob Bellhouse (chairman) and david poutney. the executive chairman is invited to attend meetings of the remuneration committee, but does not participate when his own remuneration is being discussed. all members of the committee are independent non-executive directors. the company’s remuneration policy and details of the amounts due to the directors of the company in or in respect of the year are set out in the remuneration report on pages 41 and 42. as the company is not fully listed, it is not required to produce a formal remuneration policy or seek shareholder approval of that policy. the committee met twice during the year, to approve the awards of options under the long-term incentive plan (“ltip”). aiM rules compliance committee the role of the aiM rules compliance committee is to ensure that the company has in place sufficient procedures, resources and controls to enable it to comply with the aiM rules for companies and this role is set out in its terms of reference available on the Group’s website. the committee makes recommendations to the Board and proactively liaise with the company’s nominated adviser on compliance with the aiM rules. the committee also monitors the company’s procedures to approve any share dealings by directors or employees in accordance with the company’s share dealing code and the requirements of the Market abuse regulation. the members of the committee are rob Bellhouse (chairman) and david poutney. in addition, all other directors of the company are invited to attend its meetings. the committee has not met during the year, as the relevant matters were discussed at meetings of the full Board. QCA PRINCIPLE 10 COMMUNICATE GOVERNANCE AND PERFORMANCE WITH SHAREHOLDERS the Board communicates regularly with shareholders providing updates on Group performance via interim and annual financial reports, trading updates issued via rns, investor presentations and meetings with institutional shareholders. the Board also ensures that the corporate website is kept up to date with all the latest information about the governance and performance of the business. We use our annual report to provide shareholders with details of the Group, operations, performance, strategy and policies. the Group also exhibits and presents at events attended by retail investors and subscribes, and provides content to, retail financial news websites. strategic report Governance Financial statements DIRECTORS’ SERVICE CONTRACTS all executive directors are employed under service contracts. the services of the executive directors may be terminated by the company, on the expiry of six months’ notice (nine months, in the case of tim harris). the non-executive directors are retained under letters of engagement which may be terminated by the company (i) giving three months’ notice or (ii) immediately, in the event that the director is not re-elected by shareholders at an aGM. directors’ remuneration (audited) the aggregate remuneration payable to the directors for the year ended 31 december 2019 was as follows: salary or fees (£) Benefits in kind (£) pension contributions (£) 2018 comparison (£) total (£) 107,500 – – 107,500 100,000 director stephen hemsley chris dent 103,750 7,800 1,280 112,830 109,800 Julia choudhury 96,250 – – 96,250 85,000 tim harris 124,181 peter Molloy1 127,500 colin rees1 94,065 robin auld nigel Wray david poutney rob Bellhouse – 25,625 26,875 26,875 8,400 14,651 1,179 133,760 129,428 5,057 147,208 102,106 – – – – – 1,178 95,243 64,259 – – – – – 20,000 25,625 25,000 26,875 25,000 26,875 25,000 total 732,621 30,851 8,694 772,166 685,593 notes: 1 peter Molloy and colin rees served as directors of the company from 21 March 2018. no director received any remuneration from a third party in respect of their service as a director of the company. as seen from the table above, four directors are currently accruing retirement benefits, and do so through defined contribution schemes. the company does not operate a defined benefits scheme. no director or former director received any benefits from a retirement benefits scheme that were not otherwise available to all members of the scheme. directors’ remuneration report REMUNERATION POLICY the objective of the company’s remuneration policy is to facilitate the recruitment and retention of executives of an appropriate calibre, to ensure that the senior executives of the company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the company. STRATEGIC ALIGNMENT the remuneration committee is satisfied that the pay that can be earned is appropriate for a company of comparable size and complexity, at each level of performance. all of the executive directors have significant exposure to the company’s share price: stephen hemsley has a significant personal shareholding in the company and the other executive directors have material personal investments in our shares, supplemented by options granted under our ltip. the vesting of ltip options is subject to a performance condition requiring a pre-determined and challenging rate of compound annual growth in adjusted earnings per share, which the Board regards as the key performance metric. as a result, there is a clear incentive to drive earnings per share growth over the longer term and also to mitigate downside risks that could affect the company’s profitability. reputational risks could reasonably be expected to affect the share price, so the executive directors are further incentivised to mitigate these exposures to maximise the potential value of their options. REMUNERATION IN PRACTICE the remuneration that the company offers to its executive directors has three principal components: 1. Basic salaries and benefits in kind – Basic salaries are determined by the remuneration committee bearing in mind the salaries paid in aiM-quoted companies of similar size and complexity. Benefits in kind may include a car allowance and health care. 2. Pensions – the company operates a defined contribution scheme available for all executive directors and employees. only basic salaries are pensionable. 3. Equity exposure – the company operates a share option scheme covering permanent employees (including the executive directors, other than stephen hemsley). subject to achieving compound eps growth targets, options can vest no earlier than the third anniversary of the date of grant and, once vested, may be exercised until the tenth anniversary. the exercise price of the options is set at the market value of the company’s shares at the time of grant, so that the individual only benefits if there has been share price growth. the share option scheme is overseen by the remuneration committee which determines the terms under which eligible individuals may be invited to participate, including the level of awards. the scheme utilises hMrc-approved eMi options to the extent possible. We believe that the mix between fixed and variable pay creates a powerful, but appropriate, incentive and that our approach ensures that pay and performance are directly linked. Franchise Brands plc annual report and accounts 2019 41 directors’ remuneration report continued directors’ share options (audited) details of options held under the company’s ltip by the directors who served during the year are as follows: director chris dent Julia choudhury tim harris peter Molloy colin rees date of grant 12-dec-17 11-dec-18 01-aug-16 11-dec-18 01-aug-16 11-dec-18 11-apr-17 12-dec-17 11-dec-18 12-dec-17 11-dec-18 exercise price (pence) performance condition 49.5 69 eps growth eps growth eps growth eps growth eps growth eps growth 2018 number of shares 303,030 21,970 303,030 71,970 303,030 71,970 150,000 eps growth eps growth 153,030 eps growth 106,000 eps growth eps growth 303,030 71,970 33 69 33 69 67 49.5 69 49.5 69 changes in the year Granted exercised lapsed 2019 number of shares exercisable from exercisable to – – – – – (303,030) – – – (303,030) – – – – – – – – – – – – – – – – – – 303,030 12-dec-20 12-dec-27 21,970 11-dec-21 11-dec-28 – 01-aug-19 01-Jul-26 71,970 11-dec-21 11-dec-28 – 01-aug-19 01-Jul-26 71,970 11-dec-21 11-dec-28 150,000 11-apr-20 11-apr-27 – – 153,030 12-dec-20 12-dec-27 – 106,000 11-dec-21 11-dec-28 – – 303,030 12-dec-20 12-dec-27 71,970 11-dec-21 11-dec-28 during 2019 the closing mid-market quote for the company’s shares ranged from a low of 65p to a high of 128.5p. as seen from the table above, two directors exercised options over the company’s shares during the year. the shares were exercised on 28 august 2019 when the share price was 82.5p, with a resultant gain of £150,000 for each director who exercised. 42 Franchise Brands plc annual report and accounts 2019 directors’ report strategic report Governance Financial statements SCOPE OF THIS REPORT the directors’ biographies on pages 34 and 35, the discussion of corporate governance matters on pages 36 to 40 and the remuneration report on pages 41 and 42 are hereby incorporated by reference to form part of this directors’ report. in addition, chris dent, Julia choudhury, tim harris, peter Molloy and colin rees held or hold options over shares of the company through their participation in the company’s ltip, which are detailed in the remuneration report on pages 41 and 42. as permitted under the companies act, certain matters which would otherwise need to be included in this directors’ report have instead been discussed in the strategic report. these matters are the discussion of the performance and likely future developments in the business of the company and its subsidiaries. disclosures relating to financial risk management are included in note 3 to the financial statements. PRINCIPAL ACTIVITIES the principal activity of the Group is focused on building market- leading businesses in selected customer segments, using primarily a franchise model. our focus is on established brands which can benefit from our shared support services, specialist sector expertise, management experience and group resources. the principal activity of the company is to act as a holding company and to provide management services to its subsidiary companies. DIRECTORS names, biographical details and appointment dates of the directors of the company at the date of this report are shown on pages 34 and 35. DIRECTORS’ INTERESTS the following table shows the interests of the directors (and their spouses and minor children) in the shares of the company. director stephen hemsley1 chris dent Julia choudhury2 tim harris3 peter Molloy colin rees nigel Wray4 david poutney5 rob Bellhouse At 31 December 2019 20,515,117 15,000 1,507,288 1,362,314 33,582 298,507 21,720,120 3,438,881 82,768 at 31 december 2018 20,640,117 15,000 1,204,258 1,059,284 33,582 298,507 21,720,120 2,260,791 82,768 notes: 1. included in the holding of stephen hemsley are 1,616,431 ordinary shares held by his wife, 7,477,612 ordinary shares held by ctG investment limited, a company owned by a discretionary trust of which Mr hemsley and his family are potential beneficiaries, and 1,492,537 ordinary shares held by his self-invested personal pension (sipp). included in the holding of Julia choudhury are 381,819 ordinary shares held jointly with her husband, 411,985 ordinary shares held by her sipp and 37,313 ordinary shares held by Winsham capital partners ltd, a company controlled by Julia choudhury and her husband. included in the holding of tim harris are 59,522 shares held by his sipp. included in the holding of nigel Wray are 14,026,380 ordinary shares held by Vidacos nominess limited, acting as nominee for rBc trustees (Jersey) limited as trustee of Mr Wray’s family trust. also included are 3,731,343 ordinary shares and 3,684,463 ordinary shares held by euroblue investments limited and Glengrace limited, respectively, companies wholly owned by nigel Wray. also included in nigel Wray’s interest are 223,880 ordinary shares owned by the priory Foundation, a charitable trust of which he is the settlor and a trustee. nigel Wray is not the beneficial owner of these shares. included in the holding of david poutney are 2,574,627 ordinary shares held by his sipp and an interest in 676,164 ordinary shares held by his wife and adult daughters. david poutney controls the interest held by his wife and adult daughters but is not the beneficial owner of these shares. 2. 3. 4. 5. RESEARCH AND DEVELOPMENT the Group did not have any material activities in the field of research and development during the year. MAJOR SHAREHOLDERS insofar as is known to the company and in addition to the holdings of the directors above, the following persons hold, as at the date of this document, and are expected (based on the information available as at the date of this document), to hold directly or indirectly 3% or more of the share capital: shareholder netcap limited canaccord Genuity current number of ordinary shares 3,373,134 3,351,033 percentage of existing share capital 4.3% 4.2% GOING CONCERN the directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future. accordingly, the directors continue to adopt the going concern basis in preparing the financial statements. DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AND INDEMNIFICATION OF DIRECTORS the company maintains directors’ and officers’ liability insurance which gives appropriate cover for any legal action brought against its directors. the company has also granted indemnities to each of its directors to the extent permitted by law. Qualifying third party indemnity provisions (as defined in section 324 of the companies act 2006) have been given in favour of all directors on the Board. these indemnities remain in force and relate to certain losses and liabilities which the directors may incur to third parties in the course of acting as directors of the company. DIRECTORS’ OBLIGATIONS TO THE AUDITORS the directors confirm that: • so far as each of the directors is aware, there is no relevant audit information of which the company’s auditor is unaware; and they have each taken all the steps that they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. • DIVIDENDS a final dividend of 0.46p per share was paid on 20 May 2019 in respect of the 2018 financial year. an interim dividend of 0.30p per share in respect of the 2019 financial year was paid on 24 september 2019. the directors are recommending a final dividend of 0.65p per share which, subject to shareholders’ approval at the aGM, will be paid on 26 May 2020 to shareholders on the register at the close of business on 11 May 2020. Franchise Brands plc annual report and accounts 2019 43 directors’ report continued SHARE CAPITAL the company’s entire issued share capital comprises ordinary shares of 0.5 pence each. note 24 to the financial statements summarises the number in issue during 2019. AUDITOR a resolution to reappoint Bdo llp as auditor will be proposed at the aGM. a tender in respect of the external audit of the company and Group was last conducted in 2017. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT the company’s use of financial instruments and its financial risk management objectives and policies are set out in note 3 of the financial statements. ANNUAL GENERAL MEETING the 2019 annual General Meeting of the company will be held on 28 april 2020, the business of which is set out in the notice of Meeting. a circular containing the notice of Meeting and an explanatory letter from the chairman is being posted to shareholders and is also available on the company’s website. approved by the Board. Chris Dent chief Financial officer 4 March 2020 VOTING RIGHTS on a show of hands every member who (being an individual) is present in person or by proxy or (being a corporation) is present by a duly authorised representative and is entitled to vote shall upon a show of hands have one vote and on a poll every member who is present in person or by proxy or corporate representative and entitled to vote shall have one vote for every share of which he is the holder. Where a registered holder or any other person appearing to be interested in such shares fails to comply with any notice given by the company under section 793 of the act, then not earlier than 14 days after service of such notice the shares in question may be disenfranchised. STATUTORY DISCLOSURES in accordance with the large and Medium-sized companies and Groups (accounts and reports) regulations 2008 the directors disclose the following information: • the company’s capital structure and voting rights are detailed on page 74. there are no restrictions on voting rights nor any agreement between holders of securities that result in restrictions on the transfer of securities or on voting rights; • there exist no securities carrying special rights with regard to the control of the company; • details of the substantial shareholders and their shareholdings in the company are detailed on page 43; • the rules concerning the appointment and replacement of directors, amendment to the articles of association and powers to issue or buy back the company’s shares are contained in the articles of association of the company and the companies act 2006; • there exist no agreements to which the company is party that may affect its control following a takeover bid; and • there exist no agreements between the company and its directors providing for compensation for loss of office that may occur because of a takeover bid. BRANCHES there are no branches of the company outside the uK. POLITICAL AND CHARITABLE DONATIONS no political or charitable donations were made or political expenditure incurred during the period. 44 Franchise Brands plc annual report and accounts 2019 directors’ responsibilities statement strategic report Governance Financial statements the directors are responsible for preparing the annual report and the directors’ report and the financial statements in accordance with applicable law and regulations. company law requires the directors to prepare financial statements for each financial year. under that law the directors have elected to prepare the Group and company financial statements in accordance with international Financial reporting standards (iFrs) as adopted by the european union. under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and the Group and of the Group’s profit or loss for that period. the directors are also required to prepare financial statements in accordance with the rules of the london stock exchange for companies trading securities on aiM. in preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable iFrss have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. the directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the company and enable them to ensure that the financial statements comply with the companies act 2006. they are also responsible for safeguarding the assets of the Group and the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. the directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. legislation in the united Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. the maintenance and integrity of the company’s website is the responsibility of the directors, as is the ongoing integrity of the financial statements contained therein. approved by the Board. Chris Dent chief Financial officer 4 March 2020 Franchise Brands plc annual report and accounts 2019 45 independent auditor’s report to the Members of Franchise Brands plc For the year ended 31 december 2019 OPINION We have audited the financial statements of Franchise Brands plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 31 december 2019 which comprise the consolidated statement of comprehensive income, the consolidated and company statement of financial position, the consolidated and company statement of cash flows, the consolidated and company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. the financial reporting framework that has been applied in the preparation of the financial statements is applicable law and international Financial reporting standards (iFrss) as adopted by the european union and, as regards the parent company financial statements, as applied in accordance with the provisions of the companies act 2006. in our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 december 2019 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with iFrss as adopted by the european union; the parent company financial statements have been properly prepared in accordance with iFrss as adopted by the european union and as applied in accordance with the provisions of the companies act 2006; and the financial statements have been prepared in accordance with the requirements of the companies act 2006. • • • BASIS FOR OPINION We conducted our audit in accordance with international standards on auditing (uK) (isas (uK)) and applicable law. our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the uK, including the Frc’s ethical standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following matters in relation to which the isas (uK) require us to report to you where: the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the • Group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. these matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 46 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements KEY AUDIT MATTERS CONTINUED Acquisition of WPL Group Holdings Limited How We Addressed the Key Audit Matter in the Audit during the year, the Group acquired Wpl Group holdings limited and its subsidiaries for consideration of £9.28m. We obtained the sale and purchase agreement (spa) to check that appropriate accounting treatment had been applied. our work included: accounting for acquisitions can be complex and requires significant judgement. the recognition and valuation of assets and liabilities acquired, such as customer relationships, brands and other intangible assets is inherently complex and judgemental. as a result of the judgements required to be made by management there is a risk of material misstatement in the fair value allocated to assets and liabilities acquired including intangible assets and the balance of goodwill recognised. Management have prepared detailed calculations to determine the fair value of the assets acquired and the acquisition consideration. the difference between this consideration and the net assets acquired, including the recognition of intangible assets is goodwill. • confirming cash consideration as stated in the spa to bank statements; • reviewing the fair value of the deferred contingent consideration and challenging management on the assumptions made using a range of alternative estimates and sensitivities; • With the support of our internal specialists we challenged the key inputs, assumptions and methodology used by management in determining the fair values of intangible assets acquired based on our knowledge of the industry; • use of management reconciliations and supporting documentation to agree the acquisition net book values of assets and liabilities and resulting fair value adjustments, including the adoption of iFrs 9, 15 and 16, to the amounts recognised. We have also reviewed the relevant disclosure in the financial statements to assess compliance with the requirements of iFrs 3. the business combinations disclosure is set out in note 5 of the consolidated financial statements and the relevant accounting policies can be seen within note 2. Key observations: Based on our procedures we noted no material exceptions and found management’s key assumptions to be within a reasonable range. Impairment of goodwill and intangible assets How We Addressed the Key Audit Matter in the Audit refer to the accounting policies on pages 56 and 57 and note 2 on page 60. We obtained the impairment analysis performed by management for each cGu. the Group has goodwill and indefinite life intangible assets, which requires management to test these annually for impairment. there is a high degree of management judgement in assessing the value in use of the cash Generating units (“cGu”) to which the Goodwill and intangible assets are allocated and therefore determining any potential impairments. there is therefore a significant risk that impairment of these assets is not appropriately recognised in accordance with applicable Financial reporting standards. We challenged this impairment analysis and considered the reasonableness of management’s key judgements, our work included: • challenging the future trading projections by reference to current performance and the accuracy of prior year forecasting; • challenging the discount rate applied using a range of sensitivities; • using our internal specialists to determine the appropriateness of the discount rate applied; • checking the impairment analysis for logical and arithmetic accuracy and to ensure that it has been undertaken in accordance with ias 36; • Verifying the long term growth rate using historical performance to compare to budgeted rates used; • assessing whether the forecasts adopted in the impairment review were Board approved and are consistent with those used in the going concern assessment; • performing sensitivity analysis to understand the relative impact of changes in the key assumptions within the impairment models, as well as to confirm the appropriateness of Management’s disclosure of sensitivities in respect of the impairment review. Key observations: Based on our procedures we noted no material exceptions and found management’s key assumptions underlying the impairment reviews to be within a reasonable range. Franchise Brands plc annual report and accounts 2019 47 independent auditor’s report to the Members of Franchise Brands plc continued For the year ended 31 december 2019 OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, individually or in aggregate and including omissions, could reasonably be expected to influence the economic decisions of reasonable users that are taken on the basis of the financial statements. the materiality for the Group financial statements as a whole was set at £160,000 (2018: £140,000). this was determined with reference to a benchmark of profit before tax, of which this represents 5%, which we consider to be one of the principal considerations for members of the Group in assessing the financial performance of the business. the materiality for the parent company financial statements was set at £110,000 (2018: £90,000). this was determined with reference to a benchmark of 3% of net assets limited to the component materiality set for the audit of the Group. in order to reduce to an appropriately low level the probability that any misstatements exceed materiality we use a lower materiality level, performance materiality, to determine the extent of testing needed. importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. performance materiality for the Group financial statements was set at £120,000 (2018: £105,000) and for the parent company £82,500 (2018: £67,500), representing 75% of materiality. the performance materiality threshold was selected based on the expected low level of misstatements and the relatively low number of accounts that are subject to management estimation. component materiality for significant components was set at levels between £70,000 and £140,000 (2018: £64,000 and £130,000). We agreed with the audit committee that we would report to the committee all individual audit differences identified during the course of our audit in excess of £3,200 (2018: £3,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. AN OVERVIEW OF THE SCOPE OF OUR AUDIT the Group operates through a number of legal entities, which form reporting components. audits have been performed over all components of the Group by the Group audit team. significant components were defined as those reporting components contributing more than 15% towards Group assets, turnover or profits. our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the directors that may have represented a risk of material misstatement due to fraud. the Group manages its operations from two principal locations in the uK and the financial information relating to the parent company and the two significant components of the Group were subject to full scope audit by the Group audit team. For the insignificant components we performed review procedures or specific scope procedures on certain balances based on their relative size, risks in the business and our knowledge of those entities appropriate to respond to the risk of material misstatement. as a consequence of the audit scope determined, we achieved coverage of 85% (2018: 100%) of revenue, 84% (2018: 100%) of profit before tax and 88% (2018: 100%) of net assets. OTHER INFORMATION the directors are responsible for the other information. the other information comprises the information included in the annual report and accounts, other than the financial statements and our auditor’s report thereon. our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. in connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. if we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. if, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 48 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 in our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. • MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION in the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the companies act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or • • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. RESPONSIBILITIES OF DIRECTORS as explained more fully in the directors’ responsibilities statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. in preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with isas (uK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. a further description of our responsibilities for the audit of the financial statements is located on the Financial reporting council’s website at: www.frc.org.uk/auditorsresponsibilities. this description forms part of our auditor’s report. USE OF OUR REPORT this report is made solely to the parent company’s members, as a body, in accordance with chapter 3 of part 16 of the companies act 2006. our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. to the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Gary Harding (senior statutory auditor) For and on behalf of Bdo llp, statutory auditor Manchester, united Kingdom 4 March 2020 Bdo llp is a limited liability partnership registered in england and Wales (with registered number oc305127). Franchise Brands plc annual report and accounts 2019 49 consolidated statement of comprehensive income For the year ended 31 december 2019 Revenue cost of sales Gross profit adjusted earnings before interest, tax, depreciation, amortisation, share-based payments & non-recurring items (“adjusted eBitda”) depreciation amortisation of software amortisation of acquired intangibles share-based payment expense costs of acquisition of subsidiaries total administrative expenses Operating profit Other gains and losses Finance expense Profit before tax tax expense Profit for the year and total comprehensive income attributable to equity holders of the Parent Company all amounts relate to continuing operations Earnings per share Basic diluted the notes on pages 56 to 75 form part of these financial statements. note 6 7,14,15 7,13 7,13 7,9 5,7 20 10 11 2019 £’000 2018 restated £’000 44,013 (27,631) 35,470 (22,341) 16,382 13,129 5,182 (635) (120) (260) (238) (270) 4,003 (410) (37) (216) (139) – (12,723) (9,928) 3,659 (26) (357) 3,276 (566) 3,201 – (340) 2,861 (536) 2,710 2,325 12 12 3.48 3.42 2.99 2.95 50 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements consolidated statement of Financial position at 31 december 2019 Assets non-current assets intangible assets property, plant and equipment right-of-use assets Total non-current assets Current assets inventories trade and other receivables cash and cash equivalents Total current assets Total assets Liabilities Current liabilities trade and other payables loans and borrowings obligations under leases current tax liability Total current liabilities Non-current liabilities loans and borrowings obligations under leases contingent consideration deferred tax liability Total non-current liabilities Total liabilities Total net assets Issued capital and reserves attributable to owners of the Parent share capital share premium share-based payment reserve Merger reserve treasury reserve retained earnings note 2019 £’000 2018 restated £’000 2017 restated £’000 13 14 15 16 17 18 19 21 19 21 20 22 24 24 24 24 24 35,057 1,242 3,538 39,837 594 16,935 1,682 19,211 59,048 12,684 4,074 924 594 18,276 5,200 2,563 3,606 1,544 12,913 31,189 27,859 398 22,806 316 1,390 (21) 2,970 27,232 339 947 27,025 115 1,133 28,518 28,273 245 11,048 2,940 252 8,144 3,245 14,233 11,641 42,751 39,914 8,595 3,439 335 196 6,404 4,164 326 – 12,565 10,894 4,400 673 – 702 5,775 18,340 24,411 388 22,621 226 396 (151) 931 5,255 872 – 374 6,501 17,395 22,519 388 22,621 88 396 – (974) Total equity attributable to equity holders 27,859 24,411 22,519 the consolidated financial statements of Franchise Brands plc (company number: 10281033) on pages 50 to 75 were approved and authorised for issue by the Board of directors on 4 March 2020 and were signed on its behalf by: Chris Dent director Franchise Brands plc annual report and accounts 2019 51 company statement of Financial position at 31 december 2019 Assets Non-current assets Fixed asset investments Total non-current assets Current assets trade and other receivables cash and cash equivalents Total current assets Total assets Liabilities Current liabilities trade and other payables loans and borrowings Total current liabilities Non-current liabilities loans and borrowings contingent consideration Total non-current liabilities Total liabilities Net assets Issued capital and reserves attributable to owners of the Parent share capital share premium share-based payment reserve Merger reserve treasury reserve retained earnings Total equity attributable to equity holders note 23 17 18 19 19 20 24 24 24 24 24 2019 £’000 2018 £’000 41,049 41,049 31,703 31,703 – 25 25 2,860 6 2,866 41,074 34,569 923 4,074 4,997 5,200 3,606 8,806 13,803 27,271 398 22,806 316 1,270 (21) 2,502 247 3,439 3,686 4,400 – 4,400 8,086 26,483 388 22,621 226 276 (151) 3,123 27,271 26,483 no statement of comprehensive income is presented by the company as permitted by section 408 of the companies act. Franchise Brands plc reported a profit and total comprehensive income for the financial period ended 31 december 2019 of £0.05m (2018: £3.0m). the company financial statements of Franchise Brands plc (company number: 10281033) on pages 52 to 75 were approved and authorised for issue by the Board of directors on 4 March 2020 and were signed on its behalf by: Chris Dent director 52 Franchise Brands plc annual report and accounts 2019 consolidated statement of cash Flows For the year ended 31 december 2019 Cash flows from operating activities profit for the year Adjustments for: depreciation of property, plant and equipment depreciation of right-of-use assets amortisation of software amortisation of acquired intangibles acquisition-related costs share-based payment expense other gains and losses Finance expense income tax expense Operating cash flow before movements in working capital increase in trade and other receivables decrease in inventories increase in trade and other payables Cash generated from operations income taxes (paid)/received Net cash generated from operating activities Cash flows from investing activities purchases of property, plant and equipment purchase of software acquisition of subsidiary including costs, net of cash acquired Net cash used in investing activities Cash flows from financing activities Bank loans – repaid Bank loans – received other loans – made capital element of lease obligations repaid interest paid – bank and other loan interest paid – leases proceed from issue of shares purchase of treasury shares dividends paid Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year reconciliation of cash flow to the Group net debt position strategic report Governance Financial statements note 2019 £’000 2018 restated £’000 2,710 2,325 14 15 13 13 9 20 10 11 17 16 18 14 13 5 27 183 452 120 260 270 238 26 357 566 5,182 (1,523) 5 999 4,663 (147) 4,516 (865) (837) (3,958) (5,660) (2,506) 4,000 (5) (716) (343) (44) 358 (266) (592) (114) (1,258) 2,940 1,682 131 279 37 216 – 138 – 340 536 4,002 (2,952) 7 2,107 3,164 48 3,212 (222) (348) – (570) (1,600) – (138) (326) (279) (4) – (151) (420) (2,948) (305) 3,245 2,940 Group At 1 January 2018 (restated) Financing cash flows other cash flows other changes Term Loan £’000 Revolving credit facility £’000 (6,058) (3,506) 600 – 23 1,000 – (8) Loan fees £’000 145 – – (35) Total liabilities from financing activities £’000 Obligations under leases £’000 Total net cash/(net debt) £’000 Cash £’000 (1,198) (10,617) 3,245 (7,372) 330 – (140) 1,930 – (160) – (305) – 1,930 (305) (160) At 31 December 2018 (restated) (5,435) (2,514) 110 (1,008) (8,847) 2,940 (5,907) Financing cash flows other cash flows other changes At 31 December 2019 (1,000) – 34 (500) – 12 – – 19 760 – (3,239) (740) – (3,174) – (1,258) – (740) (1,258) (3,174) (6,401) (3,002) 129 (3,487) (12,761) 1,682 (11,079) Franchise Brands plc annual report and accounts 2019 53 company statement of cash Flows For the year ended 31 december 2019 Cash flows from operating activities profit for the year Adjustments for: other gains and losses Finance expenses income tax expense share-based payment expense Cash generated from operations decrease in trade and other receivables increase in trade and other payables Net cash generated from operating activities Cash flows from investing activities acquisition of subsidiary including costs Net cash used in investing activities Cash flows from financing activities Bank loans – repaid Bank loans – received interest paid – bank and other loans proceed from issue of shares purchase of treasury shares dividends paid Net cash flows generated by/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year reconciliation of cash flow to the company net debt position Group At 1 January 2018 Financing cash flows other cash flows other changes At 1 January 2019 Financing cash flows other cash flows other changes At 31 December 2019 note 2019 £’000 2018 £’000 49 2,986 10 17 18 27 Term Loan £’000 Revolving credit facility £’000 (6,058) (3,506) 600 – 23 1,000 – (8) (5,435) (2,514) (1,000) – 34 (500) – 12 Total liabilities from financing activities £’000 (9,419) 1,600 – (21) (7,840) (1,500) – 65 Loan fees £’000 145 – – (35) 110 – – 19 (6,401) (3,002) 129 (9,275) 26 287 (236) 84 210 2,920 776 3,906 (4,538) (4,538) (2,506) 4,000 (343) 358 (266) (592) 651 19 6 25 Cash £’000 232 – (226) – 6 – 19 – 25 – 305 (44) 50 3,297 503 31 3,831 (1,607) (1,607) (1,600) – (279) – (151) (420) (2,450) (226) 232 6 Total net cash/(net debt) £’000 (9,187) 1,600 (226) (21) (7,834) (1,500) 19 65 (9,250) 54 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements consolidated and company statement of changes in equity For the year ended 31 december 2019 Group At 1 January 2018 (Restated) profit for the year and total comprehensive income Contributions by and distributions to owners dividend paid treasury shares share-based payment Share capital £’000 388 – – – – Share premium account £’000 22,621 – – – – At 1 January 2019 (Restated) 388 22,621 profit for the year and total comprehensive income Contributions by and distributions to owners shares issued dividend paid treasury shares share-based payment – 10 – – – – 185 – – – At 31 December 2019 398 22,806 Company At 1 January 2018 profit for the year and total comprehensive income Contributions by and distributions to owners dividend paid treasury shares share-based payment Share capital £’000 388 – – – – Share premium account £’000 22,621 – – – – At 1 January 2019 388 22,621 profit for the year and total comprehensive income Contributions by and distributions to owners shares issued dividend paid treasury shares share-based payment – 10 – – – – 185 – – – At 31 December 2019 398 22,806 Share- based payment reserve £’000 88 – – – 138 226 – (148) – – 238 316 Share- based payment reserve £’000 88 – – – 138 226 – (148) – – 238 316 Merger reserve £’000 396 – – – – 396 – 994 – – – Treasury shares £’000 Retained earnings £’000 Total £’000 – – (974) 22,519 2,325 2,325 – (151) – (151) (420) – – (420) (151) 138 931 24,411 – 2,710 2,710 396 – (266) – (79) (592) – – 1,358 (592) (266) 238 1,390 (21) 2,970 27,859 Merger reserve £’000 276 – – – – 276 – 994 – – – Treasury shares £’000 Retained earnings £’000 Total £’000 — – 558 23,931 2,985 2,985 – (151) – (151) – 396 – (266) – (420) – – (420) (151) 138 3,123 26,483 49 49 (79) (592) – – 1,358 (592) (266) 238 1,270 (21) 2,502 27,271 Franchise Brands plc annual report and accounts 2019 55 notes forming part of the Financial statements For year ended 31 december 2019 1 SIGNIFICANT ACCOUNTING POLICIES General information Franchise Brands plc (the “company”, and together with its subsidiaries, the “Group”), is a public company incorporated in england and Wales under the companies act 2006 with company number 10281033. the principal activity of the Group is focused on building market- leading businesses in selected customer segments, using primarily a franchise model. our focus is on established brands which can benefit from our shared support services, specialist sector expertise, management experience and group resources. the principal activity of the company is that of a holding company of a group of companies engaged in franchising and related activities. Basis of consolidation the consolidated financial statements incorporate the results and net assets of the company and its subsidiary undertakings. subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date control ceases. all inter-company transactions and balances between Group entities are eliminated upon consolidation. Basis of preparation the Group’s financial statements have been prepared in accordance with international Financial reporting standards (“iFrs”) and interpretations as adopted by the european union as they apply to the financial statements of the Group for the year ended 31 december 2019 and applied in accordance with the companies act 2006. the Group’s consolidated financial statements are prepared under the historical cost convention. the principal accounting policies adopted are set out below and have been consistently applied to all the years presented. the Group’s financial statements are presented in sterling and all values are rounded to the nearest thousand pounds (£’000s) except where indicated. the Group’s financial statements have been prepared on a going concern basis as the directors have a reasonable expectation that the Group has adequate resources to continue in existence for the foreseeable future. please refer to the directors’ report for further details. segmental reporting iFrs8 operating segments requires operating segments to be identified on the same basis as is used internally for the review of performance and allocation of resources by the “chief operating decision maker”, who has been identified as the executive chairman. iFrs8 permits the aggregation of these components into reportable segments for the purpose of disclosure in the Group’s financial statements. in the previous periods the Group only had a single reportable segment, as the directors assessed that the aggregation criteria were met with the four primary franchise networks which the Group manages. in the current period the directors have reassessed the aggregation criteria in light of the acquisition of Willow pumps limited on 7th october 2019, and the creation of two operating divisions, business to business (“B2B") and business to consumer (”B2c”). the directors have determined that the Group currently has two reportable types of operations: Franchise networks and direct labour organisations (“dlo"). in this assessment the directors have had regard to the economic characteristics of the operating segments, the nature of their business and their long-term margins. Whereas the Board had previously concluded that whilst the existing Group operated multiple franchise brands, across various business sectors, the key management and financial data used to manage them is the same, as the key drivers are attributable to them being franchises rather than the activity of the franchise, the Board recognises the direct labour operations as having different economic characteristics, and should, therefore, be presented separately where they form a material separable cash generating unit. in addition, the directors believe that now that two operational divisions have been created, it adds to the understanding of the financial statements to separately disclose the B2B and B2c segments. therefore in the current period the directors have chosen to report three segments: • B2B- Franchisor, which is made up of Metro rod and Metro plumb; • B2B- dlo, which is made up of Willow pumps; and • B2c- which is made up of chipsaway, ovenclean and Barking Mad. Business combinations the consideration of the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity issued by the Group, plus if the business combination is acquired in stages the fair value of the existing interest in the acquiree. the consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement (see note 2). identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. investments in subsidiaries are measured at cost in the parent company. intangible assets intangible assets comprise goodwill, certain acquired separable corporate brand names, acquired customer relationships, and capitalised computer software not integral to a related item of hardware. Goodwill represents the excess of fair value attributed to investments in businesses or subsidiary undertakings over the fair value of the underlying net assets, including intangible assets, at the date of their acquisition. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a 56 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements potential impairment. the carrying value of goodwill is compared to the net present value of future cash flows derived from the underlying assets using a projection period of up to five years, based on the latest approved budgets, for each cash-generating unit. after the projection period a steady growth rate representing an appropriate long-term growth rate for the industry is applied. any impairment is recognised immediately as an expense and is not subsequently reversed. corporate brand names, trade-marks, customer relationships and other intangibles acquired as part of acquisitions of businesses are capitalised separately from goodwill as intangible assets if their value can be measured reliably on initial recognition and it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group. certain corporate brands and trademarks of the Group are considered to have an indefinite economic life because of the institutional nature of the corporate brand names, their proven ability to maintain market leadership and profitable operations over long periods of time and the Group’s commitment to develop and enhance their value. the carrying value of these intangible assets is reviewed at least annually for impairment and adjusted to the recoverable amount if required. recoverable amount is the higher of fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash generating unit exceeds its recoverable amount the asset or cash generating unit is considered impaired and written down to its recoverable amount. any impairment is charged to the profit and loss in the period concerned. amortisation is provided at rates calculated to write-off the cost less estimated residual value of each asset on a straight-line basis over its estimated useful life as follows. customer-related intangibles have a useful life of 10 years. others (including capitalised computer software) have a useful life of 3-10 years. revenue revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. revenue is measured at the fair value of consideration received or receivable, net of returns, rebates and value-added taxes. there have been no changes to the accounting for revenue in the year. the following criteria must also be met before revenue is recognised: • Management service fees (“MSF”): MsF is charged for the continuing use of the rights and continuing services provided during the franchise agreements term. they are recognised as the service is provided and the rights are used. these are charged on a monthly basis and the values recognised are based on the performance obligations in the relevant contracts with our franchisees. For chipsaway and ovenclean a set monthly fee is charged. For Metro rod and Barking Mad a variable percentage is charged based on the invoiced revenue of the franchisees. • Sales of franchise territories: sales of franchise territories represent the charges for packages which include training, other start-up support and equipment. no element of these charges relate to subsequent services. revenue from franchise fees is recognised when a franchisee completes the relevant training, as this is when we have delivered our performance obligation under the franchise contract. Where deferred payment terms are offered the revenue is recognised to the extent that there is not considered to be significant doubt over the eventual recovery (see note 2). • Product sales: revenue from sales of products is recognised on delivery to customers, as this is when control is deemed to have transferred. • Direct labour income: revenue from our direct labour organisations is recognised when our performance obligations are met in relation to an individual job. Where performance obligations are met over a number of accounting periods, revenue is recognised over time and is based on the proportion of the level of service performed (see note 2). the performance obligations are defined in our underlying contracts with customers. at Willow this will be the supply and install of a pump; at Metro rod and Metro plumb, this will be on attendance and completion of an individual customer’s visit. • National Advertising Funds: national advertising Funds are collected from franchisees under their agreements and then spent on their behalf on advertising which benefits the underlying franchise networks. the management of the funds does not result in any profit or loss for the Group as all funds received are expended on behalf of the networks. the directors have concluded that the Group will recognise the costs expended by the funds in the year, and will recognise an equal amount as revenue, with any difference from the amount of cash received from our franchisees as accrued or deferred revenue within the balance sheet. this is because it is the Group which controls the expenditure of the funds, rather than the franchisees. overall, there is no effect on profit. Financial liabilities Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding. trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Financial assets all of the Groups financial assets are classified and held at amortised cost. these assets arise principally from the provision of goods and services to customers, but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. they are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Franchise Brands plc annual report and accounts 2019 57 notes forming part of the Financial statements continued For year ended 31 december 2019 1 ACCOUNTING POLICIES CONTINUED impairment provisions for trade receivables are recognised based on the simplified approach within iFrs 9 using a provision matrix in the determination of the lifetime expected credit losses. during this process the probability of the non-payment of the trade receivables is assessed based on customer type, history of payment as well as by the number of days that debt is past due. this probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the consolidated statement of comprehensive income. on confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. cash and cash equivalents includes cash in hand. contract assets primarily relate to balances which Metro rod franchisees have been paid in advance of the related revenue being taken. these balances are at all times less than the overall balances that owed to the franchise network. the contractual right of set-off exists on amounts owed from our franchisees. therefore, they do not present an impairment risk. contract assets include outlays incurred on behalf of clients, including third-party costs that have not yet been billed and are considered receivables under iFrs 15 revenue from contracts with customers. property, plant and equipment property, plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment in value. cost comprises the aggregate amount paid and the fair value of any other consideration given to acquire the asset and includes cost directly attributable to making the asset capable of operating as intended. depreciation is provided to write-off the cost, less the estimated residual values, of all tangible fixed assets evenly over their expected useful lives. it is calculated at the following rates: leasehold property improvements short-term leasehold improvements Motor vehicles plant & equipment Fixtures and fittings computer equipment – – – – – – over period of lease over period of lease 10%-25% straight line 10% straight line 33% straight line 33% straight line the assets’ residual values, useful lives and methods of depreciation are reviewed and adjusted, if appropriate on an annual basis. any gain or loss arising on derecognition of an asset is included in the statement of comprehensive income in the year that the asset is derecognised. share-based payment When share options are awarded to employees, the fair value of the options at the date of grant is charged to the statement of comprehensive income over the vesting period. When the terms and conditions of options are modified before they vest, the increase in fair value of the options, measured immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting period. Where share options vesting is contingent on a future event a charge is recognised only if the future event is considered probable. Fair value is measured by the use of an appropriate valuation model, which takes into account conditions attached to the vesting and exercise of the equity instruments. the expected life used in the model is adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. the volatility in the model is calculated by reference to an implied volatility of a group of listed entities that have similar characteristics and are in the same industry sector. income taxes current tax assets and liabilities are measured at the amount expected to be received or paid to the taxation authorities. income tax is charged or credited to the income statement, except when it relates to items charged directly to other comprehensive income or to equity, in which case the income tax is also dealt with in other comprehensive income or equity respectively. deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs from its tax base, except for differences arising on the initial recognition of goodwill. recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. the amount of the asset or liability is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities. adjusted performance Measures (apMs) apMs are utilised as key performance indicators by the Group and are calculated by adjusting the relevant iFrs measurement by acquisition related costs, amortisation of acquired intangibles and share-based payments. the two main apMs which are used are adjusted eBitda and adjusted eps. the reconciliation of these items to iFrs measurements can be found in the chief Financial officer’s review on page 18. apMs are non-Gaap measures and are not intended to replace those measurements, but are the measures used by the directors in their management of the business, and are, therefore, important Key performance indicators (Kpis). 58 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements system sales system sales are the total aggregate sales of our franchisees of services to third party customers. it is a measure used by management to understand the underlying health and size of our individual brands. For some, but not all, of our brands it is an amount which directly drives our turnover, with the Group collecting a percentage of system sales as our MsF. system sales are not, therefore, a component of the financial performance of the Group, but are a Kpi used by management, and it is therefore disclosed to provide more insight into the franchise networks which we operate. adoption of new standards at the beginning of the period the Group adopted IFRS16 Leases. other new amended standards and interpretations issued by the iasB that apply to the financial statements do not impact the Group as they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. iFrs16 replaces ias17 ‘leases’ and substantively changes the accounting for operating leases. Where a contract meets iFrs16’s definition of a lease, lease agreements will give rise to the recognition of a non-current asset representing the right to use the leased item, and a loan obligation for future lease payables. lease costs are recognised in the form of depreciation of the right to use asset and interest on the lease liability, which has impacted the phasing of operating profit and profit before tax, compared to previous cost profiles and presentation in the income statement, and has also impacted the classification of associated cash flows. the detailed assessment of the impact on the Group has been completed, and the adoption has had a significant impact on the presentation of the Group’s assets and liabilities, mainly relating to property and vehicle leases. as part of this assessment the Group applied the practical expedient allowed and did not reassess contracts which had not previously been identified as a lease. Most materially it has impacted adjusted eBitda, with the 2018 comparative figure rising from £3.7m to £4m. in respect of iFrs16 we have applied a fully retrospective approach. this means that we have gone back to the accounting at the inception of each of the different leases within the Group. this has resulted in the below adjustments to the previously reported financial statements: Year ended 31 December 2018 revenue cost of sales other administration expenses depreciation Finance expense tax expense Basic earnings per share (p) Diluted earnings per share (p) At 31 December 2018 intangible assets property, plant and equipment inventories trade and other receivables cash trade and other payables loans and borrowings obligations under leases current tax loans and borrowings obligations under leases deferred tax liability Total net assets Original Numbers £’000 IFRS16 Adjustment £’000 Final Numbers £’000 35,470 (22,341) (9,517) (410) (340) (536) – – 303 (279) (30) – (7) 2,325 (0.01) (0.01) 2.99 2.95 IFRS16 Adjustment £’000 –  904 –  –  –  – – (314) –  –  (622) –  Final Numbers £’000 27,232 1,286 245 11,048 2,940 (8,595) (3,439) (335) (196) (4,400) (673) (702) 35,470 (22,341) (9,820) (131) (310) (536) 2,332 3.00 2.96 Original Numbers £’000 27,232 382 245 11,048 2,940 (8,595) (3,439) (21) (196) (4,400) (51) (702) 24,442 (32) 24,411 Franchise Brands plc annual report and accounts 2019 59   notes forming part of the Financial statements continued For year ended 31 december 2019 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS the preparation of financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the period. the nature of estimation means that actual outcomes could differ from those estimates. each of the following items contain judgements and significant estimates and have the most significant effect on amounts recognised in the financial statements. revenue recognition deferred payments the Group offers deferred payment terms in relation to some of the franchise fees payable. the Group assesses the level of doubt over the ultimate recovery of the deferred fees based on historic experience. if there is significant doubt over the recovery of the franchise fee the balance is not recognised until the level of risk associated reduces to an acceptable level. the deferred payment terms do not include any financing impact due to their short-term nature. as at 31 december 2019 £144,000 (2018: £147,000) had been recognised as a debtor, and £141,000 (2018: £132,000) was not recognised. Metro rod revenue recognition in line with our other networks Metro rod charges its franchisees a management service fee at the rate of up to 22.5% of their underlying system sales. the franchise network has two types of system sales: national accounts and commercial. in the case of national accounts Metro rod bears the credit risk, whereas for commercial the franchisee bears the risk. therefore, for national accounts, the directors believe that we are acting as a principal and recognise the whole of the system sales as revenue, with a cost of 77.5% to leave a gross margin of up to 22.5%. in relation to commercial sales the directors believe that we are acting as an agent, and we only recognise our 22.5% management fee as revenue. Willow pumps revenue recognition as part of its range of services, Willow pumps undertakes the supply and install of pumps in adoptable pump stations. these are typically projects which are performed over a number of accounting periods. revenue recognised over time is based on the proportion of the contract completed. either an input method or an output method, depending on the particular arrangement, is used to measure progress for each performance obligation. For most fee arrangements, costs incurred are used as an objective input measure of performance. the primary input of substantially all work performed under these arrangements is labour. there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. in other circumstances relevant output measures, such as the achievement of any project milestones stipulated in the contract, are used to assess proportional performance. Judgement is required regarding the timing of recognition, particularly in assessing progress on performance obligations where revenue is recognised over time. at the end of the year there were £7.6m of supply and install contracts in progress, on which £3.1m of revenue has been taken. during the three months of ownership £1.7m of revenue was taken on these contracts. Business combinations determining a value for consideration paid determining the fair value of the consideration paid in business combinations requires the use of estimates regarding the expected future payments of deferred consideration. the values are determined using discounted cash flows and based upon latest approved budgets and longer-term forecasts which include estimates concerning factors which affect the level of deferred consideration to be paid including revenues expected to be generated, and profits forecast to be earned. the level of deferred consideration expected to be paid is re- evaluated at each balance sheet date, with any change being taken to the income statement. the current provision is a discounted value of the expected cash payments, and the unwind of the discount on the deferred contingent consideration is included within the finance costs of the Group. More details of these estimates can be found in notes 5 and 20. determining a value and life for assets acquired determining the fair value, and the life, of acquired intangible assets and goodwill acquired in business combinations requires the use of estimates regarding the value of intangible assets. the values are determined using discounted cash flows and based upon latest approved budgets which include estimates concerning factors such as new franchise sales and timing of such sales. Management has determined that acquired brands and trademarks acquired are to be treated as an indefinite life asset. Management has determined that there is nothing to suggest the future economic benefits will have a finite life. as with all tangible and intangible, assets the brands and trademarks will be reviewed at the end of each reporting period to determine whether there is any indication that they have suffered an impairment loss. More details of these estimates can be found in notes 5. performing impairment tests subsequent impairment reviews also require the use of estimates to value the cash generating units to which goodwill and indefinite life intangibles have been allocated. the value in use calculations, which are run on an annual basis for goodwill and indefinite life intangibles, or when there is an indicator of impairment for tangible and finite life intangible fixed assets, determine whether there is any impairment to the carrying value of assets arising from business combinations. More details of these estimates can be found in note 13. 60 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT capital risk management the Group manages its capital to ensure that entities in the Group will be able to meet their financial obligations as they arise while maximising the return to stakeholders. the capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings, and long and medium-term debt facilities. term loans are used to finance long-term investment such as acquisitions. revolving credit facilities and overdrafts are used to manage short-term cash requirements and minimise interest costs. the Group’s financing facilities contain the usual financial covenants including maximum gearing, minimum interest cover and minimum operating cash flow. the Group met these requirements throughout the year. the Group’s dividend policy is to provide sustainable dividends to shareholders, consistent with the Group’s earnings growth and debt gearing levels, to attract long-term investors and to enable shareholders to enjoy returns on their investment in tandem with the Group’s growth. the payment and amount of any dividends or distributions to shareholders is at the discretion of the Board, and subject to shareholder approval. categories of financial instruments Group Financial assets at amortised cost cash and cash equivalents trade and other receivables Financial liabilities at amortised cost trade and other payables Loans and borrowings Financial liabilities at fair value through profit and loss (FVtpl) Company Financial assets at amortised cost cash and cash equivalents trade and other receivables Financial liabilities at amortised cost trade and other payables Loans and borrowings Financial liabilities at fair value through profit and loss (FVtpl) 2019 £’000 1,682 15,595 (11,092) (12,761) 3,606 2019 £’000 25 – (901) (9,275) 3,606 2018 restated £’000 2,940 9,950 (7,777) (7,911) – 2018 £’000 6 2,601 (247) (7,839) – due to their short-term nature, the carrying value of cash and cash equivalents, trade and other receivables, and trade and other payables approximates to their fair value. the only financial liability at FVtpl is the provision in relation to the contingent deferred consideration. For details in relation to this, please see note 20. Financial and market risk management objectives it is the Group’s policy not to use or trade in derivative financial instruments. the Group’s financial instruments comprise its cash and cash equivalents and various items such as trade debtors and trade creditors that arise directly from its operations. the main purpose of the financial assets and liabilities is to provide finance for the Group’s operations in the year. the Group is exposed to interest rate risk as the Group borrows funds at variable interest rates. interest rate sensitivity the effect on both income and equity, based on exposure to non-derivative floating rate instruments at the balance sheet date, is shown in the table below. 0.25% increase in interest rates 0.25% decrease in interest rates Sensitivity income 2019 £’000 Sensitivity equity 2019 £’000 sensitivity income 2018 £’000 sensitivity equity 2018 £’000 (24) 24 (24) 24 (22) 22 (22) 22 Franchise Brands plc annual report and accounts 2019 61 notes forming part of the Financial statements continued For year ended 31 december 2019 3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED credit risk management the Group has adopted a policy of only dealing with creditworthy counterparties, as a means of mitigating the risk of financial loss from defaults. the Group only transacts with entities after assessing credit quality using independent rating agencies and if not available, the Group uses other publicly available financial information and its own trading records to rate its major customers. the Group’s exposure is continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. credit exposure is controlled by counterparty limits. ongoing credit evaluation is performed on the financial condition of accounts receivable. the credit risk on liquid funds is limited because the counterparties are banks with high credit-rating assigned by international credit-rating agencies. the carrying amount of financial assets recorded in the financial statements, which is net of expected credit risk losses, represents the Group’s maximum exposure to credit risk. liquidity risk management the Group’s policy throughout the year has been to ensure continuity of funds. the Group manages liquidity risk by maintaining adequate reserves and banking facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. the following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities. Group on demand Within one year More than one year and less than two years More than two years and less than five years in more than five years Total Company on demand Within one year More than one year and less than two years More than two year and less than five years in more than five years Total – 901 – – – 901 – 4,367 2,117 3,270 – Trade and other payables 2019 £’000 – 11,092 – – – Loans and borrowings 2019 £’000 – 5,252 2,924 4,413 652 FVTPL 2019 £’000 Total 2019 £’000 – – – 16,344 3,190 6,476 2,355 266 2,063 1,703 11,092 13,241 4,032 28,365 Trade and other payables 2019 £’000 Loans and borrowings 2019 £’000 FVTPL 2019 £’000 – – 266 2,063 1,703 Total 2019 £’000 – 5,268 2,383 5,333 1,703 9,754 4,032 14,686 trade and other payables 2018 £’000 – 7,777 – – – 7,777 trade and other payables 2018 £’000 – 247 – – – 247 loans and borrowings 2018 £’000 – 3,571 1,251 3,200 – 8,022 loans and borrowings 2018 £’000 – 3,550 1,200 3,200 – 7,950 FVtpl 2018 £’000 – – – – – – FVtpl 2018 £’000 – – – – – – total 2018 £’000 – 11,348 1,251 3,200 – 15,799 total 2018 £’000 – 3,797 1,200 3,200 – 8,197 4 OPERATING SEGMENTS the Group’s operating segments are determined based on the Group’s internal reporting to the chief operating decision Maker (codM). the codM has been determined to be the executive chairman, with support from the Board of directors, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments. during the year the business has reorganised itself along the lines of our B2B and B2c brands. however, within the B2B division we have two different principal activities: Franchisor – management of franchisees who trade with businesses and consumers; and direct labour organisations – trading directly with businesses and consumers. therefore, the Board has now determined that we have three different operating segments: • B2B- Franchisor, which is made up of Metro rod and Metro plumb; • B2B- dlo, which is made up of Willow pumps; and • B2c- which is made up of chipsaway, ovenclean and Barking Mad. other operations include central administration costs and non-trading companies. 62 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements the codM use adjusted eBitda, as reviewed at Board meetings and as part of the Managing directors’ and chief Financial officer’s weekly report to the senior management team, as the key measure of segments’ results as it reflects the underlying performance for the financial year under evaluation. the following is an analysis of the Group’s revenue and results by reportable segment in 2019: Continuing operations revenue Gross profit Adjusted EBITDA depreciation amortisation share based payment expense exceptional items Finance expense Profit before tax income tax expense Profit after tax B2B- Franchisor £’000 B2B- DLO £’000 B2C £’000 33,405 9,625 3,184 (435) – (101) – (13) 2,634 (403) 2,231 3,842 1,252 492 (138) – (6) – (43) 305 (50) 255 6,766 5,505 2,533 (182) – (47) – (12) 2,292 (346) 1,946 Other £’000 – – (1,027) – (260) (84) (269) (315) (1,956) 233 (1,693) Total £’000 44,013 16,382 5,182 (755) (260) (238) (269) (383) 3,276 (566) 2,710 in the prior year the Group’s revenue and results were solely as a franchisor, therefore no comparator is provided. 5 BUSINESS COMBINATION acquisition of Wpl Group holdings limited (Willow pumps) on 7 october 2019, the Group acquired the entire issued share capital of Wpl Group holdings limited and its subsidiaries, Willow pumps limited and Willow drainage limited (together, “Willow pumps”) for an initial consideration of £5.0 million (net of non-trading cash of £700,000 in Wpl Group holdings limited) and a performance-based deferred consideration of up to £7.5 million payable over the next five years. the initial consideration was paid as £4.7 million (gross of non-trading cash of £700,000 in Wpl Group holdings limited) in cash and £1.0 million through the issue of 1,212,121 new ordinary shares of 0.5p each in the company at 82.5 pence per share. the deferred consideration will be payable in cash, subject to the company having the right to settle 20% of the amount due in new ordinary shares at the then prevailing share price. the fair value of consideration comprised: cash consideration shares Fair value of deferred consideration Fair value of consideration £’000 4,700 1,000 3,580 9,280 performance related deferred consideration of up to £7.5m is payable under the sale and purchase agreement. a £3.6m provision, representing the net present value of the expected payments to be made over the next five years has been established based on the current budgets and longer-term forecasts of the Group. acquisition costs relating to this transaction amounted to £269,000 and have been disclosed within the statement of comprehensive income in the Group. there was a further £26,000 charge relating to the fair value movement on the deferred consideration. Franchise Brands plc annual report and accounts 2019 63 notes forming part of the Financial statements continued For year ended 31 december 2019 5 BUSINESS COMBINATION CONTINUED details of the fair value of the identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: intangible assets property, plant and equipment right of use assets inventories trade and other receivables cash trade and other payables deferred tax liability Total fair value of the identifiable assets and liabilities acquired Fair value of consideration Goodwill intangible asset adjustments comprise: recognise brand recognise customer relationships Book value £’000 Adjustments £’000 – 374 1,595 490 3,942 585 (4,420) (109) 2,457 3,640 – 1,167 – – – (1,178) (618) 3,011 Fair value £’000 3,640 374 2,762 490 3,942 585 (5,598) (728) 5,468 9,280 3,812 £’000 2,777 863 3,640 an adjustment has been made to align Willow pumps with the requirements of iFrs16. the deferred tax liability has been calculated on the value of the intangible assets acquired at a corporation tax rate of 17% and a corresponding amount has been recognised as goodwill. the amount recognised as goodwill will not be deductible for tax purposes. customer relationships have a useful economic life of five years, whereas the brand and goodwill both have indefinite lives. Goodwill represents the value of the business that does not qualify for separate recognition. the goodwill recognised includes certain intangible assets that cannot be separately identified and measured due to their nature. this includes control over the acquired business, and the scale and the future growth opportunities that it provides to the Group’s operations. if the acquisition had occurred on 1 January 2019, Group revenue would have been £56.3m, Group profit before tax would have been £3.6m. 6 REVENUE Management service fees sale of franchise territories product sales direct labour income national advertising funds 2019 £’000 30,819 2,006 912 9,097 1,179 44,013 2018 £’000 27,436 1,513 894 4,565 1,062 35,470 the table shows revenue from contracts disaggregated into major classes of revenue and reconciled to the Group revenue reported. Contract Assets At 1 January change in the measurement of progress At 31 December 2019 £’000 820 (231) 589 2018 £’000 611 209 820 contract assets are included within trade and other receivables. they arise from payments made to our franchisees as per their contracts in advance of when we are able to recognise revenue under iFrs15. 64 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 7 OPERATING PROFIT Operating profit is stated after charging: depreciation amortisation share-based payment expense Auditors’ remuneration: Fees for audit of the company Fees for the audit of the company’s subsidiaries Fees for non-audit services: taxation services corporate finance services other assurance services 2019 £’000 635 380 238 15 82 21 80 5 2018 £’000 410 253 138 15 49 16 – – no non-audit services were provided on a contingent fee basis. in 2019, the Group incurred costs in relation to the acquisition of Willow pumps which Management believe should be brought to the attention of users of the accounts. these costs totalled £295,000, which included £269,000 of professional fees and £26,000 movement in the fair value of the deferred consideration (please see note 20). there were no such items during the course of 2018. 8 STAFF COSTS Wages and salaries social security costs defined contribution pension cost share-based payment expense the average monthly number of persons (including directors) employed by the Group was: administration sales operations directors directors’ remuneration directors’ emoluments share-based payment expense 2019 £’000 7,031 692 154 238 8,115 144 16 61 8 229 2019 £’000 772 98 870 2018 £’000 4,789 429 70 138 5,426 110 12 24 10 156 2018 £’000 690 92 782 the highest paid director’s remuneration was £147,000 (2018: £129,000). the Board of directors are considered to be the key management personnel. their cost to the Group is £983,000 (2018: £835,000), after including employer’s national insurance. the company had no employees (other than the directors) or staff costs in either year. directors’ emoluments include £38,000 (2018: £30,000) paid to companies controlled by directors (see note 25). Franchise Brands plc annual report and accounts 2019 65 notes forming part of the Financial statements continued For year ended 31 december 2019 9 SHARE-BASED PAYMENTS the company has established an ltip in the form of an equity settled share option scheme. awards are granted and approved at the discretion of the remuneration committee. awards vest on or after the third anniversary of their issue, based on compound growth in the underlying earnings per share of the Group for the three-year period. if the compound annual growth rate is below 8%, then none of these options will vest; between 8% and 15% then a proportion of these options will vest on a straight-line basis. currently, 132 members of staff hold options for shares in the company under the scheme. the share-based payments expense recognised in respect of employee services received during the year ended 31 december 2019 was £238,000 (2018: £139,000). this all arises on equity-settled share-based payment transactions. outstanding at the beginning of the period Granted during the period Forfeited during the period exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2019 4,533,530 1,317,925 (266,805) (1,083,333) 4,501,317 310,606 Weighted average exercise price 51p 83p 63p 33p 64p 33p 2018 3,467,747 1,308,132 (242,349) – 4,533,530 – Weighted average exercise price 43p 69p 45p – 51p – the fair value of the options granted is estimated at the date of grant using a Black-scholes model, after taking into account the terms and conditions upon which they were granted. For options outstanding at the end of the period the range of exercise prices was 33p-84p (2018: 33p-69p), and the weighted average remaining contractual life was 8.2 years (2018: 8.8 years). 7 October 2019 0.83 0.83 0.75% 6.5 26.1% 1% 7 August 2019 0.84 0.84 0.75% 6.5 26.1% 1% 2019 £’000 44 313 357 11 december 2018 0.69 0.69 0.75% 6.5 33.2% 1% 2018 £’000 35 305 340 Black-scholes option pricing model closing stock price, £ exercise price, £ risk-free interest rate expected life of option (years) Volatility dividend yield 10 FINANCE EXPENSE interest element on lease agreements loan interest 66 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 11 INCOME TAX Current tax expense current tax on profits for the period adjustment for prior period Deferred tax expense origination and reversal (see note 22) Total tax expense accounting profit multiplied by the uK statutory rate of corporation tax expenses that are not deductible in determining profit expense not deductible for tax purposes adjustment for prior period Total tax expense effective tax rate 2019 £’000 439 13 114 566 622 (97) 28 13 566 17% 2018 restated £’000 215 (7) 328 536 544 – (1) (7) 536 19% the current rate of uK corporation tax is 19%. a reduction in the uK corporation tax rate from 20% to 19% (effective from 1 april 2019) and to 17% (effective from 1 april 2020) was substantively enacted in october 2015 and has therefore been considered when calculating deferred tax at the reporting date. 12 EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. diluted earnings per share are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would have been issued on the conversion of all dilutive share options at the start of the period or, if later, the date of issue. profit attributable to owners of the parent acquisition-related costs (note 5) amortisation of acquired intangibles (note 13) change in the fair value of deferred consideration (note 20) share-based payment expense (note 9) tax on adjusting items adjusted profit attributable to owners of the parent Basic weighted average number of shares dilutive effect of share options diluted weighted average number of shares Basic earnings per share diluted earnings per share adjusted earnings per share adjusted diluted earnings per share 2019 £’000 2,710 269 260 26 238 (121) 3,382 2018 restated £’000 2,325 – 216 – 138 (67) 2,612 Number number 77,948,178 1,190,696 77,687,101 1,100,364 79,138,874 78,787,465 Pence 3.48 3.42 4.34 4.27 pence 2.99 2.95 3.36 3.32 Franchise Brands plc annual report and accounts 2019 67 notes forming part of the Financial statements continued For year ended 31 december 2019 13 INTANGIBLE ASSETS Cost at 1 January 2018 additions at 31 december 2018 acquisition additions At 31 December 2019 Amortisation at 1 January 2018 charge for year at 31 december 2018 charge for year At 31 December 2019 Net book value At 31 December 2019 at 31 december 2018 at 1 January 2018 carrying amount of assets with indefinite useful lives Metro rod Willow pumps chipsaway Myhome Barking Mad Goodwill £’000 18,174 3,812 1,171 14 129 23,301 Brands, trade marks & other intangibles £’000 7,304 – 7,304 2,777 – Goodwill £’000 19,488 – 19,488 3,812 – Customer relationships £’000 Software £’000 Total £’000 2,159 – 2,159 863 – 21 460 481 – 752 28,972 460 29,432 7,452 752 23,301 10,081 3,022 1,233 37,636 – – – – – 23,301 19,488 19,488 Indefinite life intangibles £’000 4,750 2,777 – – 763 8,290 (1,791) – (1,791) – (1,791) 8,290 5,513 5,513 2019 £’000 22,924 6,589 1,171 14 892 31,591 (156) (216) (372) (260) (632) 2,390 1,787 2,003 Goodwill £’000 18,174 – 1,171 14 129 19,488 – (37) (37) (120) (157) 1,076 444 21 indefinite life intangibles £’000 4,750 – – – 763 5,513 (1,947) (253) (2,200) (380) (2,580) 35,057 27,232 27,025 2018 £’000 22,924 – 1,171 14 892 25,001 the cash generating units (“cGus") used for the impairment testing are the same as in the prior period, and are based on the different brands which the business owns and operates. each brand is a separate cGu, and no cGus have been grouped together for the purpose of impairment testing. the key assumptions for the value-in-use calculations are those regarding the discount rates and expected changes to operating results and cash flows during the period of five years from the statement of financial position dates. Management estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks in relation to the cash generating unit (“cGu”). in the current year a rate of 10.3% (2018: 9.9%) was used. the directors believe that the risk profiles of the divisions are broadly similar given their similar operational and geographic natures. changes in operating results and cash flows including the sales of franchises and the level of sales of the franchisees, are based on past results and expectations of future performance. the Group prepares cash flow forecasts for the next five years derived from the most recent budgets and long-term business plans which have been approved by the Board of directors. the key assumptions used for estimating cash flow projections are those relating to revenue growth and operating margin. For our B2B businesses revenue growth rates have been set at between 5% and 12.5%, as compared to the current year growth in system sales at Metro rod of 14%. For our B2B brands franchisee recruitment and churn is consistent from the current year, with the revenue growth being driven by the net new franchisees being introduced to the networks. the operating margins are based on those extant, with the exception of Metro rod, where we have forecast changes in operating margins based on our rebate schemes. a 2% perpetual growth rate has been assumed when extrapolating cash flow projections beyond the five-year period used in the long-term business plans, on the basis that this is a reasonable long-term growth rate for the uK economy. Based on the calculations prepared the recoverable amount for all cGus exceed their carrying amount. the recoverable amounts are not considered to be sensitive to reasonably possible changes in the discount rate or growth rates. the directors do not believe that there is currently a reasonably possible change of key assumptions that would cause the units carrying amount to exceed its recoverable amount. 68 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 14 PROPERTY, PLANT AND EQUIPMENT Leasehold improvements £’000 Fixtures and fittings £’000 Computer equipment £’000 Motor vehicles £’000 Plant and equipment £’000 Cost at 1 January 2018 additions at 31 december 2018 additions on acquisition additions At 31 December 2019 Depreciation at 1 January 2018 charge for year at 31 december 2018 additions on acquisition charge for year At 31 December 2019 Net book value At 31 December 2019 at 31 december 2018 at 1 January 2018 122 3 125 296 7 428 (100) (10) (110) (126) (13) (249) 179 15 22 129 7 136 44 8 188 (109) (14) (123) (18) (11) (151) 37 13 20 the company has no fixed assets at 31 december 2019 or 31 december 2018. 15 RIGHT OF USE ASSETS Cost at 1 January 2018 additions at 31 december 2018 additions on acquisition additions disposals At 31 December 2019 Depreciation at 1 January 2018 charge for year at 31 december 2018 additions on acquisition charge for year disposals At 31 December 2019 Net book value At 31 December 2019 at 31 december 2018 at 1 January 2018 210 34 244 73 68 385 (158) (32) (190) (4) (39) (233) 152 54 52 Land and buildings £’000 1,267 – 1,267 1,250 – – 2,517 (323) (226) (549) (83) (257) – (890) 35 (2) 33 – 416 449 (27) (4) (31) – (20) (51) 398 2 8 Motor vehicles £’000 476 103 579 2,316 353 (130) 3,118 (284) (91) (375) (721) (189) 58 31 282 313 150 212 675 (18) (40) (58) (41) (100) (199) 476 255 13 Plant and equipment £’000 – 32 32 – – – 32 – (6) (6) – (6) – Total £’000 527 324 851 563 711 2,125 (412) (100) (512) (189) (183) (883) 1,242 339 115 Total £’000 1,743 135 1,878 3,566 353 (130) 5,667 (607) (323) (930) (804) (452) 58 (1,227) (12) (2,129) 1,627 1,891 718 944 204 192 20 26 – 3,538 947 1,135 Franchise Brands plc annual report and accounts 2019 69 notes forming part of the Financial statements continued For year ended 31 december 2019 15 RIGHT OF USE ASSETS CONTINUED amounts recognised in profit and loss depreciation expense on right-of-use assets interest expense on lease liabilities expense relating to short- term leases expense relating to leases of low value assets expense relating to variable lease payments not included in the measurement of the lease liability income from sub-leasing right-of-use assets 16 INVENTORIES Group Finished goods and goods for resale 2019 £’000 452 44 33 1 – – 2019 £’000 594 2018 £’000 332 35 33 1 – – 2018 £’000 245 all amounts are carried at cost and therefore no amounts are carried at fair value less costs to sell. there are no material stock provisions at either period end. no material amounts have been written-off in either year ended 31 december 2019 or 31 december 2018 within the income statement of the company. £2.7m of inventories were recognised as an expense within the year (2018: £0.8m). 17 TRADE AND OTHER RECEIVABLES the Group applies the iFrs 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. to measure expected credit losses on a collective basis, trade receivables and contract assets are grouped separately. our contract assets represent assets with our franchise network, therefore the assets are reviewed on the basis of the health of individual franchisees. the expected loss rates are based on the Group’s historical credit losses experienced over the three year period prior to the period end. the historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. in particular we look at the differing segmental risks to which we are exposed in respect of Metro rod’s customer base, with water utilities (for example) carrying much lower risks than our exposure to the Facilities Management segment. in relation to the company, the credit risk for amounts owed by Group undertakings has not increased significantly since their initial recognition. no expected credit loss provision has been recognised on the basis of the significant net assets and positive cash flows of subsidiaries. Group trade receivables provision at the year end other receivables total financial assets other than cash and cash equivalents contract assets prepayments Total current trade and other receivables Bad debt provision: Brought forward additions on acquisition provision for the year utilised Carried forward 70 Franchise Brands plc annual report and accounts 2019 2019 £’000 14,677 (406) 1,605 15,876 725 334 16,935 2019 £’000 (267) (165) (77) 104 (406) 2018 restated £’000 9,971 (268) 247 9,950 820 278 11,048 2018 restated £’000 (646) – (97) 476 (267) strategic report Governance Financial statements 2019 £’000 8,645 1,730 748 572 371 2,051 34 43 25 13 27 418 14,677 2019 £’000 – – – – – 2019 £’000 6,520 4,142 713 1,309 12,684 61 157 3 5 697 923 2018 restated £’000 6,641 1,070 627 392 423 550 18 14 19 10 133 74 9,971 2018 £’000 2,599 2 125 134 2,860 2018 restated £’000 3,940 3,302 535 819 8,595 39 208 – – – 247 the ageing of the trade receivables is as follows: Due Past due 0-30 days 31-60 days 61-90 days 91-120 days 121+ days Past due and impaired due 0-30 days 31-60 days 61-90 days 91-120 days 121+ days Total Company amounts owed by Group undertakings other debtors prepayments social security and other taxes Total current trade and other receivables 18 TRADE AND OTHER PAYABLES Group Current trade payables accruals other creditors social security and other taxes Total trade and other payables Company trade payables accruals other creditors social security and other taxes amounts owed to Group undertakings Total trade and other payables carrying values approximate to fair value. included within other creditors is an amount of £44,000 (2018: £63,000) which represents the net payable in relation to the national advertising funds. Franchise Brands plc annual report and accounts 2019 71 notes forming part of the Financial statements continued For year ended 31 december 2019 19 LOANS AND BORROWINGS Group and Company Current revolving credit facility term loan amortised loan fees total current loans and borrowings Non-current term loan 2019 £’000 3,002 1,201 (129) 4,074 2018 £’000 2,514 1,035 (110) 3,439 5,200 4,400 the loans are comprised of a £6.4m term loan, which carries a 2.95% interest rate and is repayable in instalments until 2023; and a £5m revolving credit facility, of which £3m is utilised, which runs until april 2024, and carries a 2.95% interest rate. the Group also has a £2m overdraft facility, which was unused at the year end. included above are the amortised value of loan fees of £129,000 (2018: £110,000), which are the difference between the book value and fair value of the loans. the bank loans are secured by a floating charge over the assets of the Group. the Group has set up an asset financing scheme with hsBc plc for the use of Metro rod franchisees, primarily for the purchase of vans and tankers. the Group participates in this scheme, on a step-in basis, up to a total value of £1m. in the event of a default of a franchisee, the Group would step-in and have the rights of the financed asset, and the obligation on the liability. at the year end, £0.8m (2018: £0.9m) had been lent through this scheme. there are no expected credit losses to recognise in respect of the asset financing scheme. 20 CONTINGENT CONSIDERATION Group and Company contingent deferred consideration 2019 £’000 3,606 2018 £’000 – on 7 october 2019, the Group acquired Willow pumps for an initial consideration of £5.0 million and a performance-based deferred contingent consideration of up to £7.5 million payable over the next five years. a £3.6m provision, representing the net present value of the expected payments to be made over the next five years has been established based on the current budgets and longer-term forecasts of the Group. under iFrs13 Fair Value, the fair value of the contingent consideration in a business combination falls as a level 3 in terms of the fair value hierarchy, as the inputs for calculating the fair value are unobservable. the deferred consideration of up to £7.5 million will be paid based on business generated for the Group and profits of Willow pumps over the next five years as follows: i. up to £3.75 million will be paid at the rate of up to £750,000 per annum on a pro-rata basis for every £3.0 million per annum or more of incremental pump and related drainage business that Willow pumps generates for Metro rod for each of the five financial years ending 31 december 2020 to 2024 (inclusive). therefore, to achieve payment in full, subcontracted work to Metro rod would need to have grown by £3.0 million per annum and be £15.0 million or more in the year ending 31 december 2024. this will be calculated and will be payable annually in arrears. this element is capped at £750,000 per annum and £3.75 million in total. ii. up to £3.75 million will be paid at the rate of up to £750,000 per annum on a pro-rata basis for every £250,000 by which additional maintainable profits after tax of Willow pumps exceed £1.0 million in each of the five financial years ending 31 december 2020 to 2024 (inclusive) . therefore, to achieve payment in full, pat will have to grow to £2.25 million by the year ending 31 december 2024. this will be calculated and agreed annually based on the actual growth in maintainable pat in each year and will be payable on finalisation of the consolidated accounts of Willow pumps for the year ending 31 december 2022 in respect of the first three years (capped at £2.25 million) and on the finalisation of those accounts for the year ending 31 december 2024 in respect of the fourth and fifth years (capped at £1.5 million). iii. the deferred consideration will be payable in cash, subject to the company having the right to settle 20 per cent. of the amount due in new ordinary shares at the then prevailing share price. the directors believe that the generation of sales for the Metro rod network is the more difficult as it has no track record, therefore the initial provision was set at £1.5m out of a possible £3.75m, whereas the provision for the Willow profitability target has been set at £3m out of a possible £3.75m. these payments have been discounted at 2.95%, which is the current marginal rate of borrowing for the Group. the initial deferred consideration was established at £3.58m at the time of the acquisition, and the fair value movement of £26,000 relates to the unwinding of the discount, rather than any changes in Management’s judgement. the deferred contingent consideration is payable over the course of the next five years, and the fair value will be re-measured at each balance sheet date to take account of the progress which the business has made in fulfiling the performance criteria. 72 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 21 OBLIGATIONS FOR LEASES Group current non-current (between 1 and 5 years) total obligations for leases at 1 January 2018 additions interest expense lease payments at 31 december 2018 additions on acquisition additions interest expense lease payments At 31 December 2019 22 DEFERRED TAX LIABILITY 2019 £’000 924 2,563 3,487 Plant and equipment £’000 6 – – (1) 5 – – – (2) 3 Land & Buildings £’000 959 – 25 (244) 740 1,177 – 27 (280) 1,665 Motor vehicles £’000 171 167 10 (85) 263 1,507 353 16 (320) 1,819 deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17% (2019: 17%). Intangibles £’000 (1,269) – 39 (1,230) (618) 57 (1,791) Accelerated allowances £’000 IFRS15 adjustment £’000 Share based payment £’000 743 – (253) 490 (109) (192) 189 152 – (152) – – – – – – 38 38 – 21 59 Group at 1 January 2018 acquisition of subsidiaries credit/(charge) in the year at 31 december 2018 acquisition of subsidiaries credit/(charge) in the year At 31 December 2019 23 SUBSIDIARIES the fixed asset investments held by the company are as follows: Cost at 1 January 2018 additions in year at 31 december 2018 addition in year At 31 December 2019 the addition in the year relates to the acquisition of Willow pumps. the company has also capitalised £66,000 of stamp duty. 2018 £’000 335 673 1,008 Total £’000 1,136 167 35 (330) 1,008 2,684 353 44 (602) 3,487 Total £’000 (374) – (328) (702) (727) (114) (1,544) £’000 30,097 1,606 31,703 9,346 41,049 Franchise Brands plc annual report and accounts 2019 73 notes forming part of the Financial statements continued For year ended 31 december 2019 the subsidiaries of the company, all of which are 100% owned, which have been included in the consolidated financial statements, are as follows: Name Principal activity Metro rod limited chipsaway international limited oven clean domestic limited Myhome Marketing limited Barking Mad limited Willow pumps limited Mre drainage limited MrB drainage limited Wpl Group holdings limited oven clean (ontario) limited FB holdings limited dentsaway limited edwin investments limited Willow drainage limited operation and management of a franchise business operation and management of a franchise business operation and management of a franchise business operation and management of a franchise business operation and management of a franchise business operation and management of a pump services business operator of drainage franchise operator of drainage franchise intermediate holding company dormant dormant dormant dormant dormant 2019 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2018 % 100 100 100 100 100 – 100 100 – 100 100 100 100 – the principal country and place of business of all the above companies is england and Wales. the registered office and principal place of business is ashwood court, tytherington Business park, Macclesfield, sK10 2XF 24 SHARE CAPITAL AND OTHER RESERVES Allotted, called up and fully paid At 1 January acquisition of Willow pumps exercise of share options At 31 December 2019 £’000 388 6 4 398 2018 £’000 388 – – 388 2019 No. of shares 2018 no. of shares 77,732,033 1,212,121 569,633 77,732,033 – – 79,513,787 77,732,033 share capital comprises the nominal value of the company’s ordinary shares of 0.5 pence each. Share premium: the share premium reserve is the premium paid on the company’s 0.5 pence ordinary shares. Share-based payment reserve: the share-based payment reserve represents the movement in cost of equity-settled transactions in relation to the long-term incentive plan. Merger reserve: the merger reserve represents the premium above the nominal value of the equity issued as part of the consideration in relation to acquisitions. Treasury reserve: this represents the amount that the company paid for its own shares held in treasury. at the year end the Group held 25,000 shares (2018: 200,000 shares) in treasury for the purpose of the future settlement of equity settled share based compensation. Movements on these reserves are set out in the consolidated statement of changes in equity. 74 Franchise Brands plc annual report and accounts 2019 strategic report Governance Financial statements 25 RELATED PARTY TRANSACTIONS the following are payments to entities controlled by directors of the company. Mark peters (Miserden ltd) nigel Wray (Brendon street investments limited) related party transactions company secretary fee director’s fee 2019 £’000 12 26 38 2018 £’000 10 20 30 during the year the Group employed a family member of one of the directors. the total remuneration paid was the same as other employees at an equivalent level in the organisation. there were no outstanding balances in regards to related party transactions at the year end (2018: £nil). 26 DIVIDENDS Final 2018 dividend of 0.46p per ordinary share paid and declared (2017: 0.33p) interim dividend of 0.30p per ordinary share paid and declared (2018: 0.21p) a final dividend of 0.65 pence per share is proposed. 2019 £’000 358 234 592 2018 £’000 257 163 420 Franchise Brands plc annual report and accounts 2019 75 Five Year Financial summary (unaudited) For year ended 31 december 2019 Five year financial summary Statutory revenue Fee income Adjusted EBITDA depreciation & amortisation of software Finance expense Adjusted profit before tax tax expense Adjusted profit after tax amortisation of acquired intangibles interest on deferred consideration share based payment acquisition-related costs tax on adjusting items Statutory profit Basic eps adjusted Basic eps dividend 2019 £’000 44,013 24,401 5,182 (755) (357) 4,069 (687) 3,382 (260) (26) (238) (269) 121 2,710 3.48p 4.34p 0.95p 2018 restated £'000 35,470 18,140 4,003 (447) (340) 3,216 (603) 2,612 (216) – (138) – 67 2,325 2.99p 3.36p 0.67p 2017 restated £’000 24,867 12,701 2,972 (349) (312) 2,311 (426) 1,886 (156) – (58) (2,194) 383 (140) (0.20p) 2.71p 0.50p 2016 restated £’000 5,430 5,430 1,429 (144) (21) 1,264 (260) 1,004 – – (30) (455) – 519 1.27p 2.46p 0.17p 2015 restated £’000 4,877 4,877 1,243 (115) (18) 1,110 (227) 883 – – – – – 883 2.43p 2.43p 0.00p 76 Franchise Brands plc annual report and accounts 2019 company information DIRECTORS & COMPANY SECRETARY stephen Glen hemsley John christopher (“chris”) stewart dent peter John Molloy timothy (“tim”) John harris Julia rosalind choudhury colin david rees nigel William Wray david John poutney robin (“rob”) christian Bellhouse Mark andrew peters REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS ashwood court tytherington Business park Macclesfield sK10 2XF NOMINATED ADVISER & JOINT BROKER allenby capital limited 5 st. helen’s place london ec3a 6aB JOINT BROKER dowgate capital limited 15 Fetter lane london ec4a 1BW AUDITOR Bdo llp 3 hardman street Manchester M3 3at LEGAL ADVISOR Gateley plc one eleven edmund street Birmingham B3 2hJ FINANCIAL PUBLIC RELATIONS ADVISERS Mhp 6 agar street london Wc2n 4hn REGISTRARS slc registrars elder house st Georges Business park Brooklands road Weybridge surrey Kt13 0ts BANKERS hsBc Bank plc 8 canada square london e14 5hQ strategic report Governance Financial statements executive chairman chief Financial officer Managing director, Metro rod Managing director, chipsaway and ovenclean corporate development director chief information officer non-executive director non-executive director non-executive director company secretary Franchise Brands plc annual report and accounts 2019 77 notes 78 Franchise Brands plc annual report and accounts 2019 notes strategic report Governance Financial statements Franchise Brands plc annual report and accounts 2019 79 F r a n c h i s e B r a n d s p l c a n n u a l r e p o r t a n d a c c o u n t s 2 0 1 9 Franchise Brands plc Ashwood Court Tytherington Business Park Macclesfield Cheshire SK10 2XF   

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