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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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Franchise Brands plc
Ashwood Court
Tytherington Business Park
Macclesfield
Cheshire
SK10 2XF