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2023 ReportEMPOWERING FRANCHISEES Annual Report & Accounts 2021 Franchise Brands plc Annual Report and Accounts 2021 Our purpose BUILDING MARKET-LEADING BRANDS Our purpose is to build market-leading businesses primarily via a franchise model. We support our franchisees to successfully grow their businesses and achieve their goals. This provides unity behind our purpose and theirs – when they grow, we grow. Contents STRATEGIC REPORT 1 Financial and Operational Highlights 2 At a Glance 4 Chairman’s Statement 8 Business model and Strategy 10 Strategy in Action 16 B2B Review 20 B2C Review 22 Working Responsibly 30 Financial Review 35 Risk Management GOVERNANCE FINANCIAL STATEMENTS 37 Board of Directors 40 Senior Leadership Team 41 Governance Structure 42 Board Activities in 2021 43 Chairman’s Introduction to Governance 44 Corporate Governance 46 Directors’ Remuneration Report 48 Directors’ Report 50 Directors’ Responsibilities Statement 51 Independent Auditor’s Report to the Members of Franchise Brands plc 56 Consolidated Statement of Comprehensive Income 57 Consolidated Statement of Financial Position 58 Company Statement of Financial Position 59 Consolidated Statement of Cash Flows 61 Company Statement of Cash Flows 63 Consolidated Statement of Changes in Equity 64 Company Statement of Changes in Equity 65 Notes forming part of the Financial Statements 85 Five-Year Financial Summary (Unaudited) 86 Company Information Front cover image: Ben Simpson Drainage engineer - Metro Rod Newport & Hereford Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 1 Financial & Operational Highlights OUR HIGHLIGHTS REVENUE £57.7m +17% 2020: £49.3m ADJUSTED EBITDA* £8.5m +28% 2020: £6.6m PROFIT BEFORE TAX £5.8m +57% 2020: £3.7m ADJUSTED EARNINGS PER SHARE** DIVIDEND PER SHARE NET CASH*** 5.55p +27% 2020: 4.35p 1.50p +36% 2020: 1.10p £6.5m2020: £4.9m Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation and share-based payment expense and non-recurring items. * ** Adjusted EPS is earnings per share before amortisation of acquired intangibles, share-based payment expense and non-recurring items. *** Net Cash is cash less loans, borrowings and obligations under leases. A strong recovery across the Group in 2021, despite the Q1 lockdown. Metro Rod and Metro Plumb system sales increased by 24% to a record £50.4m. – Metro Rod won significant £1m contract with Peel Ports, delivered directly. – Pump sales by Metro Rod franchisees increased 103% to £1.5m, facilitated by Willow Pumps. Acquisition of Azura Group, a leading franchise management software system developer, which gives the Group ownership of its core IT systems. Willow Pumps’ sales growth of 7% driven by a 33% rise in the higher-margin service work and the development of the Metro Rod corporate franchise areas. A strong recovery by the B2C division, underpinned by franchisees returning to full fees and a steady level of recruitment with 57 new franchisees (2020: 58). Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 2 At a Glance OUR LEADING BRANDS B2B B2C • The UK’s commercial drainage experts with over 35 years’ experience. • Provides one-stop solutions to a range of commercial customers, including facilities management, construction, manufacturing, education, retail, insurance, water utilities and the public sector. • 42 franchisees providing full national coverage through the B2B division’s network of over 50 depots and Metro Rod’s 470 highly trained engineers. • Specialist plumbing franchise built on providing emergency services to insurance customers, with over 90 plumbers. • Range of services is expanding and moving to service domestic as well as commercial customers. • 33 franchisees of which 7 are stand-alone and 3 of which are operated corporately. • Founded in 1997, a leading pump design, installation and maintenance business, with a below-ground and above-ground capability. • One-stop shop for design, installation and maintenance of adoptable and non-adoptable pump stations. • Servicing, reactive and extra works for a wide range of commercial customers across different sectors. • Acquired by Franchise Brands in 2019 to help expand Metro Rod and Metro Plumb’s range of services. • The UK’s leading mobile car paintwork repair specialist established in 1994. • 213 franchisees in the UK. • 36 Car Care Centres can complete larger repairs. • The leading and longest established oven cleaning business in the UK, since 1994. • A network of 105 franchisees. • A leading provider of dog home boarding services (dog holidays) since 2000. • Services provided by 63 franchisees. B2C-ADJUSTED EBITDA* £2.6m B2B-ADJUSTED EBITDA* £7.1m * Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation and share-based payment expense and non-recurring items (Covid-19 related restructuring charge and bad debt provision). Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 3 At a Glance continued IPO AT AUGUST 2016 AT 31 DECEMBER 2021 NUMBER OF PRINCIPAL BRANDS: NUMBER OF EMPLOYEES: NUMBER OF PRINCIPAL BRANDS: NUMBER OF EMPLOYEES: 2 325 NUMBER OF FRANCHISEES: 26 £12m MARKET CAPITALISATION: 6 430 NUMBER OF FRANCHISEES: 291 £147m MARKET CAPITALISATION: STRONG LONG-TERM GROWTH RECORD Acquisition of Metro Rod Strengthening of management team Trial of new works management system Acquisition of Barking Mad Launch of Metro Rod's Vision 2023 strategy Completion of roll-out of Vision works management system Creation of integrated B2C division Acquisition of Azura Group First stand-alone Metro Plumb franchise Acquisition of Willow Pumps Launch of Connect customer portal New works management system piloted and developed 31/12/2016 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 150 130 IPO E C N E P 110 90 70 50 30 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 4 Chairman’s Statement STRONG MOMENTUM STEPHEN HEMSLEY Executive Chairman “I have been extremely pleased with the performance of Franchise Brands during 2021. All our businesses have shown themselves to be resilient and demonstrate the overall strength of our portfolio of franchise networks.” ADJUSTED EBITDA £8.5m Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 5 Chairman’s Statement continued “2021 saw a strong recovery in our business as the continued lifting of the Covid-19 restrictions led to an increase in the demand for the Group’s services, particularly at Metro Rod.” METRO ROD SYSTEM SALES £50.4m During the year the B2B division completed a £1m contract for Peel Ports on a direct labour basis. This was delivered directly as we felt that the speed with which it had to be mobilised, and the investment in equipment required, was beyond the labour and financial resources of our franchises. The contract was successfully concluded in February 2022 and we anticipate that most of the labour and equipment will be absorbed into the franchise network. The division’s other direct labour activity, Kemac, which is a specialist plumbing business and operates three Metro Plumb territories, traded well. It is currently working on broadening its customer base to improve resilience and increase the range of services offered. INTRODUCTION Our B2C franchisees also operated for the full year in 2021, after the three-month shutdown in 2020. New ways of working became further embedded in the business, as a result of lessons learnt during the lockdowns and our ongoing digital investment, which will enhance our operational gearing in the years to come. During the year we acquired Azura Group Ltd (“Azura”), a leading franchise management software system developer. This has enabled the Group to consolidate its software development and secure full ownership of the intellectual property (“IP”) created in partnership with Azura. It also provides the opportunity to use Franchise Brands’ experience and expertise to grow Azura’s business by offering a Software as a Service (“SaaS”) platform to other franchise businesses in the UK and overseas. On 16 February 2022, we announced that we had reached agreement on the terms of a recommended all-share offer for Filta Group Holdings plc (“Filta”), a market-leading commercial kitchen services provider. The business specialises in fryer management and fat, oils & grease (“FOG”) services. Filta’s core business operations are within North America, the UK and mainland Europe. The North America and mainland Europe operations are exclusively operated as a franchise network, whilst the UK activities are operated under both franchise and direct labour (“DLO”) business models. The business is complementary to our B2B franchise and DLOs in the UK and will significantly expand our “Water In, Waste Out” offering. Filta’s franchise businesses in North America and Europe will provide accelerated growth prospects for the enlarged Group through both organic growth and complementary acquisitions. B2B FRANCHISE DIVISION Metro Rod and Metro Plumb recovered strongly in 2021, with system sales growing by 24% (2020: -2%) to £50.4m (2020: £40.6m) as we successfully won new contracts with a wide range of local and national customers. This, in part, resulted from the investment made by our franchisees in tankers and a pump maintenance capability which allows us to provide a “one-stop-shop” to customers with a greater diversity of requirements. The tanker fleet has grown from 24 vehicles in 2018 to 57 by the year-end. We also saw the pump servicing undertaken by franchisees grow by 103% to £1.5m, as the lifting of Covid-19 restrictions allowed more face-to-face training of the franchisees’ engineers. There are now a total of 49 Metro Rod and Metro Plumb franchisees in the system and of these, 47 grew their sales in 2021, with 32 growing by over 20%. 24 franchisees now have sales of over £1m (2020: 17). In line with our objective to develop Metro Plumb as a stand-alone franchise, 2 new franchisees were recruited in the year, bringing the total to seven. In addition, 23 Metro Rod franchisees also operate a Metro Plumb franchise and three territories in the South-East are operated corporately as DLOs. Metro Plumb sales totalled £6.9m, a 26% increase over the previous year. We are focused on accelerating the recruitment of stand-alone Metro Plumb franchisees in the coming year as the remaining Covid-19 restrictions are lifted. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 6 Chairman’s Statement continued As a result of the strong growth in system sales, a robust performance by the DLOs, Covid-related overhead efficiencies and the continuing benefits resulting from our investment in IT systems, adjusted EBITDA increased by 45%. This was another excellent performance by the business, led by Peter Molloy, Managing Director of Metro Rod and Metro Plumb, and his team. WILLOW PUMPS Willow Pumps, which is a DLO, had a mixed year. The pump and drainage service side of the business, which accounts for 78% of total sales (excluding the two Metro Rod corporate franchises), continued to grow strongly. However, the supply and installation (“S&I”) business suffered from depressed sales volumes due to the slow and patchy recovery of the house- building sector. Service revenue from the reactive and planned maintenance of pumps and drains grew by 33% due to new contracts and the developing relationship with the Metro Rod depots which helps the combined business provide customers with a truly national and cost-effective service. The growth in sales resulted in an increased gross profit contribution; however, the percentage gross margin declined slightly due to the tighter margin on work sub-contracted to Metro Rod. S&I sales declined 30% during the year as this activity relies on new starts in the house-building sector which were disrupted by labour and material shortages. This was compounded by a reduction in gross margin due to much of the work being lower-margin, early-stage material supply. Action has been taken to address these more challenging market conditions by reducing overheads and seeking to broaden the customer base and product mix. The Metro Rod corporate franchises of Kent & Sussex and Exeter which were transferred to Willow Pumps in 2020, grew sales by 12% and showed strong growth in profitability, albeit from a small base. Overall, the EBITDA contribution from Willow Pumps declined by 9% in 2021, which was disappointing. However, it was entirely attributable to the decline in S&I activity, and we anticipate that the changes made in this area will result in a rebound in sales and EBITDA in 2022. B2C FRANCHISE DIVISION The B2C Franchise Division is comprised of the consumer-facing franchise businesses ChipsAway, Ovenclean and Barking Mad. This division recovered strongly in 2021 from the three-month shutdown of the business at the start of the Covid 19 pandemic in 2020. Almost all franchisees paid full fees in 2021 resulting in a recovery in sales, which, combined with the careful reintroduction of overhead costs following the reductions that the furlough payments in 2020 allowed, resulted in strong growth in EBITDA of 24%. Franchise recruitment at ChipsAway, the leading brand in this division accounting for 84% of EBITDA, declined in the year to 38 new recruits (2020: 45). Whilst this was disappointing it was still the second-highest level of recruitment achieved over the last five years. Ovenclean, by contrast, METRO ROD FRANCHISEES WITH SALES >£1M 24 METRO ROD AND METRO PLUMB FRANCHISEES IN GROWTH 47 had a particularly strong year with 13 new recruits (2020: 8). Barking Mad also increased recruitment to 6 franchisees (2020: 5) in a challenging year for this brand given the low demand for overseas holidays. Overall, the B2C division recruited 57 new franchisees (2020: 58), but lost 62, resulting in a total number of B2C franchisees at the year- end of 381. This is considered an excellent result given the uncertain environment that has existed since the start of the Covid pandemic. DIGITAL TRANSFORMATION The digital transformation of the business has progressed at pace during the year, culminating in the acquisition of Azura in November 2021. Prior to the acquisition, and in response to franchisee feedback, our in-house team of software developers and the team embedded at Azura, developed a series of further upgrades to the Vision works management system. The additional functionality has automated an increasing number of processes, reducing costs for both us and our franchisees, improved efficiency and enhanced our customer service. The investment in the digital transformation of the B2B franchise business is driving significant operational gearing. Whilst system sales increased 24%, administration expenses increased by only 10% and headcount grew by less than 1%. Since we acquired Metro Rod in 2017, almost every business function has benefited from some level of digital automation. As a result, the headcount at Metro Rod and Metro Plumb is now 15% lower and system sales per Support Centre employee increased 75% over the period to £450,000 per employee (2017: £257,000). We anticipate the digital transformation accelerating in the future following the acquisition of Azura. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 7 Chairman’s Statement continued “Metro Rod and Metro Plumb grew strongly in 2021, with system sales growing 24%.” INCREASE IN METRO ROD ADJUSTED EBITDA 45% The use of the Connect portal, which provides customers with real-time visibility of every job, has rapidly grown in popularity since being launched. Connect provides customers with faster and more comprehensive information on a job, on a self-serve basis, and has reduced contact centre telephone traffic by 14%. The functionality of Connect is being extended to allow customers to both place jobs and review the invoices on closed jobs, which we anticipate will further enhance customer service and reduce contact-centre traffic. We will continue to shape our development journey around customer needs and will further encourage them to use Connect as their primary source of information. The acquisition of Azura represents an important step in the Group’s digital journey and I would like to welcome their leadership team of Simon Pullman (Managing Director), Sean McAree (Software Architect) and Mark Scott (Operations Director). The acquisition has a strong strategic and commercial rationale in that it consolidates and secures our software development and key IP, as well as providing a potential source of future income. We believe that there is considerable scope to develop and grow Azura’s business through combining the Group’s expertise and experience in franchising, technology and marketing with Azura’s pre-eminent franchise management platform. This will allow us to develop the existing software, using some of our Vision and Connect developments, and offering the enhanced package as a SaaS platform to other franchise businesses in the UK and overseas. FILTA ACQUISITION On 16 February 2022, the Boards of Franchise Brands and Filta announced that they had reached agreement on the terms of a recommended all-share offer for the entire share capital of Filta. This offer is conditional on, amongst other things, Franchise Brands receiving acceptances in respect of at least 75% of the Filta voting rights. Franchise Brands has received irrevocable undertakings to accept the offer from 82% of the Filta shareholders. The offer is also subject to the passing of an ordinary resolution at the Franchise Brands general meeting to be held on 7 March 2022 giving the directors the authority to create and issue the consideration shares. The Board of Franchise Brands has unanimously approved the offer and each director of Franchise Brands together with Gresham House, who together hold 60% of the voting rights of Franchise Brands, have irrevocably undertaken to vote in favour of the resolution. The Board of Franchise Brands is therefore confident that the offer will be declared wholly unconditional soon after the irrevocable undertakings are fulfilled. We believe that the merging of the two companies will establish a franchise business with a robust international footprint that will allow overseas development of the existing brands and facilitate the acquisition of new brands in North America, UK and Europe. The merged management team has significant franchising experience and expertise, which combined with the shared support services and resources will drive the future growth of the enlarged Group. The complementary nature of the services provided, and the breadth of the customer base of the combined direct labour businesses in the UK, is expected to also provide significant opportunities for growth. The acquisition will significantly progress our ambition of offering a “Water In. Waste Out” service to the commercial sector. OUTLOOK Trading has started strongly in 2022, with continuing sales growth in the B2B division and steady recruitment in the B2C division. Profitability continues to be enhanced by the improved operational gearing that our digital investment enables, which has been enhanced by the acquisition of Azura. The acquisition of Filta will be transformational for the business, taking us from a UK-focused business to one with international scale and an expanded management team capable of developing the group in North America, UK and Europe and enabling us to provide a broader range of complementary services to a larger combined client base. I look forward to welcoming Jason Sayers and Brian Hogan to our board and all of the Filta team to the Group once the merger is declared unconditional. We also remain keen to increase the scale of our B2C franchise business and continue to search for complementary acquisitions which will leverage our existing infrastructure. It has been an extremely active and challenging twelve months for our corporate team dealing with both the disruptive effects of Covid-19 and expanding the group both organically and by acquisition. This applies equally to our franchisees who have weathered the storm and come out stronger and with better businesses. I would like to thank them all for their contribution in 2021. We therefore look forward with confidence to the year ahead. STEPHEN HEMSLEY Executive Chairman Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 8 Business model and Strategy BUSINESS BUILDING STRATEGY We build market-leading businesses primarily via a franchise model, and our business-building strategy has four engines of growth. At the centre of our strategy is supporting our franchisees who are the backbone of the group. If they grow, we grow. We support our franchisees in a variety of ways and we also look for external growth opportunities through acquiring new franchise brands. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 9 Business model and Strategy continued SUPPORTING OUR FRANCHISEES EXPANDING OUR RANGE OF SERVICES DEVELOPING A TECHNOLOGY PLATFORM GROWING OUR PORTFOLIO We provide our franchisees with support, training and specialist tools, from launch or acquisition of their franchise to helping them build a profitable business over the long term. Our support services include sales and marketing, technology, specialist training, health and safety, invoicing and credit control and business mentoring. We actively look for opportunities to help our B2B franchisees to expand their range of services and customer base. Our ambition is to offer a “Water In, Waste Out” service to the commercial sector. Willow Pumps is helping Metro Rod franchisees to develop a pump capability. We look for additional opportunities to help franchisees develop specialist capabilities. A key part of the Group’s strategy for developing our brands is the automation of as many of our processes and interactions as possible. We believe that this will not only enhance customer service and thereby increase sales, but also improve corporate and franchisee efficiency, thereby reducing costs and increasing profitability. Our ambition is to develop a group-wide technology platform. Acquisitions are a central part of our growth strategy and we actively seek franchise businesses where we can leverage our high-quality support services and existing divisional structure. We also seek franchise businesses of scale that could create a third division of the Group. PROGRESS IN 2021 We supported our franchisees recover strongly from the impact of the Covid-21 restrictions, provided them with strong levels of customer enquiries, helped them develop sales, supported investment in their businesses and provided specialist training.. PROGRESS IN 2021 We helped train 65 engineers across 30 Metro Rod depots to perform pump servicing work. 75% of these engineers are trained to a level that allows them to service all reactive and extra works. Pump sales at Metro Rod in 2021 were £1.5m, more than double that of 2020. PROGRESS IN 2021 We embarked on a further, more ambitious three-year digital journey. Following the successful roll out of Vision, we launched the Connect customer portal and optimised these platforms with a series of upgrades to further enhance functionality. PROGRESS IN 2021 We acquired Azura Group, a leading franchise management software system developer with whom we partnered to develop Vision. The acquisition consolidates and secures our software development and key IP. PRIORITIES FOR 2022 Continue supporting our franchisees to grow their businesses to pre-pandemic levels in terms of sales volume and customer service. We consider the recruitment and retention of labour one of the business’s critical issues in 2022. PRIORITIES FOR 2022 Continue to train engineers to become competent in repairing and servicing pump equipment. As additional pump work leads to more tanker work, we will also support our franchisees in investing in a still more capable tanker fleet. PRIORITIES FOR 2022 The acquisition of Azura provides the opportunity to both accelerate our digital journey and offer an enhanced platform to other franchise businesses on a Software as a Service (“SaaS”) basis. PRIORITIES FOR 2022 The integration of the anticipated acquisition of Filta in the UK and the accelerated development of its businesses in North America and Europe. We also continue to seek complementary B2C acquisitions. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 10 Strategy in Action OUR VISION FOR ENHANCED SERVICE ‘Vision’, our works management system, allows our franchisees to be more productive, efficient and ultimately more profitable. REAL-TIME TECHNICIAN UPDATES PERSONALISED CUSTOMER RULES DYNAMIC MANAGEMENT REPORTING AUTOMATION THROUGH ROBOTICS Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 11 Strategy in Action continued VISION WORKS FOR OUR FRANCHISEES CUSTOMER SPECIFIC PROCESSES A benefit of Vision is the ability to implement customer specific rules which reduces the time taken to process jobs and improves accuracy. For example, engineers are able to receive notifications of a new job, and the mobile app provides them with clear notes and step-by-step customer instructions. As well as saving time for engineers on site or franchisees offices, it helps improve compliance with customer processes and reduces issues with invoicing. IMPROVED FRANCHISEE REPORTING The roll out of Vision and the improved functionality has facilitated better reporting for our franchises using intelligent dashboards. These are constantly evolving and the new reports which can now be generated have helped franchisees better understand their KPIs and profitability to identify where the opportunities are. FOCUS FOR 2022 A key priority for 2022 is a scheduling tool to improve engineer efficiency which is critical against the backdrop of a tight labour market and will also help SLA performance. Being able to carry out more jobs a day, with reduced mileage and fuel costs also leads to improved productivity and profitability. We continue trials of a new remote worker device that is intended to enable to connect with the relevant customer apps and systems, and negates the need for engineers to remember passwords on site. A POWERFUL AND VERSATILE TOOL IMPROVED ROBOTICS AND AUTOMATION THE CREATION OF AN INTEGRATED SYSTEM Vision has enabled jobs to be logged by robots more quickly and accurately. This means engineers can be deployed to site faster which improves our ability to meet customer SLAs. We developed an email handling tool which can intelligently understand requests and this is enhancing customer service as well as leading to contact centre efficiencies. Robots have allowed us to automate certain elements of the invoicing process. The robots automatically detect discrepancies and then submit the required approvals. This speeds up invoicing and enables us to process increased volumes without the need to increase labour overhead. The roll out of Vision enables us to fully integrate our systems using its CRM as the core. We will feed enquiries from the website into Vision and then automatically pass them to franchisees. A new upgraded quotations management system is also being included that will enable us to automate quote production and portal updates. The data and information that will be provided by the system will help us improve the quality of our marketing campaigns. The same information will also be made available to our customers via Connect. JOBS LOGGED BY ROBOTS IN 2021 EMAILS TO CONTACT CENTRE HANDLED BY ROBOTS INVOICING TASK AUTOMATIONS 10% 24% >22k Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 12 Strategy in Action continued CONNECTING SMARTER WITH CUSTOMERS INTEGRATION WITH CUSTOMER SYSTEMS AND PORTALS SELF-SERVICE JOB LOGGING (COMING SOON) SCHEDULED DELIVERY OF REPORTS AND JOB IMAGES SELF-SERVICE ACCESS TO INFORMATION IN NEAR REAL-TIME Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 13 Strategy in Action continued HOW CONNECT BENEFITS OUR CUSTOMERS A real-time portal developed together with our customers, providing them with full on-line visibility of every job. Connect offers self-reporting functionality, saving customers time and money. CUSTOMER LOGINS IN 2021 REDUCTION IN CONTACT CENTRE TRAFFIC OUTBOUND CUSTOMER TEXTS 23k 14% 19k TRANSFORMING THE CUSTOMER EXPERIENCE OVERVIEW Connect is a portal which provides our customers with information and tools that allows them to see the status of their job in real-time. This ability for customers to self-select information in an efficient and transparent way saves them - and us - time and money. We launched Connect, which is also available on a mobile app, in January 2021 and there has been a 7-fold increase in customer logins over the year. FOCUS FOR 2022 To date the journey has centred around making real-time information available. The next stage will be around enabling our customers to provide inbound information and transact with Connect. For example, we have developed functionality that allows customers to log their own jobs and this is currently being trialled. In time, customers will also be able to provide purchase order numbers, authorise uplifts and review and potentially approve quoted works. OUR CUSTOMER JOURNEY We have shaped our development journey around our customer’s needs. During the year we developed self-reporting functionality to allow customers to request their own updates on certain events at certain times. Customers can schedule automated reports, including job card and photos, to be emailed when a job is either created or has been completed. Certain customers can also receive an SMS notifying them of the initial appointment and can receive a call from the engineer on route. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 14 Strategy in Action continued ACQUISITION OF AZURA GROUP FRANCHISE PARTNER OF CHOICE END-TO-END PLATFORM WEB BASED CUSTOMISED SOLUTIONS Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 15 Strategy in Action continued AN IMPORTANT STEP IN OUR DIGITAL JOURNEY BACKGROUND Franchise Brands has partnered with Azura since 2018 to develop and customise the “Vision” works management system which is built on Azura’s core system. The acquisition enables the Group to consolidate its software development and secure ownership of the related intellectual property created to date, as well as bring Azura’s skilled team in-house. ABOUT AZURA Established in 1990 by Simon Pullum, Azura has developed a proprietary, fully integrated, cloud-based, franchise management software system specifically tailored and designed to the needs of franchise businesses. Azura works with over 35 franchise networks and has particular experience in the service-based, van-based, children’s activity and domiciliary care sectors. BENEFITS FOR AZURA AND FRANCHISE BRANDS Azura now has a deep insight into our business. This will enhance their ability to develop further functionality for Franchise Brands and other franchisors. Technology is fundamental to any business but we see particular relevance to franchise businesses which are often start-ups and need to be as efficient as possible. Core functionality includes a customer web portal, full CRM system, franchise recruitment CRM, an integrated invoicing and bookkeeping system, and intranet and mobile applications. Franchisors benefit from improved efficiencies, reliability, accessibility and compliance, flexibility and scaleability. AZURA’S TECHNOLOGY TRANSFORMS THE FRANCHISE EXPERIENCE CUSTOMER A ACCESSIBLE A cloud-based system that can be accessed from any internet-enabled device Z ZZZ... U R A UNCOMPLICATED RELIABLE ADAPTABLE Sleep easy at night knowing you have full transparency on every aspect of your business Easy to explain and train for those unfamiliar with new technology All systems are hosted in UK datacentres with exceptional uptimes and high levels of security A flexible system which can easily be customised to your unique business requirements Quotations Invoicing Renewals Reminders Marketing Payment collection CRM Project & task management Contract management Compliance management Full bookkeeping system Class management Franchise recruitment CRM Internet & mobile applications Route planning Job scheduling Resource scheduling Stock control Health & safety Audits AUTOMATION SYSTEMS LOGISTICS Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 16 B2B Review STRENGTH IN NUMBERS Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 17 B2B Review continued SYSTEM SALES INCREASE IN TANKER SALES % METRO ROD FRANCHISEES WITH SALES >£1M £50.4m 68% 57% 2021 PERFORMANCE REVIEW METRO ROD Metro Rod performed strongly in 2021, delivering record system sales of £50.4m, an increase of 24% over 2020. We continued to provide an expanded range of “Water In. Waste Out” services to our customers. Tanker sales increased 68%. Pump sales by Metro Rod franchisees doubled to £1.5m as more franchisees developed a pump capability by training up engineers. Tanker and pump work has an average order value (AOV) several times higher than that of drainage. Encouragingly, local sales grew more rapidly than national sales in 2021. This is in line with our Vision 2023 strategy where we are supporting the franchisees to undertake more local work which is easier to service and attracts a significantly higher AOV than national account work. Franchisees are also better able to leverage local relationships and build customer loyalty. We broadened the scope of work we provided national accounts in particular, with higher value-added services such as surveys and inspections, asset mapping, specialist repairs or excavations. This has been made possible through franchisee investment in new equipment. In addition to the external finance we have facilitated, we have deployed our own resources to help finance this expansion by providing loans to franchisees of £250,000 over the last 12 months. We are also seeing the benefits of the 9 new franchisees that have joined the network since 2019 through resales (of which there have been 7) and franchising previously sub- contracted territories. The average size of a Metro Rod franchisee in 2021 increased by 24%. 57% of franchisees exceeded £1m in sales compard to 2020. PETER MOLLOY Managing Director, Metro Rod and Metro Plumb METRO PLUMB Metro Plumb sales totalled 26% to £6.9m and plumbing now accounts for 8.5% of system sales. Our seven stand-alone Metro Plumb franchisees are bringing focus and dynamism to previously under-utilised territories and are expanding their businesses with additional plumbers and vans. We are helping them to win more local work through sales and marketing support, including highly effective national digital advertising that was launched in June. We provided plumbing services to over 550 customers in 2021. Five Metro Plumb businesses achieved over £150,000 of sales in 2021. We have over 90 plumbers in the network. This provides us with a strong platform from which to accelerate the build out of Metro Plumb. PRIORITIES IN 2022 METRO ROD Build out the pump capability of Metro Rod franchisees and grow local and national sales. Engineer recruitment, retention including creating additional capacity through innovative IT solutions. Focus on improving the customer’s experience. Territory maximisation including an accelerated process for resales. METRO PLUMB Accelerate the recruitment of new stand- alone Metro Plumb franchisees. Increase local sales through improved sales and marketing. Greater focus on the key competencies of Metro Plumb and Metro Rod. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 18 B2B Review continued METRO ROD CUSTOMER SITES BENEFITING FROM TANKER SERVICES IN 2021 2,073 METRO ROD & WILLOW PUMPS TANKER FLEET 66 METRO ROD PUMP SALES IN 2021 £1.5m EXPANDING METRO ROD’S RANGE OFSERVICES TANKER SERVICES We now have 57 tankers in the Metro Rod network and 5 franchisees have 3 or more tankers. This compares to only 24 tankers in 2018. Over the period, tanker sales at Metro Rod have grown over four-fold and over 2,000 customer sites now benefit from tanker services. Together with Willow Pumps’ fleet of 9 tankers, we have 66 tankers across the Group. PUMP WORK The acquisition of Willow Pumps has enabled us to train Metro Rod franchisees to develop a pump capability. 30 Metro Rod franchisees now have a pump capability and the team at Willow Pumps has helped train up 65 engineers to carry out pre-planned maintenance, reactive and extra works. Pump sales in 2021 were £1.5m and we serviced 355 customers, an increase of 60% over 2020. 67% of pump work was delivered by Metro Rod franchisees without the need of assistance of Willow Pumps. Franchisees need a range of tankers to service customers. These start from smaller multi- purpose combination units to larger vehicles which can recycle up to 3,000 gallons of water and waste. Franchisees with a tanker fleet can be more responsive to customer needs ensuring we deploy the right equipment to provide a first-time fix. Tankers are essential in order to carry out pump work as chambers will need to be emptied and cleaned prior to servicing being carried out. Franchisees are now winning high value, repeat business from a mixture of local and national accounts. The AOV for pump work is approximately three times higher than drainage and hence the work is highly profitable for franchisees. Customers benefit from higher service levels as franchisees can deliver the entire end-to-end service. The pump and drainage service side of the business, which represents 78% of total sales (excluding the two Metro Rod corporate franchises) continued to grow strongly. Sales increased 33% due to new contracts and the developing relationship with Metro Rod which helps the combined business provide customers provide a truly national service and cost effective service. During the year we carried out over 4,000 pre-planned maintenance jobs and over 9,000 quoted and reactive jobs. The supply & installation business was impacted by the slow and patchy recovery of the house- building sector as a result of labour disruptions and material shortages. As a result, supply and installation sales declined 30% during the year. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 19 B2B Review continued WILL TAYLOR, Pump Engineer, Metro Rod Mid Wales & Shropshire “Having invested in a fleet of 4 tankers, I was keen to develop a pump capability to offer one-stop solutions to customers. The Willow Pumps team has been brilliant. They have trained and mentored my son, Will, who is now a certified Level 3 pump engineer, able to carry out reactive and extra works. The combination of pumps and tankers has been fantastic for my business.” ADRIAN TAYLOR, Metro Rod Mid Wales & Shropshire METRO ROD TRAINED PUMP ENGINEERS % OF WORK DELIVERED WITHOUT WILLOW PUMPS ASSISTANCE 65 67% The training of Metro Rod engineers began in earnest in the second half of 2020 and accelerated during 2021 as the lifting of the restrictions allowed greater face-to-face training. The training takes place at the Willow Pumps depot in Aylesford. The depot has a purpose-built workshop fitted out with a Control Panel, pumps and floats to simulate the realities of being on site. This allows engineers to practice their newly learnt skills in a safe environment, repeating jobs under the watchful eye of the expert trainer until both are satisfied the job has been completed safely and effectively. It takes 5-10 days to train an engineer with limited mechanical experience to a level which allows them to carry out all reactive and extra works. 75% of the Metro Rod franchisees have taken the opportunity to train engineers to this level. The team at Willow Pumps are also on hand to expertly assist recently-trained engineers, and provide advice and mentoring on site via video calls. This helps engineers build confidence in their new skills and develop further on the job. They are also able to support franchisees deliver larger more complex jobs such as refurbishing pump stations or design new pump stations. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 20 B2C Review ROBUST PERFORMANCE Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 21 B2C Review continued TOTAL B2C FRANCHISEES 381 TOTAL FRANCHISEES RECRUITED IN 2021 CHIPSAWAY FRANCHISEES WITH EXPANDED OPERATIONS 57 45% TIM HARRIS Managing Director, B2C Division 2021 PERFORMANCE REVIEW CHIPSAWAY ChipsAway continues to be our largest B2C brand generating 84% of the division’s EBITDA. The business performed strongly in 2021 with 38 new franchisees joining the network, the second highest number over the last 5 years. The network reduced slightly in size from 215 to 213 franchisees due to a higher number of leavers, but this is considered a good result given the uncertain environment. The Group’s marketing activities generated nearly 300,000 consumer leads for our franchisees. We take particular care to optimise the lead volume with franchisee capacity to ensure a steady stream of high-quality leads. In 2021, the network completed over 68,000 jobs, 20% higher than 2020 together with a 4% increase in the average order value to £246. ChipsAway franchisees expanded the scope of their operations during the year by establishing car care centres or fixed units, where larger more specialist repairs can be carried out. 95 franchisees (45% of the total) operated expanded operations by the end of the year compared to 89 in January. The Corporate Car Care R&D Centre we established in 2019 had an excellent year, with EBITDA up 40% on 2020. We continued to provide our franchisees with a range of specialist training courses. We currently have 170 technicians in the network qualified to City and Guilds NVQ3 Level that are able to repair electric and hybrid vehicles. In addition, we ran numerous advanced paints and dents training courses and master classes and trialled specialist courses on Advanced Driver Assistance Systems awareness which will be rolled out in 2022. OVENCLEAN Ovenclean performed particularly well in 2021. We were able to expand the size of the network from 100 to 105 franchisees by recruiting 13 new franchisees, with only 8 franchisees leaving the system. Ovenclean franchisees benefited from improved consumer confidence resulting in high demand for our services. We were able to provide our franchisees with 35% more consumer leads than in 2020 and also carried out a rebrand. BARKING MAD It was another challenging year for Barking Mad due to the impact of Covid on the foreign holiday market. However, we recruited 6 new franchisees during the year. The network reduced from 71 to 63 franchisees as the result of 14 leavers. The new website helped generate customer enquiries and we are hopeful that Barking Mad will benefit from the return of foreign holidays in 2022. PRIORITIES IN 2022 CHIPSAWAY Continued franchisee training for new automotive technologies associated with the move to electric and hybrid vehicles and those with Advanced Driver Assistance Systems. Further development of our Car Care concept to provide greater customer service, operating efficiency and potential for franchisee roll out. Continued development of our IT platform including using technology for online quotations and subsequent booking of repairs. OVENCLEAN Expansion to deliver greater national coverage through both existing franchisees and new partnerships. Investigate expanding our embryonic ‘white goods’ repair offering. BARKING MAD Continue to support and invest in our network to take full advantage of a return of the holiday market. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 22 Working Responsibly Our values and culture OUR GUIDING PRINCIPLES WE DEMAND INTEGRITY We are professional in everything we do and treat people with respect. 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, suppliers, and customers. WE EMPOWER 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 WORK AS A TEAM We place a huge amount of importance on teamwork between our colleagues and our franchisees to create a dynamic business. 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 continuous improvement. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 23 Working Responsibly Overview OVERVIEW Working responsibly is an imperative and we want to do what we can to contribute to a more sustainable future. Our focus is on developing a business that builds economic and social value and protects our environment in everything we do. We want to create an inclusive, fair and rewarding environment where our people, and our franchisees can thrive, one which has a positive impact on the communities in which we work and live, and operates to the highest standards of integrity, transparency and accountability. We are also committed to reducing our environmental impact wherever we can. UN GOAL: HOW WE CONTRIBUTE: GOOD HEALTH AND WELLBEING • Mental Health First Aiders training. • Employee assistance programme for all staff. • Highly developed health and safety processes and training. GENDER EQUALITY • High proportion of females in our Support Centres: 61% in Metro Rod and 65% in B2C. • Dedicated leadership training and mentoring for female managers. DECENT WORK AND ECONOMIC GROWTH • Development opportunities, rewards and recognition. Share options for 100% of qualifying employees. • Create local employment in the community. • Opportunities through apprenticeship scheme. SUSTAINABLE CITIES AND COMMUNITIES • High standards of quality and sustainability. • Manage and commitment to reduce environmental impact. • Accreditations and certifications. JULIA CHOUDHURY Corporate Development Director OUR APPROACH TO ESG We made good progress on our ESG journey in 2021 and initiated a process to determine what matters most and what we should focus on. This involved engaging with our customers, shareholders and employees to understand what is important to them. We have developed a framework around 4 ESG pillars: environment, people, communities and governance to help drive and measure progress and embed sustainability considerations into our decision making. We also considered how we can link our ESG strategy to the UN Sustainable Development Goals and have chosen four particular goals to which we can contribute to. OUR ESG PILLARS We have developed a framework around four ESG pillars: 1. ENVIRONMENT • Reduce, Re-Use, Recycle • High quality and sustainable service delivery • Education and training 2. PEOPLE • Rewarding opportunities for our people to develop and thrive • Wellbeing and keeping people safe • Diversity and inclusion 3. COMMUNITIES • Creating local employment • Apprenticeships and work experience • Contribution to community projects, charities and activities 4. GOVERNANCE: • Upholding high standards • Being transparent • Being accountable Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 24 Working Responsibly continued Stakeholders and S172 OUR COMMITMENT TO S172 AND STAKEHOLDER ENGAGEMENT As a progressive, principle-led Group, we are committed to working in partnership with all our stakeholders. We place particular importance on directly engaging and collaborating with our employees, franchisees, customers, suppliers and shareholders. See page 45 which sets out examples of some of the principal decisions taken by the Board during the year. STAKEHOLDERS IMPORTANCE OF STAKEHOLDER TO THE GROUP HOW WE ENGAGED RELEVANT LINKS EMPLOYEES Our committed and dedicated employees are our most important resource. They play a key role in supporting our franchisees and helping provide them with the tools they need to grow their businesses. We aim to cultivate and maintain a positive working environment and provide learning and development opportunities, recognition and rewards. - Presentations, forums, webinars, communications bulletins, videos and online events. - Providing support for working from home and wellbeing. - Share options granted and exercised. See pages 22, 23, 25 and 26. FRANCHISEES Our franchisees are the very backbone of the Group and it is their commitment, hard work and entrepreneurialism that helps us grow our business. Our teams provide all the support and development they need to grow their businesses and maintain the highest brand and operational standards. - Predominantly digital engagement due to the restrictions, assisted by our IT systems. - Training and development and visits face-to-face where possible. See pages 9, 10, 11, 18 and 19. SHAREHOLDERS Our shareholders support the long-term growth of the Group. We rely on them to finance our development and growth plans. Engaging with them regularly to communicate progress, understand their perspectives, discuss long-term issues and ensure feedback is taken into account is critical to the long-term success of the Group. - Annual Report, Interim Report, trading updates, regular meetings with institutions. - Regular engagement with Proactive Investors digital platform - UK Investor Show presentation at live event. See pages 4 to 7 and 30 to 34. CUSTOMERS AND LOCAL COMMUNITIES We are passionate about providing the highest possible customer service. Understanding the needs of our customers, evaluating our performance delivery against KPIs and evaluating feedback helps us to continually improve. We are committed to making a positive contribution to the communities we work in. - Online meetings, reviews, surveys, performance ratings. - Supported and worked with our commercial customers See pages 12, 13, 18 and 26. during Covid. - New Metro Rod community engagement initiatives. SUPPLIERS Our suppliers provide us and our franchisees with the highest possible quality of products, equipment and services. This allows us to deliver a first class service to our customers. Regular reviews take place to ensure a supply chain free of slavery and human trafficking. - Online meetings and demonstrations and direct feedback. - New relationships for franchisees where supply was See pages 18, 19 and 29. constrained, ie, vehicles. - Vendor visits where possible. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 25 Working Responsibly continued Social A GREAT WORK ENVIRONMENT OUR COMMITMENT TO DIVERSITY AND INCLUSION We believe in the importance of creating and maintaining a diverse and inclusive working environment where team members feel welcome and can be themselves. We are committed to promoting equality of opportunity for all our people and those seeking to join the Franchise Brands family. We aim to create a working environment in which all individuals are able to make best use of their skills, free from discrimination or harassment, and in which all decisions are based on merit. GENDER PAY GAP We reward our people fairly. This includes upholding equal pay. As part of our commitment to be an Employer of Choice, we have chosen this year to start to report on Gender Pay Gap on a voluntary basis. Our gender pay gap is 27%. This is largely due to the nature of our business with At 31 December 2021 Metro Rod Support Centre B2C Support Centre Willow Pumps Metro Rod Direct Labour Organisations Franchise Brands plc Total: predominantly male engineers who command a higher salary than office workers, and the fact we have fewer women in senior management. The ratio between our top salary and bottom salary is 8x. SHARE OWNERSHIP Our strong ownership culture is one of the keys to our success and we offer share options to everyone in the Group. This principle is extended to businesses we acquire. WOMEN IN THE BUSINESS We are proud of the number of women we have in the business, in particularly in our Support Centres which provide valuable services and support to our franchisees. We also have a growing number of women in management positions and we are pioneering our Developing Inspiring Leaders programme with high potential women from across the business. Total number of employees % of male employees % of female employees 100 20 92 69 10 291 39% 35% 78% 90% 90% 65% 61% 65% 22% 10% 10% 35% EMPLOYEE WELL-BEING INITIATIVE MENTAL HEALTH FIRST AIDERS TRAINING In 2019 we launched mental health first aid training as part our employee well-being commitment and now have 30 mental health first aiders across the group. The training is designed to help our people spot the signs and symptoms of mental ill health and provide help on a first aid basis. It is aimed at teaching people how to listen, reassure and respond and the practical two-day skills and awareness course is carried out via a combination of group activities, presentations and discussions. Q What interested you in becoming a mental health first aider? A “I have fought with mental health issues for many years. I understand the struggles people have with mental health. Often, I’ve had to go through my struggles alone, making my internal fight harder. I understand how important it is to have someone to talk to and how much it helps, especially talking to someone who understands from experience.” Martin Georgiev, Metro Rod Q How would you describe the training? A “I have attended many training courses in my career. However, I felt truly humbled when the trainer shared his personal experiences with such honesty. He empowered and encouraged the group to interact. This life-changing training has helped to support both my colleagues and a network of over 160 franchisees, which has been particularly important during the challenges of Covid-19”. Suzi Nicholson, Barking Mad and Ovenclean Q How has being a mental health first aider helped you in your role and in the business? A “Becoming a mental health first aider has been really valuable. Since the course I’ve used these skills twice. Both times I noticed early signs of stress and anxiety – keeping to themselves, lack of interaction, etc. I carried out welfare checks in private. What amazed me was how freely they talked. It seemed like a relief. Both had personal issues impacting their mental health. I was able to show empathy without judging and assist them to seek professional help.” Simon Kings, ChipsAway Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 26 Working Responsibly continued Social I first arrived with Chips Away in 1998 as an admin temp for one week and had no idea what I was walking in to! I jumped in at the deep end, with all manner of general office work and franchisee enquiries and found the process fascinating. ChipsAway was much smaller then but after three weeks I really felt like this was something I could do. I quickly became involved in some of the UK accounts, office management, and then PA roles. When Franchise Brands acquired ChipsAway in 2008, working with the Directors and others gave me a more detailed understanding of the legal issues around franchising. Examining the legal language and detail behind our processes really fascinates me. You’re not just thinking on behalf of Franchise Brands, but also on behalf of the franchisee. Pulling together different strands – ie, the franchise agreement, the system, trademark, brand protection, health and safety, GDPR – and understanding how they sit together is something I’ve found real enthusiasm for. After asking the Directors about completing a law degree, they gave me their full support to balance a 4-year part time course with my role. I followed this up with a 2-year Masters in Commercial Law, which included a dissertation in franchise trademarks. The Masters equipped me well to be involved in the IPO. It was such an interesting process, with external people needing to understand and verify the information on the business. MELANIE HALL Group Contracts Manager We dealt with very detailed questioning to provide the level of information required. Following that, I started a group role taking responsibility for franchise agreements and national contracts. “When I first started as a temp, I never imagined I would one day help to float the company. I’ve had 24 years working with and learning from people who saw potential in me that I didn’t see myself, always giving me fantastic opportunities for professional and personal development.” METRO ROD IN THE COMMUNITY METRO ROD WALKING BUS SPONSORSHIP Metro Rod has supported school walking buses across the UK as part of our commitment to supporting local schools and the communities in which we operate. Our support will see hi-vis jackets provided to over 900 children encouraging them to “Be Bright, Be Green, Be Seen” and continue to walk to school to help reduce carbon emissions. By walking to school or work and making other small but impactful everyday lifestyle changes, everyone can help reduce climate change and the adverse weather events it causes as well as having health benefits. Metro Rod has also produced an interactive education leaflet for distribution to schools, to help build a child’s understanding of how small changes can help reduce their carbon footprint. METRO ROD SUPPORTING FOODCYCLE Metro Rod is supporting FoodCycle – a national charity that provides hungry and lonely people in our communities with delicious meals and great conversation, using food that would otherwise go to waste. Our mission to support FoodCycle will help areas of the charity with the greatest need, such as recruitment and training of volunteers, or purchasing kitchen equipment to create community meals. Metro Rod has provided 3,496 meals to FoodCycle guests. Food poverty and loneliness are growing issues which have been heightened by the recent pandemic. FoodCycle works to tackle these by offering welcoming, safe spaces and a free meal. The charity has volunteers across the country, bringing together people from all backgrounds, improving mental wellbeing, strengthening community spirit and reducing loneliness, as well as reducing environmentally harmful food waste. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 27 Working Responsibly continued Environmental APPROACH AND PERFORMANCE We acknowledge the significant environmental risk posed by climate change and are committed to reducing our environmental impact. This is the second year we have reported scope 1, 2 and 3 GHG emissions and we have identified measures to help tackle our top three high emitting areas of liquid fuels, fuel used within road travel, and electricity use. ACTIONS TAKEN IN 2021 Willow Pumps acquired four electric vans and three hybrid company cars to replace diesel vehicles. We are in the process of installing electric charging points at our Support Centres and making electric pool cars available to our people. Metro Rod developed a vehicle emissions tracking tool for company vehicles. ACTIVITIES PLANNED FOR 2022 We plan to further develop the fuel consumption and mileage tool. The scheduling analysis and development work that the IT team will be carrying out will generate important feedback and solutions to reduce mileage and fuel consumption. We have explored options for fleet electrification building on Willow Pumps initiatives and have ordered further electric vans to trial. FRANCHISE BRANDS PLC. STREAMLINED ENERGY AND CARBON REPORTING 2021 This SECR report reflects the period 1st January 2021 – 31st December 2021. This is Franchise Brands plc’s second reporting year, the first being 1st January 2020 – 31st December 2020. The 2020 data points have also been included in this report to allow for direct year-on-year comparison. METHODOLOGY Responsibilities of Franchise Brands plc and Compare Your Footprint Franchise Brands plc was responsible for the internal management controls governing the data collection process. Compare Your Footprint and Green Element were responsible for the data aggregation, any estimations and extrapolations applied (as required), the GHG calculations and the resultant emissions statements. Greenhouse gas emissions were calculated according to the Greenhouse Gas Protocol Corporate Greenhouse Gas Accounting and Reporting Standard. This standard is internationally accepted as best practice. The figures were calculated using UK government 2021 conversion factors, expressed as tonnes of carbon dioxide equivalent (tCO2e). SCOPE AND SUBJECT MATTER: The report includes sources of environmental impacts under the operational control of Franchise Brands plc. This includes the following: - Metro Rod, Ashwood Court - Metro Rod, Peel Ports - Kemac, Maltings - MRE Drainage, Exeter - MRB Drainage, Crawley - Willow Pumps, Aylesford - Willow Pumps, Wetherby - ChipsAway, Edwin Avenue - Car Care Centre, Edwin Avenue - Oven Clean, Edwin Avenue - Barking Mad, Edwin Avenue - Azura, Crusader Business Park - Franchise Brands plc, Ashwood Court GREENHOUSE GAS SOURCES INCLUDED IN THE PROCESS: GHG Protocol Category Scope 1: Fuel used in company vehicles, natural gas (boilers), diesel for electricity generation, other fuels Scope 2: Purchased electricity (location-based method) Scope 3: Fuel used for business travel in employee owned or hired vehicles Data Source Companies reported their annual natural gas consumption in pounds which Compare Your Footprint converted, using the average price per kWh in the UK in 2021, into kWh. Companies reported their fuels used in company vehicles either in a spend format or in litres. The average fuel price (Diesel and Unleaded) per litre in 2021 was used to convert the data points given as spend into litres. In 2021 the average price per litre of: - Diesel: 135.04p - Unleaded: 131.4p Litres were converted in kWh using 2021 conversion factors calculated by DEFRA. Companies provided their 2021 annual electricity consumption in kWh. Only one company (Azura) did not provide a kWh and only provided a total spend. To convert the spend into kWh, the average cost per kWh in the UK in 2021 was used. According to the Department for Business, Energy & Industrial Strategy (BEIS) the average cost for standard electricity in the UK in 2021 was 18.9 p/kWh Many of Franchise Brands’ companies utilise leased or employee-owned vehicles for business travel. Expensed mileage in employee-owned vehicles was reported in a spend format rather than by consumption (e.g. litres of fuel or distance). Therefore, to convert the fuel expenses into distance, the standard estimate of 45p per mile was utilised. Once the distance was calculated for employee-owned vehicles, it was converted into kWh using 2021 conversion factors calculated by DEFRAw Companies reported their fuels used in their leased vehicles either in a spend format or in litres. When the data was only provided in a spend format, the average fuel price (Diesel and Unleaded) per litre in 2021 was used to convert the spend into litres. In 2021 the average price per litre of: - Diesel: 135.04p - Unleaded: 131.4p Litres were converted in kWh using 2021 conversion factors calculated by DEFRA. ** Types of GHGs included, as applicable: CO2, N2O, CH4, HFCs, PFCs, SF6, and NF3. The greenhouse gas emissions were calculated using UK government 2021 conversion factors, expressed as tonnes of carbon dioxide equivalent (tCO2e). Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 28 Working Responsibly continued Environmental FRANCHISE BRANDS’ 2021 ENERGY AND GREENHOUSE GAS STATEMENT ENERGY EFFICIENCY ACTIONS Location Energy consumption: (kWh) - Electricity - Gas - Transport fuel - Other fuels Total energy consumption Emissions (tCO2e) Scope 1 Emissions from combustion of gas in buildings Emissions from heating oil Emissions from combustion of fuel for transport purposes Scope 2 Emissions from purchased electricity (location based method*) Scope 1 & 2 2020 2021 Year-on-Year % Change 460,927.1* 133,507.1* 5,045,390.0 39,609.0 5,679,433.2 335,859 189,632 5,952,495 40,199 6,518,185 24.5 9.7 895.7 34.7 9.9 1,138.2 (27.1%) 42.0% 18.0% 1.5% 14.8% 41.6% 2.1% 27.1% Over the financial year 1st January 2021 to 31st December 2021, Franchise Brands has implemented or continued with several energy efficiency measures across all of its companies. These include: Metro Rod: - Installed LED lights with times and sensors throughout the office, therefore they switch off automatically when a space/room is not being utilised. - Switched to a green energy provider. - Utilise video conferencing technology as a substitute for face-to-face meetings to avoid travelling where possible. This not only saves energy and greenhouse emissions, but helps faciilitate flexible working. - Ordered electric charging points for Macclesfield Support Centre and an electric pool car for staff. 107.5 71.3 (33.7%) - Willow Pumps: - In 2021 Willow leased 4 electric vans to replace their diesel vans and bought 3 hybrid company cars to replace their diesel company cars. Installed LED lights with times and sensors throughout the office, therefore they switch off automatically when a space/room is not being utilised. Total Scope 1+2 emissions 1,037.4 1,254.1 20.9% - Utilise video conferencing technology as a substitute for face-to-face meetings to minimise travelling Scope 3 Category 6: Business travel (Emissions from business travel in rental cars or employee vehicles where company is responsible for purchasing the fuel) Emissions from upstream transport and distribution losses and excavation and transport of fuels not included in scope 1 (location-based method**) 118.4 274.1 271.3 378.5 129.1% 38.7% Total emissions for mandatory reporting 1,419.1 1,903.9 33.2% Intensity (tCO2e / £ million EBITDA) EBITDA £m Intensity ratio: tCO2e / £m Methodology Certification and external verification 6.640 215.3 8.474 224.7 27.6% 4.3% GHG Protocol Corporate Accounting and Reporting Standard Calculated and verified as accurate by Green Element Limited and Compare Your Footprint Limited, UK. where possible. B2C: - Electric charging point installed at our Kiddermister Support Centre and electric pool car made availalble to our people. Notes on the Data: * Some figures from Franchise Brand’s 2020 SECR report have been updated. This is owing to the 2020 data being re- calculated to ensure method consistency (e.g. Gas and Electricity). This has resulted in a marginal increase to Franchise Brands overall 2020 footprint (increased from 1404.5 to 1419.1 tCO2e). ** Location based electricity (Scope 2) emissions use the average grid fuel mix in the region or country where the electricity was purchased and consumed. For SECR, location based is mandatory. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 29 Working Responsibly continued Environmental HELPING OUR CUSTOMERS UNDERSTAND THEIR ENVIRONMENTAL OBLIGATIONS TECHNOLOGY AT WORK Our commitment to innovation and technology means we can supply CCTV surveys and mapping services with minimal disruption to sites through the use of a cutting-edge GPS system, providing accuracy up to 2cm. We also work with coordinates, using OSGM15. The data collected is supplied to customers in the form of an in-depth report including schematic drawings, an asset register, images of access points and an interactive Google Maps overlay. Our professional service ultimately empowers our clients to understand their assets and accurately identify any potential risk their drainage system may pose on the environment. DRAIN MAPPING Drainage systems can quickly transport pollutants off site and into the environment, so drain mapping is a vital tool for reducing the risk of environmental damage. Knowing the exact position of pipework and assets safeguards against upsetting any existing drainage systems, prevents pollution and allows for management of flood risk. This is why drain mapping is an essential part of compliance for regulated sites. Our expertise allows us to support site owners in ensuring that they dispose of waste correctly and safely, fulfilling a responsibility to support and protect the local environment. HELPING OUR FRANCHISEES AND EMPLOYEES WORK MORE RESPONSIBLY ENVIRONMENT AND SAFETY To help Metro Rod franchisees give a higher priority of environmental issues in the planning, implementation and monitoring of their activities we launched an Environmental Manual and updated Pollution Prevention Guides. We also run continued training programmes for ChipsAway franchisees in electric and hybrid vehicles. COMMUNITY ENGAGEMENT INITIATIVES During the year we launched new Metro Rod community engagement initiatives, the Walking Bus Sponsorship – “Be bright, be green, be seen” – and Food Cycle initiatives which our franchisees have actively supported. OVERHAUL OF ALL GROUP POLICIES We reviewed and updated all our group policies during the year, not only with regulatory and legal compliance in mind but to ensure they reflected our position as a responsible business. INTRODUCTION OF CHECKED SAFE APP The Checked Safe App that we rolled out to Metro Rod franchisees to help ensure effective vehicle compliance is paperless. FB SUSTAIN To give our people a voice in putting forward their ESG views, feedback and suggestions, and helping drive progress we are in the process of setting up a new group from across all our brands - FB Sustain. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 30 Financial Review UNDERLYING STRENGTH CHRIS DENT Chief Financial Officer “The strength of the deleveraged balance sheet and high level of liquidity puts the Group in a strong position to support a progressive dividend policy. ” INCREASE IN FULL YEAR DIVIDEND 36% Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 31 Financial Review continued SUMMARY STATEMENT OF INCOME Revenue Cost of sales Gross profit 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 expense Non-recurring costs Other gains and losses Tax on adjusting items Statutory profit after tax 2021 £’000 57,690 (35,764) 21,926 (13,452) 8,474 (1,717) (292) 6,465 (1,154) 5,311 (393) (334) (187) 223 (387) 2020 £’000 49,287 (30,307) 18,980 (12,341) 6,640 (1,357) (446) 4,836 (899) 3,937 (393) (205) (706) 151 9 Change £’000 8,403 (5,457) 2,946 (1,112) 1,834 (360) 154 1,629 (255) 1,374 – (129) 520 72 (397) Change % 17% 18% 16% 9% 28% 26% (34%) 34% 28% 35% 4,233 2,793 1,440 52% Overall, consolidated Group revenue has increased by 17% to £57.7m in the period (2020: £49.9m). This has been driven by the increase in demand for the Group’s services following the continued lifting of COVID-19 lockdown restrictions. Gross profit has increased by 16% to £21.9m (2020: £18.9m), reflecting a slight decrease in the gross margin from 39% to 38%. This resulted from the strong growth in revenues at Metro Rod, which has a gross margin of 31%. Overheads increased by only 9%, resulting in a 28% increase in Group EBITDA to a record £8.5m (2020: £6.6m). DIVISIONAL TRADING RESULTS The adjusted EBITDA of the operational business divisions of the Group may be analysed as follows: Statutory revenue Cost of sales Gross profit GM% Admin expenses Divisional EBITDA Group overheads Adjusted EBITDA Metro Rod £’000 36,201 (25,027) 11,174 31% (5,790) 5,385 Willow Pumps £’000 15,061 (9,369) 5,692 38% (4,007) 1,686 B2C £’000 6,428 (1,368) 5,060 79% (2,422) 2,638 Total 2021 £’000 57,690 (35,764) 21,926 38% (12,218) 9,708 (1,234) 8,474 Metro Rod £’000 29,324 (20,326) 8,998 31% (5,276) 3,722 Willow Pumps £’000 14,128 (8,636) 5,492 39% (3,648) 1,844 B2C £’000 5,835 (1,345) 4,490 77% (2,359) 2,131 Total 2020 £’000 49,287 (30,307) 18,980 39% (11,283) 7,697 (1,058) 6,640 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 32 Financial Review continued METRO ROD Metro Rod comprises the franchise activities of Metro Rod and Metro Plumb, the direct labour contract at Peel Ports and Kemac, the London-based plumbing business operated as a DLO. The results of the division may be summarised as follows: The 45% increase in the adjusted EBITDA to £5.4m (2020: £3.7m) has been driven by the increase in system sales and the strong performance by direct labour operations. In addition, the division continues to benefit from some permanent cost savings through the efficiencies developed during lockdowns and the growing benefits resulting from the investment in IT systems. Revenue Cost of sales Gross profit GM% Admin expenses Adjusted EBITDA 2021 £’000 36,201 (25,027) 11,174 31% (5,790) 5,385 2020 £’000 29,324 (20,326) 8,998 31% (5,276) 3,722 Change £’000 6,876 (4,700) 2,176 (514) 1,662 Change % 23% 23% 24% 10% 45% The statutory revenue of Metro Rod does not reflect the underlying system sales generated by the franchisees as national sales are accounted for on a gross basis, as are the sales of Kemac and the direct labour activities, whereas in respect of the local sales generated by franchisees, only the management service fee (“MSF”) revenue is reflected. Therefore, it is re-analysed below to reconcile system sales to gross profit. WILLOW PUMPS Willow Pumps comprises the core DLO pump business and the Metro Rod corporate franchises in Kent & Sussex and Exeter. The results of the division may be summarised as follows: Revenue Cost of sales Gross profit GM% Admin expenses Adjusted EBITDA 2021 £’000 15,061 (9,369) 5,692 38% (4,007) 1,686 2020 £’000 14,128 (8,636) 5,492 39% (3,648) 1,844 Change £’000 934 (733) 201 (1%) (359) (158) Change % 7% 8% 4% 10% (9%) System sales MSF income Effective MSF % Other gross profit Gross profit 2021 £’000 50,361 9,411 18.7% 1,763 11,174 2020 £’000 40,631 7,807 19.2% 1,192 8,998 Change £’000 9,730 1,604 572 2,176 Change % 24% 21% 48% 24% The Willow Pumps core business has two distinct types of revenue: Service revenue and S&I. Service revenue is generated from the reactive and planned maintenance of pumps and drains. S&I revenue is generated from the design, supply and installation of pump stations, which are typically projects that are performed in discrete phases over a number of accounting periods. As a result, revenue is recognised over time based on the proportion of the contract which has been completed in the accounting period. The gross profit generated on S&I projects is lower than Service work due to the significant proportion of the total cost being the supply of the pumps. Overall, system sales at Metro Rod and Metro Plumb increased by 24% to a record £50.4m in the period (2020: £40.6m). Our net MSF income at Metro Rod increased by 21% to £9.4m (2020: £7.8m), which represented an effective MSF of 18.7% (2020: 19.2%). We continue to incentivise Metro Rod’s franchisees to grow their businesses through a series of MSF discount schemes designed to encourage sales growth and investment in a broader range of equipment and people. In line with this strategy, as system sales have grown, especially in tanker and pump work, the effective MSF percentage rate has fallen. Whilst total revenue increased by 7%, the components have performed differently, with Service seeing 33% revenue growth, the corporate franchises growing by 13%, but S&I being 30% lower than last year. In addition, the S&I work performed during the year has been weighted towards the supply element of the work, meaning that the S&I revenue only generated a gross margin of 16% compared to 30% during 2020. This weighting has resulted in the overall gross margin of the business falling to 38%. Other gross profit represents the gross profit from Metro Rod’s DLOs. This profit increased 48% to £1.8m (2020: £1.2m) due to a good performance by Kemac and the contribution from Metro Rod’s centrally managed contract with Peel Ports. By their nature, DLOs have less operational gearing than franchise businesses, as the increase in income needs to be matched by increased labour costs. As a result, there was a 10% increase in administrative expenses when compared with the prior period, as the temporary cost savings achieved during the 2020 Spring lock-down reversed. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 33 Financial Review continued Overall, this meant that whilst adjusted EBITDA increased on the Service work and at the corporate franchises, the reduced gross profit and fixed administrative costs relating to the S&I work weighed heavily on the profitability of this business, resulting in a 9% decrease in the divisional EBITDA to £1.7m (2020: £1.8m). B2C DIVISION The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses. The results of the division may be summarised as follows: Revenue Cost of sales Gross profit GM% Admin expenses Adjusted EBITDA 2021 £’000 6,428 (1,368) 5,060 79% (2,422) 2,638 2020 £’000 5,835 (1,345) 4,490 77% (2,359) 2,131 Change £’000 592 (23) 570 2% (63) 507 Change % 10% 2% 13% 3% 24% The key revenue streams are MSF and Area Sales income. MSF income is mostly made up of fixed monthly fees as this remains the most effective method of generating income from a large number of franchisees with lower individual sales. Area Sales are the fees generated from the sale (or resale) of franchise territories. The B2C division was the most impacted by the 2020 Spring lockdown as the franchisees were unable to trade. To help ensure their survival, the majority of fees charged to the networks were suspended or greatly reduced during this period. During 2021, franchisees were back to paying full monthly fees and, as a result, revenue increased by 10%. The cost base of this business was very strictly controlled particularly when compared with a significant reduction in salary costs in H1 2020 resulting from the furlough scheme. In the current period we have seen the benefit of our decision to close the Barking Mad head office and consolidate all B2C operations in Kidderminster. Overall, the 13% increase in gross profit, together with a stable cost base, resulted in a 24% increase in adjusted EBITDA to £2.6m (2020: £2.1m). Adjusted & statutory profit 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 expense Non-recurring costs Other gains and losses Tax on adjusting items 2021 £’000 8,474 (1,716) (292) 6,465 (1,154) 5,311 (393) (334) (187) 223 (387) 2020 £’000 6,640 (1,357) (446) 4,836 (899) 3,937 (393) (205) (706) 151 9 Change £’000 1,834 (359) 154 1,629 (255) 1,374 – (129) 520 72 (397) Change % 28% 26% (34%) 34% 28% 35% Statutory profit after tax 4,233 2,793 1,440 52% Depreciation and amortisation of software increased 26% to £1.7m (2020: £1.4m) as a result of the increase in the amortisation charge in respect of software development and the purchase of £0.8m of tangible assets to support the Peel Ports contract at Metro Rod. The finance charge has reduced by 34% due to the lower net debt position over the year as bank facilities have been paid back, leaving the Group free of bank debt at the end of the year. The finance charge also includes interest on capitalised leases as required by IRFS 16. During the year the Group had £0.2m of non-recurring charges, which include the professional fees related to the purchase of Azura (£47,000), professional fees related to an aborted acquisition (£67,000), and the write-off of capitalised bank fees following the early repayment of our term loan (£66,000). During 2020 we increased our bad debt provision by £0.5m as we believed it was prudent to anticipate that a number of customers would fail as the various Government support schemes begin to unwind. During the period the level of actual credit losses were £0.3m, with a further £0.2m being provided for within underlying results taking the provision to £0.7m (2020: £0.8m). The other gain of £0.2m (2020: £0.2m) represents the movement in the fair value of the deferred consideration in relation to the acquisition of Willow Pumps which is provided in accordance with IFRS9. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 34 Financial Review continued The tax charge for the period at 27% (2020: 24%) was higher than the statutory rate of 19% due to the revaluation of the deferred tax liability on acquired intangibles resulting from the increase in the future corporation tax rate to 25% in 2023. As a result, the statutory profit after tax increased by 52% to £4.2m (2020: £2.8m). EARNINGS PER SHARE During the year the Group issued 107,139 new Ordinary Shares as part of the purchase consideration for Azura, meaning that the total number of Ordinary Shares at the end of the period was 95,865,609 (31 December 2020: 95,758,470), with the average number of Ordinary Shares being 95,767,863. On 30 April 2020 the Group completed a Placing of 15,555,556 new Ordinary Shares. Although this represented a 20% dilution, the basic weighted average number of Ordinary Shares in issue in 2020 was 90,462,594, resulting in 6% effective dilution in the current period. Adjusted profit after tax / Adjusted EPS Amortisation of acquired intangibles Share-based payment expense Non-recurring costs Other gains and losses Tax on adjusting items 2021 £’000 5,311 (393) (334) (187) 223 (387) Statutory profit after tax / Basic EPS 4,233 EPS p 5.55 (0.41) (0.35) (0.19) 0.23 (0.40) 4.42 2020 £’000 3,937 (393) (205) (706) 151 9 2,793 EPS p 4.35 (0.43) (0.23) (0.78) 0.17 0.01 3.09 As a result, whilst adjusted profit after tax grew by 37% to £5.3m (2020: £3.9m), adjusted earnings per share increased by 27% to 5.55p (2020: 4.35p). Basic earnings per share increased by 43% to 4.42p (2020: 3.09p). FINANCING AND CASH FLOW The strong cash generative nature of the Group’s business has allowed the early full repayment of its term loan. At the year-end, the Group had cash of £9m and an additional £5m unutilised Revolving Credit Facility (“RCF”) giving the Group £14m of cash and available facilities. Overall, the Group continues to be substantially ungeared, being in a net cash position of £6.5m (2020: £4.9m).Other lease debt represents the current value of future operating lease payments, as required to be recognised by IFRS 16. Cash Term loan RCF Loan fee Hire purchase debt Adjusted net cash Other lease debt Net cash 31 Dec 2021 £’000 31 Dec 2020 £’000 9,054 – – – (821) 8,233 (1,713) 6,520 13,203 (5,225) – 96 (1,408) 6,666 (1,729) 4,937 Change £’000 (4,149) 5,225 – (96) 587 1,567 16 1,583 Change % (31%) (100%) – (100%) (42%) 24% 1% 32% The Group generated cash from operating activities of £8.2m (2020: £5.9m) resulting in a cash conversion rate from adjusted EBITDA of 97% (2020: 90%). The cash generated in the period has been partially absorbed by the investment required in plant and machinery needed for the Peel Ports contract and our continued investment in our IT infrastructure to enable our digital journey. DIVIDEND The strength of the deleveraged balance sheet and high level of liquidity puts the Group in a strong position to support a progressive dividend policy. Therefore, the Board is pleased to propose a final dividend of 0.9 pence per share (2020: 0.8 pence per share). This takes the total dividend for the year to 1.5 pence per share (2020: 1.1 pence per share), an increase of 36%, which is covered 3.0 times by statutory profit after tax, and 3.7 times by adjusted profit after tax. Subject to shareholder approval at the AGM on 26 April 2022, the final dividend will be paid on 27 May 2022 to shareholders on the register at the close of business on 13 May 2022. CHRIS DENT Chief Financial Officer Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 35 Risk Management A PROACTIVE APPROACH TO RISK MANAGEMENT We proactively consider the effect risks could have on our business model and strategy. At Franchise Brands, the Board is ultimately responsible for risk management. The Board meets regularly and reviews the process for identifying, assessing and mitigating significant risks faced by the Group, and the potential impact of these on our ability to meet our strategic objectives. Our approach is to embed risk management principles within our businesses and the key implementation tool we use is the risk management framework we have developed for significant risks. This incorporates a top down approach, which includes determining our risk appetite and identifying our strategic risks and a bottom-up process to identify individual risks. Our risk appetite is influenced by the nature of the risk and how it might affect the business. IDENTIFYING RISKS We identify risks and potential risks by reviewing the key performance indicators and key success factors for each business and the contribution they make to delivering the strategic and financial objectives. Our risk management framework has identified potential strategic, operational, financial and compliance risks. - Strategic risks include those relating to franchisees, customers, demand for the Group’s services and our ability to convert profits into cash and liquidity. - Operational risks include changes in legislation, dependence on key personnel, health and safety, and information technology. - Financial risks include credit, liquidity, interest rate and exchange rate risk. - Compliance risks include changes in regulation. KEY ROLES AND RESPONSIBILITIES IMPLEMENTATION AND COMPLIANCE RESPONSIBILITY BOARD SENIOR MANAGEMENT AUDIT COMMITTEE Reviews the process for identifying, assessing and mitigating significant risks. Sets risk appetite and profile. Regularly reviews top down and bottom up risks from both a business unit and functional perspective. Monitors the quality of accounting and internal controls. Challenges the formulation and implementation of strategies and controls. Assess impact on strategic and financial objectives. Ensures the Group’s financial performance is properly measured and reported on. Ongoing monitoring and development. Discuss and agree mitigation strategies and include in Board reporting. The Audit Committee meets at least twice a year and has unrestricted access to the Group’s auditors. MONITORING AND REPORTING RESPONSIBILITY Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 36 Risk Management continued PRINCIPAL RISKS PRINCIPAL RISKS ANALYSING RISKS In evaluating risks, we review the likelihood and potential impact of the risk, the ability of the business to withstand it and our tolerance to both take on and bear the risk. We carry out structured reviews of risk and traffic light each risk in order to identify those areas of particular concern. MANAGING RISK Once risks have been appropriately identified and evaluated, we formulate strategies and identify actions to mitigate and contain them. These are then reported on and reviewed as part of the ongoing monitoring process which also includes the identification of new potential risks. PRINCIPAL RISKS 1. Ability to grow our businesses 2. Ability to recruit and retain quality franchisees 3. Ability to attract and retain customers, particularly in B2B businesses 4. Ability to convert profits to cash and liquidity 5. Impact of changing legislation and regulation 6. Dependence on key personnel 7. Health and Safety, particularly in B2B businesses RISK HEAT MAP To help visualise our potential risks we have plotted them on the heat map below. High Low STRATEGIC OPERATIONAL 3 1 2 9 4 6 7 8 8. Technology and key system dependence 5 9. Ability to make earnings-enhancing acquisitions FINANCIAL COMPLIANCE Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 37 Board of Directors STEPHEN HEMSLEY Executive Chairman CHRIS DENT Chief Financial Officer PETER MOLLOY Managing Director, Metro Rod and Metro Plumb Stephen co-founded Franchise Brands in 2008 and has led the development of the business, including the IPO and external growth. He is a Chartered Accountant by training and spent nearly ten years with 3i as Investment Director. He then joined Domino’s Pizza as Finance Director progressing to CEO , Executive Chairman and Non-executive Chairman. During this time, he took Domino’s from private ownership to a market capitalisation of almost £1.5bn. He retired from Domino’s in 2019 after 21 years with the business to focus exclusively on Franchise Brands. 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 was appointed as Chief Financial Officer of the Company on 17 July 2017. On 7 December, Chris informed the Board of his intention to leave the Company following the announcement of the Group’s final results for the year ending 31 December 2021, in order to take up the role of Chief Financial Officer at UP Global Sourcing Holdings PLC. Peter has over 35 years of management and commercial experience. Peter joined Metro Rod in 2003 and was promoted to Commercial Director in 2005 and to Managing Director in 2017. 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 a Director of the Company on 21 March 2018. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 38 Board of Directors continued TIM HARRIS Managing Director, B2C Division JULIA CHOUDHURY Corporate Development Director COLIN REES 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 39 Board of Directors continued COMMITTEE MEMBERSHIP Audit Committee AIM Rules Compliance Committee Remuneration Committee Denotes Committee Chair NIGEL WRAY Non-executive Director DAVID POUTNEY Independent Non-executive Director ROB BELLHOUSE Independent Non-executive Director MARK PETERS Company Secretary 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 wideranging number of AIM quoted companies, as well as a number of private companies, including Saracens Rugby Club. 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 45 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 25 years as a corporate broker, David has been involved in the listings of over 40 companies and advised many through extended periods of growth, most recently Belluscura PLC where he is also a non-executive director. He was appointed as a Director of the Company on 15 July 2016. Rob is an experienced Company Secretary with 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 ICS A Company Secretary of the Year. He is currently Deputy Company Secretary at DeLaRue plc. He was appointed as a Director of the Company on 15 July 2016. 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 40 Senior Leadership Team IAN LAWRENCE Managing Director, Willow Pumps RACHEL STEWART Managing Director, Barking Mad ROBIN AULD Group Marketing Director ANDREW MALLOWS Group Commercial Director Ian founded Willow Pumps in 1992. Over the past 28 years he has built it into a leading pump design, installation and servicing business with a below-ground and aboveground capability. Franchise Brands acquired Willow Pumps in 2019 to help expand Metro Rod and Metro Plumb’s range of services. Rachel was appointed as Managing Director of Barking Mad in 2019. She was previously a Business Development Consultant with the company for almost 4 years. Rachel comes from a commercial background, and previously Commercial Director at Trinity Mirror Plc and held a Board position at Clear Channel Outdoor. Robin oversees consumer, trade and franchise recruitment marketing activity ensuring continual evolution of strategy and best practice in execution. He joined Franchise Brands in 2010 and has a successful track record of marketing success over 25 years. He is best known for his work at Domino’s Pizza as Sales & Marketing Director. Andrew has spent his career in the consumer sector and has particular experience in franchising. Andrew joined Franchise Brands in 2016 and works as Commercial Director for all the Group’s brands. He was Finance Director of Domino’s Pizza during the period 2001 to 2004, before being appointed Business Development Director. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 41 Governance Structure OUR GOVERNANCE FRAMEWORK OUR BOARD Key Reponsibilities - Setting strategy and budgets, oversight of the Group’s businesses, performance and governance. - Establishment and oversight of risk management and internal controls. - Supporting and challenging management to deliver long-term sustainable success. - Promoting our guiding principles and ensuring they underpin our strategy. - Generating value for all stakeholders. BOARD COMMITTEES Key Reponsibilities - Monitor the quality of internal controls and ensuring that the financial performance of the Group is properly measured and reported on. - Review the performance of the Executive Directors and make recommendations to the Board on matters relating to their remuneration and terms of employment. - Make recommendations to the Board on proposals for the granting of share awards and equity incentives. - Ensure that the Company has in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules for Companies. AUDIT COMMITTEE Key Reponsibilities - Monitors the quality of internal controls and ensuring that the financial performance of the Group is properly measured and reported on. - Maintains an appropriate relationship with the external auditors and monitors the internal controls. REMUNERATION COMMITTEE Key Reponsibilities - Ensures remuneration policy and practices of the Group support the strategy and reward fairly and responsibly having regard to statutory and regulatory requirements and ESG. - Reviews the performance of the Executive Directors and make recommendations to the Board on matters relating to their remuneration and terms of employment. Makes recommendations to the Board on proposals for the granting of share awards. AIM COMPLIANCE COMMITTEE Key Reponsibilities - Ensures that the Company has in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules for Companies. - Makes recommendations to the Board and proactively liaises with the Company’s nominated adviser on compliance with the AIM Rules for Companies. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 42 Board activities in 2021 Q1 Q2 Q3 Q4 Establishment of an inaugural 3 year strategic target to underpin our ambitions. Strategic review of technology and decision to invest £1.5m in the Accelerate Programme. Strategic reviews of our B2B and B2C divisions. Acquisition of Azura Group Ltd. Review of strategic, operational, financial and compliance risks. Review of votes against AGM special resolutions 15 and 16 and engagement with shareholders. Focus on acquisition opportunity and decision not to proceed. Review of 2022 strategy and budget. Strategic review of marketing to build sustainable long term brands. Inaugural strategic review of HR including diversity, inclusion and succession planning. Engagement with our largest shareholders on ESG. Review of strategic, operational, financial and compliance risks. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 43 Chairman’s Introduction to Governance SUPPORTING SHAREHOLDER VALUE “We believe that good corporate governance is vital in supporting our Company’s growth strategy and in turn its long-term success. As an AIM-quoted company, the Board has chosen to follow the QCA Corporate Governance 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.” STEPHEN HEMSLEY Executive Chairman Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 44 Corporate Governance Set out below is how we currently comply with the key principles set out in the QCA code. QCA PRINCIPLE COMPLIANT EXPLANATION FURTHER READING 1 ESTABLISH A STRATEGY AND BUSINESS MODEL WHICH PROMOTES LONG-TERM VALUE FOR SHAREHOLDERS. Focused on building market-leading businesses using primarily a franchise model. Focus is on established brands which can benefit from our shared support services and Group expertise and resources. See pages 8 to 22. See www.franchisebrands.co.uk 2 SEEK TO UNDERSTAND AND MEET SHAREHOLDER NEEDS AND EXPECTATIONS. The Executive Chairman, Chief Financial Officer and Corporate Development Director meet regularly with institutional shareholders and provide feedback. Retail shareholders benefit from presentations and website updates. See pages 24 and 42. See www.franchisebrands.co.uk 3 TAKE INTO ACCOUNT WIDER STAKEHOLDER AND SOCIAL RESPONSIBILITIES AND THEIR IMPLICATIONS FOR LONG-TERM SUCCESS. The Board has a clear understanding of the factors important to all its stakeholders and maintains strong relationships, solicits feedback and fosters responsible working practices. See page 45. See www.franchisebrands.co.uk 4 EMBED EFFECTIVE RISK MANAGEMENT, CONSIDERING BOTH OPPORTUNITIES AND THREATS, THROUGHOUT THE ORGANISATION. The Board reviews its risk management framework biannually to detail the key risks, their potential impact and mitigation and embeds risk management principles to drive proactive management. See pages 35 and 36. See www.franchisebrands.co.uk 5 MAINTAIN THE BOARD AS A WELL-FUNCTIONING, BALANCED TEAM LED BY THE CHAIR. The Board comprises six Executive Directors, two of which are the Managing Directors of the two largest businesses, and three Non-executive Directors of which two are considered to be independent. See pages 35, 37 to 39. See www.franchisebrands.co.uk 6 ENSURE THAT BETWEEN THEM THE DIRECTORS HAVE THE NECESSARY UP-TO-DATE EXPERIENCE, SKILLS AND CAPABILITIES. Directors are drawn from a range of backgrounds, skills and experiences. New appointments will be considered against objective, merit-based criteria and with due regard for the benefits of diversity. See pages 37 to 39. See www.franchisebrands.co.uk 7 EVALUATE BOARD PERFORMANCE BASED ON CLEAR AND RELEVANT OBJECTIVES, SEEKING CONTINUOUS IMPROVEMENT. 8 PROMOTE A CORPORATE CULTURE THAT IS BASED ON ETHICAL VALUES AND BEHAVIOURS. A performance self-evaluation was undertaken in December 2020 led by an independent Non-executive Director, the results of which were implemented by the Board in 2021. The review will be repeated bi-annually. See page 42. See www.franchisebrands.co.uk Franchise Brands has five well established guiding principles that inform the way we work with each other, support our franchisees and serve our customers and communities. See pages 22, 23, 25 and 26. See www.franchisebrands.co.uk 9 MAINTAIN GOVERNANCE STRUCTURES AND PROCESSES THAT ARE FIT FOR PURPOSE AND SUPPORT GOOD DECISION- MAKING BY THE BOARD. Franchise Brands has properly constituted Audit, Remuneration and AIM Compliance committees of the Board with formally delegated duties and responsibilities, comprised of independent Directors. See pages 35 to 39. See www.franchisebrands.co.uk 10 COMMUNICATE HOW THE COMPANY IS GOVERNED AND IS PERFORMING BY MAINTAINING A DIALOGUE WITH SHAREHOLDERS AND OTHER RELEVANT STAKEHOLDERS. Regular shareholder communications on performance via interim and annual financial reports, trading updates issued via RNS, investor presentations, retail digital platforms including Proactive Investors and shareholder meetings. See pages 4 to 7 and 30 to 34. See www.franchisebrands.co.uk Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 45 Corporate Governance continued Set out below is our commitment to Section 172. In making decisions, the Company’s Directors are cognisant of all their legal duties, including their duty under Section 172(1) of the Companies Act 2006 to act in the way that is most likely to promote the success of the Company for the benefit of its members as a whole and to have regard (among other matters) to the factors set out in Section 172(1)(a) to (f) of the Companies Act 2006. BOARD DECISION-MAKING Examples of some of the principal decisions taken by the Board during the year and an explanation of which factors the Directors had regard to when reaching such decisions, including those set out in Section 172(1)(a) to (f) of the Companies Act 2006, are set out in the table below. KEY OF FACTORS CONSIDERED: Financial impact Long-term impact Reputation Employees Acting fairly between members Fostering business relationships BOARD DECISIONS KEY DIRECTORS’ CONSIDERATION OF FACTORS IN ACCORDANCE WITH S.172(1) £1.5M IT ACCELERATE PROGRAMME ACQUISITION OF AZURA GROUP A key part of the Group’s strategy for developing all our brands, particularly Metro Rod and Metro Plumb, is the automation of as many of our processes and interactions as possible. The Board decided to increase the investment the Group is making in the digital transformation of our business by an additional £1.5m over the next three years. This additional investment will accelerate development and will lead to increased sales, overhead savings and operational efficiencies that will enhance run-rate EBITDA. Azura has played an important in the development of our “Vision” works management system at Metro Rod and Metro Plumb, and the acquisition consolidates and secures our software development and key IP. We also see an opportunity to develop and grow Azura to enhance sales to other franchise businesses both in the UK and overseas. LIMIT OF 10% ON DISAPPLICATION OF PRE-EMPTION RIGHTS In view of the shareholder reaction to Special Resolutions 15 and 16 at the 2020 AGM in relation to the disapplication of pre-emption rights, having first consulted with shareholders the Board agreed to limit its powers to allot equity securities or to allow Treasury shares, to 10% of the current share capital unless and until otherwise decided. RECOMMENDATION OF FINAL DIVIDEND In discussing the recommendation of the 2020 final dividend, the Board was mindful of its S.172 responsibilities, and discussed whether or not there might be a potential issue in paying the dividend where furlough grants had been accepted in 2020 and concluded that this would not be the case. EARLY TERM LOAN REPAYMENT It was decided to repay early the term loan originally taken out for the acquisition of Metro Rod and which was due to expire in April 2023. The strong cash generation of the Group resulted in a significant cash cushion and while this was beneficial during the Covid crisis and gave us flexibility to finance acquisitions, these benefits became smaller as the loan neared the end of its term. The Board agreed to retain the £5m unutilised RCF to retain some flexibility. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 46 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. In addition, we 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, which means 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. Variable pay – 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 generally 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 exception to this is for matching schemes, where director are required to purchase an equal number of shares to those being granted and are awarded nil paid shares if performance targets are met. 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 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 corporate performance are directly linked. 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 2021 was as follows: Director Stephen Hemsley Chris Dent Julia Choudhury Tim Harris Peter Molloy Colin Rees Nigel Wray David Poutney Rob Bellhouse Total Salary or fees (£) 140,000 112,500 111,250 125,533 Benefits in kind (£) Pension contributions (£) 2020 comparison (£) Total (£) 6,750 8,700 3,750 8,850 — 146,750 110,000 3,375 124,575 114,994 — 115,000 100,000 3,753 138,136 135,854 135,625 19,453 4,069 159,146 151,077 110,522 3,750 3,316 117,587 99,164 29,375 29,375 29,375 — — — — — — 29,375 27,500 29,375 27,500 29,375 27,500 823,555 51,253 14,513 889,320 793,589 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 has never operated 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 47 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 Exercise price (pence) Performance condition 2020 Number of shares Granted Exercised Lapsed 2021 Number of shares Changes in the year 49.5 69 88 0.5 69 88 69 88 67 49.5 69 88 0.5 49.5 69 88 0.5 EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth EPS growth 303,030 21,970 34,091 17,045 71,970 34,091 71,970 34,091 150,000 153,030 106,000 34,091 28,409 303,030 71,970 34,091 39,773 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 303,030 21,970 34,091 17,045 71,970 34,091 71,970 34,091 150,000 153,030 106,000 34,091 28,409 303,030 71,970 34,091 39,773 Date of grant 12-Dec-17 11-Dec-18 15-Sept-20 15-Sept-20 11-Dec-18 15-Sept-20 11-Dec-18 15-Sept-20 11-Apr-17 12-Dec-17 11-Dec-18 15-Sept-20 15-Sept-20 12-Dec-17 11-Dec-18 15-Sept-20 15-Sept-20 Exercisable from 12-Dec-20 11-Dec-21 15-Sept-23 15-Sept-23 11-Dec-21 15-Sept-23 11-Dec-21 15-Sept-23 11-Apr-20 12-Dec-20 11-Dec-21 15-Sept-23 15-Sept-23 12-Dec-20 11-Dec-21 15-Sept-23 15-Sept-23 Exercisable to 12-Dec-27 11-Dec-28 15-Sept-30 15-Sept-30 11-Dec-28 15-Sept-30 11-Dec-28 15-Sept-30 11-Apr-27 12-Dec-27 11-Dec-28 15-Sept-30 15-Sept-30 12-Dec-27 11-Dec-28 15-Sept-30 15-Sept-30 During 2021 the closing mid-market quote for the Company’s shares ranged from a low of 83.5p to a high of 151.5p. No Director exercised an option over the Company’s shares during the year. COMPANY SHARE OPTION PLAN During 2020 the Company established a CSOP for employees and Directors, which will enable them to acquire new Ordinary Shares of 0.5 pence each in the Company subject to certain Company performance criteria being met. Similar to the Company’s existing share option schemes, employees and directors are only able to exercise their options under the CSOP as follows: 1) 20% after reported adjusted EPS achieves compound annual growth of 8% over each of the next three financial years; 2) 100% after reported adjusted EPS achieves compound annual growth of 15% over each of the next three financial years; and 3) between 20% to 100% of their options on a sliding scale basis on EPS growth between the targets in 1) and 2) above. In respect of the Directors and certain members of the senior leadership team, this plan is a matching plan, requiring these participants to purchase shares in the Company at the prevailing market price before the grant is effective. MANAGEMENT SHARE OPTION SCHEME In addition to the above, the Company has an unapproved “nil cost” Management Scheme, which will enable them to acquire new Ordinary Shares at their nominal value of 0.5 pence each based on the number of Ordinary Shares they have purchased in the Company. The number of matching shares options granted to each Director under the Management Scheme has been determined as being equal to the number of Ordinary Shares they have purchased in the Company, at the then prevailing share price. Options granted under the Management Scheme have the same EPS conditions of exercise as the CSOP as set out above. SCOPE OF THIS REPORT The Directors’ biographies on pages 37 to 39, the discussion of corporate governance matters on pages 43 to 45 and the Remuneration Report on pages 46 and 47 are hereby incorporated by reference to form part of this Directors’ Report. As permitted under the Companies Act 2006, 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 48 Directors’ Report PRINCIPAL ACTIVITIES The principal activity of the Group is building market-leading businesses in selected customer segments, primarily via 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. In addition, Chris Dent, Julia Choudhury, Tim Harris, Peter Molloy and Colin Rees hold options over shares of the Company through their participation in the Company’s LTIP, which are detailed in the Remuneration Report on pages 46 and 47. RESEARCH AND DEVELOPMENT The Group continues to invest in the development of its IT platforms, particularly at Metro Rod. In the current year, the Group claimed £nil of qualifying R&D expenditure (2020: £371,655). DIRECTORS Names, biographical details and appointment dates of the Directors of the Company at the date of this report are shown on pages 37 to 39. 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 Dent2 Julia Choudhury3 Tim Harris4 Peter Molloy5 Colin Rees Nigel Wray6 David Poutney7 Rob Bellhouse At 31 December 2021 At 31 December 2020 22,179,844 61,602 1,546,701 1,385,365 71,956 403,009 22,366,303 3,696,495 111,260 22,156,644 60,603 1,544,671 1,385,365 71,965 403,009 22,366,303 3,696,495 111,260 Notes: 1. Included in the holding of Stephen Hemsley are 1,626,875 Ordinary Shares held by his wife, 8,946,989 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 1,613,292 Ordinary Shares held by his Self-Invested Personal Pension (“SIPP”). Included in the holding of Chris Dent are 61,602 Ordinary Shares held by his SIPP. Included in the holding of Julia Choudhury are 384,286 Ordinary Shares held jointly with her husband, 423,170 Ordinary Shares held by her SIPP and 37,554 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 74,156 Ordinary Shares held by his SIPP. Included in the holding of Peter Molloy are 38,095 Ordinary Shares held by his SIPP. Included in the holding of Nigel Wray are 1,815,763 Ordinary Shares held by Vidacos Nominees Limited, acting as nominee for RBC Trustees (Jersey) Limited as trustee of Nigel Wray’s family trust. Also included are 11,631,782 Ordinary Shares and 8,085,248 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 2,800,109 Ordinary Shares held by his SIPP and an interest in 761,386 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. 6. 7. 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 Slater Investments Limited Canaccord Genuity Group Inc Gresham House Asset Management Limited Current Number of Ordinary Shares 6,870,505 6,728,524 5,479,878 Percentage of existing share capital 7.2% 7.0% 5.7% GOING CONCERN The Group has generated significant profits both during the years covered by these financial statements, and in previous years. The Group has sufficient current financial assets to meet its current liabilities as they fall due. The Group has budgeted its anticipated financial performance over the balance of 2022, and throughout the whole of 2023. These financial forecasts include detailed income statement and cash flow budgets. These forecasts have been subject to review by the Board of Directors. These forecasts have been subject to sensitivity analysis and reverse stress testing. On 16 February the Group announced a recommended all-share offer for Filta Group Holdings plc. The Group has modelled the cash flow of the Group on both the scenarios of the offer being accepted, and the offer being declined. Given the fact that the Group and the Company continues to be profitable, continues to have net assets and has access to cash and funding, the Directors have made appropriate enquiries and consider that the Company 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 49 Directors’ Report continued 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. 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. 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. BRANCHES There are no branches of the Company outside the UK. DIVIDENDS A final dividend of 0.8 pence per share was paid on 28 May 2021 in respect of the 2020 financial year. An interim dividend of 0.60 pence per share in respect of the 2021 financial year was paid on 17 September 2021. The Directors are recommending a final dividend of 0.9 pence per share which, subject to shareholders’ approval at the AGM, will be paid on 27 May 2022 to shareholders on the register at the close of business on 13 May 2022. 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 2021. 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. 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 84. 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 48; • 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. POLITICAL AND CHARITABLE DONATIONS No political or charitable donations were made during the period. 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 2021 Annual General Meeting of the Company will be held on 26 April 2022, 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. CHRIS DENT Chief Financial Officer 2 March 2022 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 50 Directors’ Responsibilities Statement 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 accounting standards in conformity with the requirements of the Companies Act 2006. 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 2 March 2022 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 51 Independent auditor’s report to the members of Franchise Brands plc OPINION ON THE FINANCIAL STATEMENTS 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 2021 and of the Group’s profit for the year then ended; • • • the Group financial statements have been properly prepared in accordance with UK adopted international accounting standards; the Parent Company financial statements have been properly prepared in accordance with UK adopted international accounting standards 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. We have audited the financial statements of Franchise Brands plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2021 which comprise the consolidated statement of comprehensive income, the consolidated and company statements of financial position, the consolidated and company statements of cash flows, the consolidated and company statements 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 their preparation is applicable law and UK adopted international accounting standards and, as regards the Parent Company financial statements, as applied in accordance with the provisions 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. INDEPENDENCE We remain 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. CONCLUSIONS RELATING TO GOING CONCERN In auditing the financial statements, we have concluded that the Directors use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the Group and the Parent Company’s ability to continue to adopt the going concern basis of accounting included: • reviewing and challenging the going concern paper prepared by the Directors by verifying the numerical inputs such as opening cash, accuracy of calculations and obtaining evidence to support the Directors’ estimates and assumptions; • a comparison of the historical forecasts prepared by the Directors to the actual results in the financial period being audited in order to assess the accuracy of the Directors forecasting ability along with an assessment of the reasonableness of the assumptions used to substantiate the potential impact of Covid-19; • reviewing the forecasts prepared by the Directors, challenging the assumptions used within these models (such as growth in income, inflationary increases). This challenge included review of external market data and trends as well as corroborating known information such as current inflation rates. We also compared these key assumptions to actual post year end results to determine the reasonability thereof; • We have challenged the assumptions within the stress test scenarios and performed sensitivity analysis to understand the impact of reductions in revenue, EBITDA and profit, and any delays in receipts of cash from customers on the available headroom on all financing facilities, cash and loan covenants; and • confirming the accuracy of the directors forward looking covenant calculations on the banking facilities based on the forecast figures. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and the Parent Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 52 Independent auditor’s report continued to the members of Franchise Brands plc OVERVIEW Coverage 94% (2020: 99%) of Group profit before tax 94% (2020:99%) of Group revenue 98% (2020: 99%) of Group total assets Key audit matters Impairment of goodwill and intangible assets Recoverability of trade receivables 2021 2020 – In the prior year, the risk in the recoverability of trade receivables was heightened as a result of the impact of Covid-19 on the customers of the Group. However, due to the lifting of restrictions and the recovery of wider consumer activity / developments in the current year and the resulting impact on the Group’s trade receivables, this is no longer considered to be a key audit matter. Materiality Group financial statements as a whole £280,000 (2020: £180,000) based on 5% (2020: 5%) of profit before tax. AN OVERVIEW OF THE SCOPE OF OUR AUDIT 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. The Group operates solely in the United Kingdom through a number of legal entities, which form reporting components. Significant components were defined as those reporting components contributing more than 15% towards Group profit before tax, or if judgementally considered to be significant by nature. The financial information relating to the Parent Company and all other significant components of the Group were subject to full scope audits by the Group audit team. The Group audit team also performed full scope statutory audits on the trading non-significant components. 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) that 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. Key audit matter Impairment of goodwill and intangible assets Refer to the accounting policies in note 2 and Note 13 The Group has goodwill and indefinite life intangible assets, which require 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 Unit (“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. How the scope of our audit addressed the key audit matter We challenged management’s impairment analysis performed for each CGU and considered the reasonableness of management’s key judgements. Our work included; • We assessed whether the CGU as presented by management was reasonable and in line with the definition in the applicable financial reporting standards. • Challenging the future trading projections by reference to current performance and the accuracy of prior year forecasting; • Determining whether the forecasts adopted in the impairment review were approved by the Board and consistent with those used in the going concern assessment; • Using our internal valuations experts to determine the appropriateness of the discount rate applied and challenging the discount rate applied using a range of sensitivities; • Checking the impairment analysis for logical and arithmetic accuracy and that it has been undertaken in accordance with the requirements of the applicable financial reporting standards; • Verifying the reasonableness of the budgeted long term growth rate by comparing to historical performance; • 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 found management’s key assumptions underlying the impairment analysis to be appropriate. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 53 Independent auditor’s report continued to the members of Franchise Brands plc OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. COMPONENT MATERIALITY We set materiality for each component of the Group between £70,000 and £182,000 (2020: £70,000 and £145,000) dependent on the size and our assessment of the risk of material misstatement of that component. In the audit of each component, we further applied performance materiality levels of 75% (2020:75%) of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated. 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. REPORTING THRESHOLD We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £8,400 (2020: £3,600). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows: Group financial statements Parent company financial statements 2021 £ 2020 £ 2021 £ Materiality 280,000 180,000 112,000 2020 £ 110,000 Basis for determining materiality 5% of Profit Before Tax 40% (2020: 60%) of group materiality Rationale for the benchmark applied Profit Before Tax is one of the principal considerations for users of the financial statements in assessing the financial performance of the business. Capped at 40% (2020: 60%) of Group materiality given the assessment of the components aggregation risk. 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. 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 course of 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 this gives rise to a material misstatement in the financial statements themselves. 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. Performance materiality 210,000 135,000 84,000 82,500 We have nothing to report in this regard. Basis for determining performance materiality 75% of materiality based on the expected low level of misstatements and the relatively low number of accounts that are subject to management estimation. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 54 Independent auditor’s report continued to the members of Franchise Brands plc OTHER COMPANIES ACT 2006 REPORTING Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. 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. Strategic report and Directors’ report Matters on which we are required to report by exception 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. In the light of the knowledge and understanding of the Group and 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. 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. EXTENT TO WHICH THE AUDIT WAS CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: We obtained an understanding of the legal and regulatory framework applicable to the Group and Parent Company and the sector in which it operates. We considered the significant laws and regulations to be the applicable accounting framework, the UK Companies Act 2006, Value Added Tax Act 1994, Income Tax Act 2007 and those that relate to the payment of employees. We assessed the susceptibility of the financial statements to material misstatement, including fraud and evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries, management bias in accounting estimates and improper revenue recognition associated with year-end cut-off. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 55 Independent auditor’s report continued to the members of Franchise Brands plc Our audit procedures included: • Agreement of the financial statement disclosures to underlying supporting documentation; • Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to goodwill and intangible asset impairment (refer to the key audit matters section above), right of use assets and valuation and completeness of accruals and other provisions; • We have assessed the revenue recognised for a defined period around the year end and post year end through selection of revenue items and assessing if these have been reflected in the correct period in line with when the performance obligation was met. • Identifying and testing journal entries to supporting documentation, in particular any journal entries posted with specific unusual narrative, manual journals to revenue and cash, and review of journals posted to least used accounts; • We have made enquiries of management, those charged with governance and those responsible for legal and compliance procedures regarding known or suspected instances of non-compliance with laws and regulation and fraud. We corroborated our enquiries through our review of board minutes for the year and other evidence gathered during the course of the audit; and • We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it. A further description of our responsibilities is available 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 02 March 2021 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 56 Consolidated Statement of Comprehensive Income For the year ended 31 December 2021 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 Non-recurring items 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 65 to 84 form part of these financial statements. Note 6 7,14,15 7,13 7,13 7,9 5,7 20 10 11 12 12 2021 £’000 57,690 (35,764) 21,926 8,474 (1,377) (339) (393) (334) (187) 2020 £’000 49,287 (28,362) 20,925 6,640 (1,149) (209) (393) (205) (707) (16,082) (16,948) 5,844 223 (292) 5,775 (1,542) 4,233 3,977 151 (446) 3,682 (889) 2,793 4.42 4.30 3.09 3.03 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 57 Consolidated Statement of Financial Position At 31 December 2021 Assets Non-current assets Intangible assets Property, plant and equipment Right-of-use assets Trade and other receivables 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 Contingent consideration 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 Company Share capital Share premium Share-based payment reserve Merger reserve Treasury reserve EBT reserve Retained earnings Total equity attributable to equity holders Note 2021 £’000 2020 £’000 The consolidated financial statements of Franchise Brands plc (Company number: 10281033) on pages 56 to 84 were approved and authorised for issue by the Board of Directors on 2 March 2022 and were signed on its behalf by: CHRIS DENT Director 13 14 15 17 16 17 18 19 21 20 19 21 20 22 24 24 24 24 24 24 35,278 2,609 2,723 182 40,792 908 16,514 9,054 26,476 67,268 12,144 — 754 213 345 13,456 — 1,780 2,567 2,139 6,487 19,943 47,325 480 36,966 789 1,390 — (504) 8,204 47,325 34,754 1,274 3,377 155 39,560 712 15,072 13,203 28,987 68,547 10,808 1,908 897 445 320 14,378 3,200 2,240 3,136 1,752 10,328 24,706 43,841 479 36,817 455 1,390 — (149) 4,849 43,841 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 58 Company Statement of Financial Position At 31 December 2021 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 Contingent consideration 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 Company Share capital Share premium Share-based payment reserve Merger reserve Treasury reserve EBT reserve Retained earnings Note 23 17 18 19 20 19 20 24 24 24 24 24 24 2021 £’000 2020 £’000 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 2021 of £1.19m (2020: £2.97m). The Company financial statements of Franchise Brands plc (Company number: 10281033) on pages 56 to 84 were approved and authorised for issue by the Board of Directors on 2 March 2022 and were signed on its behalf by: CHRIS DENT Director 42,153 42,153 859 3,958 4,817 41,049 41,049 2,242 8,997 11,239 46,970 52,288 511 — 344 855 — 2,568 2,568 3,423 292 1,908 320 2,520 3,200 3,136 6,336 8,856 43,547 43,432 480 36,966 789 1,270 — (504) 4,546 479 36,817 455 1,270 — (149) 4,560 Total equity attributable to equity holders 43,547 43,432 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 59 Consolidated Statement of Cash Flows For the year ended 31 December 2021 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 Non-recurring costs Share-based payment expense Other gains and losses Finance expense Tax expense Operating cash flow before movements in working capital (Increase)/decrease in trade and other receivables (Increase) in inventories Increase/(decrease) in trade and other payables Cash generated from operations Corporation taxes paid Net cash generated from operating activities Cash flows from investing activities Purchases of property, plant and equipment Purchase of software Acquisition of subsidiaries including costs, net of cash acquired (including deferred consideration) Net cash used in investing activities Cash flows from financing activities Bank loans – repaid Bank loans – received Other loans – made Capital element of lease liability repaid Interest paid – bank and other loan Interest paid – leases Proceed from issue of shares Funds Supplied to Employee Benefit Trust Dividends paid Note 2021 £’000 2020 £’000 4,233 2,793 14 15 13 13 9 20 10 11 17 16 18 14 13 5 26 499 879 339 393 187 334 (223) 292 1,542 8,474 (1,392) (195) 1,311 8,198 (924) 7,273 (1,723) (433) (861) (3,017) (5,309) — 2 (1,106) (107) (189) — (355) (1,341) 327 822 209 393 707 205 (151) 446 889 6,640 1,345 (119) (1,878) 5,988 (745) 5,243 (460) (319) — (779) (4,200) — (163) (1,100) (257) (189) 13,696 (214) (516) Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 60 Consolidated Statement of Cash Flows continued For the year ended 31 December 2021 Net cash generated from financing activities Net increase 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 Group At 1 January 2020 Financing cash flows Other cash flows Other changes At 31 December 2020 Financing cash flows Other cash flows Other changes At 31 December 2021 Note 2021 £’000 (8,404) (4,148) 13,203 9,054 2020 £’000 7,057 11,521 1,682 13,203 Term Loan £’000 Revolving credit facility £’000 Loan fees £’000 Lease liabilities £’000 Total liabilities from financing activities £’000 (6,401) 1,200 — (24) (5,225) 5,309 — (84) — (3,002) 3,000 — 2 — — — — — 129 — — (13) 117 — — (117) — (3,487) (12,761) 1,258 — (908) (3,137) 1,295 — (692) (2,534) 5,458 — (943) (8247) 6,604 — (893) (2534) Cash £’000 1,682 — 11,521 — 13,203 — (4,149) — 9,054 Total net cash/ (net debt) £’000 (11,079) 5,458 11,521 (943) 4,957 6,604 (4,149) (893) 6,520 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 61 Company Statement of Cash Flows For the year ended 31 December 2021 Cash flows from operating activities Profit for the year Adjustments for: Non-recurring costs Other gains and losses Finance expenses Tax expense Share-based payment expense Operating cash flow before movements in working capital Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Cash generated from operations Corporation taxes paid Net cash generated from operating activities Cash flows from investing activities Acquisition of subsidiaries including costs (including deferred consideration) 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 Funds supplied to Employee Benefit Trust Dividends paid Net cash flows (used)/generated by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Note 2021 £’000 2020 £’000 1,199 2,973 17 18 26 181 84 (223) 132 (107) 1,267 2,459 561 4,287 (924) 3,362 (1,290) (1,290) (5,309) — (107) — (355) (1,341) (7,112) (5,039) 8,997 3,958 — (151) 242 (89) 53 3,027 (1,998) (394) 635 (172) 463 — — (4,200) — (257) 13,696 (214) (516) 8,509 8,972 25 8,997 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 62 Company Statement of Cash Flows continued For the year ended 31 December 2021 RECONCILIATION OF CASH FLOW TO THE COMPANY NET DEBT POSITION Group At 1 January 2020 Financing cash flows Other cash flows Other changes At 1 January 2021 Financing cash flows Other cash flows Other changes At 31 December 2021 Term Loan £’000 (6,401) 1,200 — (24) (5,225) 5,309 — (84) — Revolving credit facility £’000 (3,002) 3,000 — 2 — — — — — Loan fees £’000 129 — — (13) 117 — — (117) — Total liabilities from financing activities £’000 (9,275) 4,200 — (33) (5,108) 5,309 — (201) — Cash £’000 25 — 8,972 — 8,997 — (5,039) — 3,958 Total net cash/ (net debt) £’000 (9,250) 4,200 8,972 (33) 3,889 5,309 (5,039) (201) 3,958 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 63 Consolidated Statement of Changes in Equity For the year ended 31 December 2021 Group At 1 January 2020 Profit for the year and total comprehensive income Contributions by and distributions to owners Shares issued Dividend paid Treasury shares Contributions to Employee Benefit Trust Share-based payment At 1 January 2021 Profit for the year and total comprehensive income Contributions by and distributions to owners Shares issued Dividend paid Contributions to Employee Benefit Trust Share-based payment At 31 December 2021 Share capital £’000 398 — 79 2 — — — 479 — 1 — — — Share premium account £’000 22,806 — 13,623 389 — — — 36,817 — 149 — — — Share-based payment reserve £’000 316 — (66) — — — 205 455 — — — — 334 Merger reserve £’000 1,390 — — — — — — 1,390 — — — — — 480 36,966 789 1,390 Treasury shares £’000 EBT reserve £’000 Retained earnings £’000 2,970 2,793 66 (906) (9) (65) — 4,849 4,233 — (1,341) — 462 Total £’000 27,859 2,793 13,779 (515) — (279) 205 43,841 4,233 — 150 (1,341) (355) 796 — — 65 — — (214) — (149) — — — (355) — (504) 8,204 47,325 (21) — 12 — 9 — — — — — — — — — Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 64 Company Statement of Changes in Equity For the year ended 31 December 2021 Company At 1 January 2020 Profit for the year and total comprehensive income Contributions by and distributions to owners Shares issued Dividend paid Treasury shares Contributions to Employee Benefit Trust Share-based payment At 1 January 2021 Profit for the year and total comprehensive income Contributions by and distributions to owners Shares issued Dividend paid Contributions to Employee Benefit Trust Share-based payment At 31 December 2021 Share capital £’000 398 — 79 2 — — — 479 — 1 — — — Share premium account £’000 22,806 — 13,623 389 — — — 36,817 — 149 — — — Share-based payment reserve £’000 316 — (66) — — — 205 455 — — — — 334 Merger reserve £’000 1,270 — — — — — — 1,270 — — — — — 480 36,966 789 1,270 Treasury shares £’000 EBT reserve £’000 (21) — 12 — 9 — — — — — — — — — — — 65 — — (214) — (149) — — — (355) — (504) Retained earnings £’000 2,502 2,972 66 (906) (9) (65) — 4,560 1,199 — (1,341) — 127 4,545 Total £’000 27,271 2,972 13,779 (515) — (279) 205 43,432 1,199 150 (1,341) (355) 461 43,547 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 65 Notes forming part of the Financial Statements For the year ended 31 December 2021 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 accounting standards in conformity with the requirements of Companies Act 2006 as they apply to the financial statements of the Group for the year ended 31 December 2021. 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 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. The business is organised along the lines of our B2B and B2C brands. Within the B2B division there are 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 determined that we have three different operating segments: • B2B- Franchisor (a.k.a. Metro Rod), which is made up of Metro Rod and Metro Plumb ; • B2B- DLO (a.k.a. Willow Pumps), which is made up of Willow Pumps, and other B2B DLOs; and • B2C, which is made up of ChipsAway, Ovenclean and Barking Mad. On 26 November the group purchased Azura Group Limited. As its operations are primarily concerned with Metro Rod, its result for the one month of the year has been included within Metro Rod. 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 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 66 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 1 SIGNIFICANT ACCOUNTING POLICIES CONTINUED Corporate brand names, trademarks, 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 Pumps this will be the supply and install of a pump. • 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 Group’s 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 67 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 1 SIGNIFICANT ACCOUNTING POLICIES CONTINUED INVENTORIES Inventories are stated at the lower of cost and net realisable valye. At the end of each reporting period inventories are assessed for impaiment, 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 are 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. 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. 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 & fittings Computer equipment – – – – – – over period of lease over period of lease 10%-25% straight line 10% straight line 33% straight line 33% straight line CORPORATION TAX Current tax assets and liabilities are measured at the amount expected to be received or paid to the taxation authorities. Corporation 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 corporation 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. LEASES Where a contract meets IFRS 16’s definition of a lease, lease agreements 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 68 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 1 SIGNIFICANT ACCOUNTING POLICIES CONTINUED EMPLOYEE BENEFIT TRUST In order to facilitate its employee share option scheme, on 1 July 2021 the Group established an onshore discretionary employee benefit trust (the “EBT”), which is expected to conduct market purchases of Ordinary Shares to satisfy potential future option exercises by employees (but not Directors). When the Group funds the EBT the cash value is debited to a separate EBT reserve of the Parent Company. The EBT’s assets are consolidated into the Group. 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. GOVERNMENT GRANTS REVENUE RECOGNITION Government Grants are set against the relevant cost. In the current year the Group made use of two different Government Grants: R&D tax credits and the Coronavirus Job Retention Scheme. 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, share- based payments and non-recurring items. 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 31. 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”). 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 The 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. 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 2021 £178,000 (2020: £206,000) had been recognised as a debtor, and £168,000 (2020: £151,000) 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 incentive schemes designed to increase system sales will reduce the headline rate down from the contractual rate of 22.5%. The franchise network has two types of system sales: National and Local accounts. In the case of National accounts Metro Rod bears the credit risk, whereas for Local 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 at least 77.5% to leave a gross margin of up to 22.5%. In relation to Local account sales the Directors believe that we are acting as an agent, and we only recognise our 22.5% management fee as revenue. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 69 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS CONTINUED 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 contractual 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 £6.3m (2020: £6.0m) of supply and install contracts in progress, on which £4.1m (2020: £3.7m) of revenue has been taken. 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 other gains and losses. 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 Note 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. 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 70 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED 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”) 2021 £’000 9,054 16,395 (10,951) (2,534) 2,913 2021 £’000 3,958 — (472) — 2,913 2020 £’000 13,203 14,499 (9,642) (8,245) 3,456 2020 £’000 8,997 1,998 (249) (5,108) 3,456 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. Sensitivity income 2021 £’000 — — Sensitivity equity 2021 £’000 — — Sensitivity income 2020 £’000 (13) 13 Sensitivity equity 2020 £’000 (13) 13 0.25% increase in interest rates 0.25% decrease in interest rates 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 71 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED 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 Trade and other payables 2021 £’000 Loans and borrowings 2021 £’000 — 10,951 — — — 10,951 — 786 558 1,044 382 2,770 Trade and other payables 2021 £’000 Loans and borrowings 2021 £’000 — 472 — — — 472 — — — — — — FVTPL 2021 £’000 — 586 1,050 2,116 — 3,752 FVTPL 2021 £’000 — 586 1,050 2,116 — 3,752 Total 2021 £’000 — 12,323 1,608 3,160 382 17,473 Total 2021 £’000 — 1,058 1,050 2,116 — 4,224 Trade and other payables 2020 £’000 Loans and borrowings 2020 £’000 — 9,662 — — — 9,662 — 3,045 2,729 2,377 448 8,599 Trade and other payables 2020 £’000 Loans and borrowings 2020 £’000 — 249 — — — 249 — 2,099 2,035 1,204 — 5,338 FVTPL 2020 £’000 — 319 284 4,050 — 4,653 FVTPL 2020 £’000 — 319 284 4,050 — 4,653 Total 2020 £’000 — 13,026 3,013 6,427 448 22,914 Total 2020 £’000 — 2,667 2,319 5,254 — 10,240 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. The business is organised along the lines of our B2B and B2C brands. Within the B2B division there are 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 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 other B2B DLOs; and • B2C, which is made up of ChipsAway, Ovenclean and Barking Mad. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 72 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 4 OPERATING SEGMENTS CONTINUED Other operations include central administration costs and non-trading companies. The CODM uses 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. 2020 Continuing operations Revenue Gross profit Adjusted EBITDA 2021 Continuing operations Revenue Gross profit Adjusted EBITDA Depreciation & amortisation of software Amortisation of acquired intangibles Share based payment expense Non-recurring costs Finance expense Other gains and losses Profit before tax Tax expense Profit after tax B2B- Franchisor £’000 B2B- DLO £’000 B2C £’000 Other £’000 Total £’000 36,201 11,174 15,061 5,692 6,428 5,060 — — 57,690 21,926 Depreciation & amortisation of software Amortisation of acquired intangibles Share based payment expense Non-recurring costs Finance expense Other gains and losses 5,385 1,686 2,638 (1,234) 8,474 Profit before tax (645) — (117) — (16) 4,606 (670) 3,936 (909) — (101) — (134) 541 (100) 441 (162) — (32) — (10) — (393) (84) (187) (132) 223 (1,716) (393) (334) (187) (292) 223 2,434 (1,807) 5,775 (359) (412) (1,542) 2,075 (2,219) 4,233 Tax expense Profit after tax 5 BUSINESS COMBINATION ACQUISITION OF AZURA GROUP LIMITED B2B- Franchisor £’000 B2B- DLO £’000 B2C £’000 Other £’000 Total £’000 29,324 8,998 3,722 (445) — (92) (599) (34) — 2,552 (372) 2,180 14,128 7,437 1,844 5,835 4,490 — — 49,287 20,925 2,131 (1,058) 6,640 (743) — (45) — (159) — 897 (129) 768 (168) — (15) (108) (11) — — (393) (53) — (242) 151 (1,358) (393) (205) (707) (446) 151 1,829 (1,596) 3,682 (328) 1,501 (62) (889) (1,656) 2,793 On 26 November 2021, the Group acquired the entire issued share capital of Azura Group Limited and its subsidiaries, (together, “ Azura”) for gross consideration of £1.1m, and net consideration of £0.8m (with £0.3m of net cash purchased). Cash Consideration shares Fair value of deferred consideration Fair value of consideration £’000 850 150 98 1,098 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 73 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 5 BUSINESS COMBINATION CONTINUED The consideration paid was made up of £850,000 (gross of non-trading net cash of £324,000) in cash and £150,000 through the issue of 107,139 new Ordinary Shares of 0.5 p each in the Company at 140 pence per share. In addition £98,000 was payable on the basis of a completion accounts mechanism. 6 REVENUE Acquisition costs relating to this transaction amounted to £48,000 and have been disclosed within the consolidated statement of comprehensive income. Details of the fair value of the identifiable assets and liabilities acquired, purchase consideration and goodwill were as follows: Management service fees Sale of franchise territories Product sales Direct labour income National advertising funds 2021 £’000 36,738 1,504 771 17,680 997 57,690 2020 £’000 30,592 1,607 758 15,547 783 49,287 Intangible assets Property, plant and equipment Right of use assets Inventories Trade and other receivables Cash Trade and other payables Loans and borrowings Deferred tax liability Total fair value of the identifiable assets and liabilities acquired Fair value of consideration Goodwill Book value £’000 Adjustments £’000 Fair value £’000 — 10 — — 29 428 (80) (108) (1) 278 — — 65 — — — — (68) — (3) — 10 65 — 29 428 (80) (176) (1) 275 1,098 824 An adjustment has been made to align with the requirements of IFRS 16. 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 2021 Group revenue would have been £58.3m and Group profit before tax would have been £5.9m. The table shows revenue from contracts disaggregated into major classes of revenue and reconciled to the Group revenue reported. All revenue was generated in the UK. Contract assets At 1 January Change in the measurement of progress At 31 December 2021 £’000 377 (324) 53 2020 £’000 589 (212) 377 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 IFRS 15. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 74 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 7 OPERATING PROFIT 8 STAFF COSTS Operating profit is stated after charging/(crediting): Depreciation Amortisation Share-based payment expense Receipts from Government Job Retention Scheme (“furlough”) 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 No non-audit services were provided on a contingent fee basis. 2021 £’000 1,377 732 334 (58) 12 90 20 23 10 2020 £’000 1,149 602 205 (653) 15 80 25 — 26 Administration Sales Operations Directors The following costs have been drawn to the attention of the users of the accounts due to their nature and materiality within the accounts. DIRECTORS’ REMUNERATION Acquisition related-costs Early repayment of term loan Expected credit loss provision (see note 17) Reorganisation expense 2021 £’000 114 73 — — 187 2020 £’000 — — 526 181 707 Directors’ emoluments Share-based payment expense Wages and salaries Social security costs Defined contribution pension cost Share-based payment expense 2021 £’000 10,481 1,021 215 334 12,051 The average monthly number of persons (including Directors) employed by the Group was: 2020 £’000 9,626 935 212 205 10,978 171 19 83 9 282 2020 £’000 794 25 819 157 19 108 9 293 2021 £’000 889 19 908 During the year, the Group incurred professional costs of £114,000 in relation to the acquisitions. In addition, the Group wrote-off £73k of capitalised loan fees following the early re-payment of the term loan. In 2020 the Group took a £526,000 charge in respect of potential credit losses and a charge of £181,000 in relation to the closure of the Barking Mad office. The highest paid Director’s remuneration was £159,000 (2020: £151,000). The Board of Directors are considered to be the key management personnel. Their cost to the Group is £991,000 (2020: £887,000), after including employer’s National Insurance. The Company had two employees (other than the Directors) incurring staff costs of £218,000 (2020: £201,000). Directors’ emoluments include £nil (2020: £7,000) paid to companies controlled by Directors (see Note 25). Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 75 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 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; if the compound annual growth rate is above 15%, then all of these options will vest; between 8% and 15% then a proportion of these options will vest on a straight-line basis. Currently 201 (2020: 243) 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 was £334,000 (2020: £205,000). This all arises on equity-settled share-based payment transactions. BLACK-SCHOLES OPTION PRICING MODEL Closing share price, £ Exercise price, £ Risk-free interest rate Expected life of option (years) Volatility Dividend yield Outstanding at the beginning of the period Granted during the period Lapsed during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2021 5,714,302 — (164,273) (330,653) 5,219,376 2,305,801 Weighted average exercise price 70p — 83p 52p 71p 59p 2020 4,501,317 1,807,955 (178,349) (416,621) 5,714,302 1,621,215 Weighted average exercise price 10 FINANCE EXPENSE 64p 81p 76p 39p 70p 51p Interest element on lease agreements Loan interest 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- 88p (2020: 33p-88p), and the weighted average remaining contractual life was 7.4 years (2020: 8.3 years). In order to facilitate the Programme, the Company established an onshore discretionary employee benefit trust (the “EBT”), which conducts market purchases of Ordinary Shares to satisfy potential future option exercises by employees (but not directors). The Black-Scholes pricing model is applied on the granting dates of options., as shown in the table below. 14 September 2020 14 September 2020 0.88 0.005 0.13% 6.5 50.8% 1% 2021 £’000 159 133 292 0.88 0.88 0.13% 6.5 50.8% 1% 2020 £’000 189 257 446 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 76 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 11 CORPORATION 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 Income not taxable in determining taxable profits Effect of Capital allowances Effect of change in deferred tax rate Adjustment for prior period Total tax expense Effective tax rate 2021 £’000 796 (103) 849 1,542 1,097 (30) (120) 621 (29) 1,542 27% 2020 £’000 685 (4) 208 889 700 (82) 69 206 (4) 889 24% During the current year, the Finance Act 2020, which was substantively enacted in June 2021, increased the rate of corporation tax from 19% to 25% from April 2023. Therefore, the future rate of UK corporation tax of 25% has been used 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 Company by the weighted average number of Ordinary Shares outstanding during the year. Basic earnings per share Diluted earnings per share Adjusted earnings per share Adjusted diluted earnings per share Diluted earnings per share are calculated by dividing the profit attributable to Ordinary equity holders of the Parent Company 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 Company Non-recurring costs (Note 5,7) 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 Company Basic weighted average number of shares Dilutive effect of share options Diluted weighted average number of shares 2021 £’000 4,233 187 393 (223) 334 387 5,311 2020 £’000 2,793 707 393 (151) 205 (9) 3,937 Number Number 95,767,863 2,600,637 90,462,594 1,649,029 98,368,500 92,111,623 Pence 4.42 4.30 5.55 5.40 Pence 3.09 3.03 4.35 4.27 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 77 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 13 INTANGIBLE ASSETS Brands, trademarks & other intangibles £’000 Customer relationships £’000 Software £’000 Total £’000 10,081 — 10,081 — 10,081 (1,791) — — (1,791) — — (1,791) 8,290 8,290 8,290 3,022 — 3,022 — 3,022 (632) — (393) (1,025) — (393) (1,418) 1,604 1,995 2,390 1,232 318 1,550 430 1,980 (157) (16) (209) (382) — (339) (721) 1,259 1,168 1,076 37,636 318 37,954 1,253 39,208 (2,580) (16) (602) (3,198) — (732) (3,930) 35,278 34,754 35,057 Goodwill £’000 23,301 — 23,301 824 24,125 — — — — — — — 24,125 23,301 23,301 Cost At 1 January 2020 Additions At 31 December 2020 Additions At 31 December 2021 Amortisation At 1 January 2020 Impairment Charge for year At 31 December 2020 Impairment Charge for year At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 At 1 January 2020 CARRYING AMOUNT OF ASSETS WITH INDEFINITE USEFUL LIVES Metro Rod Willow Pumps B2C Azura Goodwill £’000 18,174 3,812 1,315 824 Indefinite life intangibles £’000 4,750 2,777 763 — 2021 £’000 22,924 6,589 2,077 824 Goodwill £’000 18,174 3,812 1,315 — Indefinite life intangibles £’000 4,750 2,777 763 — 2020 £’000 22,924 6,589 2,077 — 24,125 8,290 32,415 23,301 8,290 31,591 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 CGU. In the current year a rate of 11.1% (2020: 10.6%) 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 10%. For our B2C brands franchisee recruitment and churn is consistent with historical averages, with the revenue growth being driven by the net new franchisees being introduced to the networks. The operating margins are based on the current operational margins, 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 CGUs carrying amount to exceed its recoverable amount. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 78 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 14 PROPERTY, PLANT AND EQUIPMENT 15 RIGHT OF USE ASSETS Cost At 1 January 2020 Reclassified (to)/from ROU Additions Disposals At 31 December 2020 Reclassified (to)/from ROU Additions on Acquisition Additions Disposals Leasehold improvements £’000 Fixtures and fittings £’000 Computer equipment £’000 Motor vehicles £’000 Plant and equipment £’000 428 — 16 (113) 331 — — 15 — 188 — 9 (12) 185 — — 11 — 385 (65) 70 — 390 39 10 70 — 449 221 275 (82) 863 270 — 1,471 (123) 675 (107) 90 (8) 650 106 — 181 (8) Total £’000 2,125 49 459 (215) 2,418 415 10 1,748 (131) At 31 December 2021 346 196 509 2,481 929 4,460 Depreciation At 1 January 2020 Reclassified (to)/from ROU Charge for year Disposals At 31 December 2020 Reclassified (to)/from ROU Charge for year Disposals At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 At 1 January 2020 (249) — (28) 114 (163) — (30) — (151) — (16) 8 (159) — (17) — (233) 19 (56) 2 (268) (32) (61) — (51) (199) (104) 82 (272) (222) (239) 103 (199) 32 (122) 8 (883) (148) (327) 214 (63) (151) 6 (317) (499) 109 (193) (177) (362) (630) (491) (1,851) 153 168 179 19 26 37 147 122 152 1,851 591 398 438 368 476 2,609 1,274 1,242 Cost At 1 January 2020 Reclassified (to)/from PPE Additions Disposals At 31 December 2020 Reclassified (to)/from PPE Additions on acquisition Additions Disposals At 31 December 2021 Depreciation At 1 January 2020 Reclassified (to)/from PPE Charge for year Disposals Reclassified (to)/from PPE Accumulation at acquisition Charge for year Disposals At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 At 1 January 2020 (282) (1,144) At 31 December 2020 Land and buildings £’000 Motor vehicles £’000 Plant and equipment £’000 2,517 — — (111) 3,118 (221) 379 (272) 2,406 3,004 — 104 199 — (270) — 204 (486) 2,709 2,453 (890) — (340) 111 (1,119) — (39) (329) — (1,227) 199 (447) 213 (1,262) 222 — (472) 239 (1,486) (1,272) 1,223 1,287 1,627 1,181 1,743 1,891 Total £’000 5,667 (49) 630 (383) 5,865 (415) 104 603 (604) 5,553 (2,129) 148 (832) 324 32 172 251 — 455 (145) — 200 (118) 391 (12) (51) (45) — (108) (2,488) 95 — (77) 17 (73) 318 347 20 317 (39) (879) 256 (2,830) 2,723 3,377 3,538 The Company has no fixed assets at 31 December 2021 or 31 December 2020. “ROU” assets are those categorised as Right of Use. Please see Note 15. “PPE” assets are those categorised as Property, Plant & Equipment. Please see Note 14. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 79 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 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 2021 £’000 879 159 149 — — — 2021 £’000 908 2020 £’000 832 189 92 — — — 2020 £’000 712 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 2021 or 31 December 2020 within the income statement of the Group £6.9m of inventories were recognised as an expense within the year (2020: £6.1m). 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. The differing segmental risks to which the Group is exposed in respect of the customer base have been considered. 2021 £’000 Gross 12,109 1,189 1,819 386 15,503 No provision Low risk Medium risk High risk Total 2021 % 2021 £’000 2021 £’000 Provision Net — 12,109 991 1,639 103 (198) (180) (283) 0% 17% 10% 73% 4% 2020 £’000 Gross 5,956 5,366 2,431 168 (661) 14,842 13,920 2020 % 2020 £’000 Provision 2020 £’000 Net 0% 7% 12% 69% 6% — 5,956 4,977 2,128 52 (389) (303) (116) (807) 13,113 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. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 80 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 17 TRADE AND OTHER RECEIVABLES CONTINUED Group Non-current other receivables 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 Total trade and other receivables Credit loss provision: Brought forward Additions on acquisition Provision for the year Utilised Carried forward 2021 £’000 182 15,503 (661) 1,371 16,213 53 248 16,514 16,696 2021 £’000 (807) — (141) 287 (661) 2020 £’000 155 13,920 (807) 1,231 14,344 377 351 15,072 15,227 2020 £’000 (406) — (617) 216 (807) 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 Prepayments Corporation tax Total current trade and other receivables 2021 £’000 2020 £’000 9,434 8,009 1,335 787 292 210 2,548 — 11 32 239 85 530 1,400 729 326 335 2,394 16 18 11 69 41 574 15,503 13,920 2021 £’000 — 10 849 859 2020 £’000 1,998 2 242 2,242 Company amounts owed by Group undertakings are interest free and due on demand. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 81 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 18 TRADE AND OTHER PAYABLES 19 LOANS AND BORROWINGS 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 2021 £’000 4,372 5,622 957 1,193 12,144 84 280 8 39 100 511 2020 £’000 4,870 4,209 583 1,146 10,808 20 229 — 43 — 292 Carrying values approximate to fair value. Included within other creditors is an amount of £162,000 (2020: £91,000) which represents the net payable in relation to the National Advertising Funds. Group and Company Current Revolving credit facility Term loan Amortised loan fees Total current loans and borrowings Non-current Term loan 2021 £’000 — — — — — 2020 £’000 — 2,025 (117) 1,908 3,200 The strong cash generative nature of the Group’s business has allowed the early full repayment of its term loan. At the year end, the Group had cash of £9.0m and an unutlised £5m RCF, which runs until April 2024. The bank facilities 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 of the liability. At the year end, £0.6m (2020: £0.7m) had been lent through this scheme. There are no expected credit losses to recognise in respect of the asset financing scheme. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 82 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 20 CONTINGENT CONSIDERATION 21 LEASE LIABILITIES Group and Company Contingent deferred consideration 2021 £’000 2,913 2020 £’000 3,456 Under IFRS 13 Fair Value, the fair value of the contingent consideration in a business combination falls as a Level 3 item in terms of the fair value hierarchy, as the inputs for calculating the fair value are unobservable. The initial deferred consideration was established at £3.58m at the time of the acquisition. During the current year this has been decreased to £2.91m based on the current long-term forecasts produced by management, and the payment of £320,000 which was made during the year. The change in value is a gain of £223,000 (2020: gain of £151,000) and has been taken to the income statement as an ‘Other Gain or Loss’. Group Current Non-current (between 1 and 5 years) Total lease liabilities At 1 January 2020 Additions Interest expense Lease payments At 31 December 2020 Additions on Acquisition Additions Interest expense Lease payments At 31 December 2021 The Company has no lease liabilities. 2021 £’000 754 1,780 2,534 Plant and equipment £’000 94 252 6 (48) 304 — 200 17 (211) 310 2020 £’000 897 2,240 3,137 Total £’000 3,487 595 189 (1,134) 3,137 68 583 152 (1,406) 2,534 Land & Buildings £’000 1,665 — 44 (378) 1,330 68 199 41 (367) 1,273 Motor vehicles £’000 1,728 343 140 (708) 1,503 — 184 93 (829) 951 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 83 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 22 DEFERRED TAX LIABILITY Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 25% (2020: 17%). The subsidiaries of the Company, all of which are 100% owned, which have been included in the consolidated financial statements, are as follows: Group At 1 January 2020 Credit/(charge) in the year At 31 December 2020 Acquired in the year Recognised through the statement of changes in equity Credit/(charge) in the year At 31 December 2021 Intangibles £’000 Accelerated allowances £’000 Provisions £’000 Share-based payment £’000 (1,804) (150) (1,955) — — (519) (2,474) 186 (74) 112 (1) — (425) (314) 13 (10) 3 — — — 3 59 26 88 — 463 95 646 23 SUBSIDIARIES The fixed asset investments held by the Company are as follows: Cost At 1 January 2020 Additions in year At 31 December 2020 Additions in year At 31 December 2021 Name Principal activity Metro Rod Limited ChipsAway International Limited Oven Clean Domestic Limited My HandymanVan Limited Barking Mad Limited Willow Pumps Limited MRE Drainage Limited MRB Drainage Limited Azura Group Limited WPL Group Holdings Limited Oven Clean (Ontario) Limited Kemac Services Limited Metro Plumb Limtied FB Holdings Limited DentsAway Limited Edwin Investments Limited Willow Drainage Limited Azura Design Studio Limited Azura Business Solutions 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 Provider of IT solutions to franchise businesses Intermediate holding company Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant 2021 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2020 % 100 100 100 100 100 100 100 100 — 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. Total £’000 (1,544) (208) (1,752) (1) 463 (849) (2,139) £’000 41,049 — 41,049 1,104 42,153 Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 84 Notes forming part of the Financial Statements continued For the year ended 31 December 2021 24 SHARE CAPITAL AND OTHER RESERVES Allotted, called up and fully paid At 1 January Placing Scrip dividend Acquisition of Azura Group Limited Exercise of share options At 31 December 2021 £’000 479 — — 1 — 480 2020 £’000 398 78 2 — 1 479 2021 No. of shares 2020 No. of shares 95,758,470 — — 107,139 — 79,513,787 15,555,556 388,199 — 300,928 95,865,609 95,758,470 Share capital comprises the nominal value of the Company’s Ordinary Shares of 0.5 pence each. During the year the Group issued 107,139 as part of the consideration for the acquisition of Azura group Limited. Share premium: The share premium reserve is the premium paid on the Company’s 0.5 pence Ordinary Shares. 25 RELATED PARTY TRANSACTIONS The following are payments to entities controlled by related parties of the Company. Mark Peters (Miserden Ltd) Nigel Wray (Brendon Street Investments Limited) Company Secretary fee Director’s fee Related party transactions 2021 £’000 6 — 6 2020 £’000 12 7 19 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 (2020: £nil). 26 DIVIDENDS 2021 £’000 766 575 1,341 2020 £’000 619 287 906 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. Final 2020 dividend of 0.80p per Ordinary Share paid and declared (2020: Final 2019 dividend of 0.65p) Interim dividend of 0.60p per Ordinary Share paid and declared (2020: 0.30p) 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 nil shares (2020: nil shares) in Treasury for the purpose of the future settlement of equity-settled share-based compensation. EBT reserve: This represents the amount that the Company paid for its own shares held in the EBT. During the year, the EBT purchased 394,268 Ordinary Shares (2020: 264,848 Ordinary Shares) at an average price of 140 pence per share (2020: 96 pence per share). 330,653 Ordinary Shares (2020: 109,223 Ordinary Shares) have been used to satisfy the exercise of options. Accordingly, at the year end the EBT held 219,240 Ordinary Shares (2020: 155,625 Ordinary Shares) which represents 0.23% of the Company’s current issued share capital. Movements on these reserves are set out in the consolidated statement of changes in equity. A final dividend of 0.90 pence per share is proposed. Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 85 Five Year Financial Summary (Unaudited) For the year ended 31 December 2021 Five year financial summary Statutory revenue Adjusted EBITDA Depreciation & Amortisation of software Finance expense Adjusted profit before tax Tax expense Adjusted profit after tax Amortisation of acquired intangibles Other gains & losses Share-based payment Non-recurring items Tax on adjusting items Statutory profit Basic EPS Adjusted basic EPS Dividend 2021 £’000 2020 £’000 57,690 49,940 8,474 (1,716) (292) 6,465 (1,154) 5,311 (393) 223 (334) (187) (387) 4,233 4.42p 5.55p 1.50p 6,640 (1,357) (446) 4,836 (899) 3,937 (393) 151 (205) (707) 9 2,793 3.09p 4.35p 1.10p 2019 £’000 44,013 5,182 (755) (357) 4,069 (687) 3,382 (260) (26) (238) (270) 121 2,710 3.48p 4.34p 0.95p 2018 Restated £’000 35,470 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 2,972 (349) (312) 2,311 (426) 1,886 (156) — (58) (2,194) 383 (140) (0.20p) 2.71p 0.50p Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 86 Company Information Governance Financial Statements DIRECTORS AND 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 Executive Chairman Chief Financial Officer Managing Director, Metro Rod and Metro Plumb Managing Director, B2C Corporate Development Director Chief Information Officer Non-executive Director Non-executive Director Non-executive Director Company Secretary LEGAL ADVISOR Gateley Plc One Eleven Edmund Street Birmingham B3 2HJ FINANCIAL PUBLIC RELATIONS ADVISERS MHP 6 Agar Street London WC2N 4HN REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS Ashwood Court Springwood Close Tytherington Business Park Macclesfield SK10 2XF NOMINATED ADVISER AND JOINT BROKER Allenby Capital Limited 5 St. Helen’s Place London EC3A 6AB REGISTRARS SLC Registrars P.O. Box 5222 Lancing BN99 9FG BANKERS HSBC Bank plc 8 Canada Square London E14 5HQ JOINT BROKER Dowgate Capital Limited 15 Fetter Lane London EC4A 1BW AUDITOR BDO LLP 3 Hardman Street Manchester M3 3AT Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 87 Notes Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 88 Notes Financial StatementsStrategic ReportGovernance Franchise Brands plc Annual Report and Accounts 2021 89 Printed on FSC® certified paper to the EMAS standard and Environmental Management System ISO 14001. Contributing photographers: Ben Wood, Island Images Kris Clarke Julia Choudhury Sarah Stoten Freddie Anscombe Financial StatementsStrategic ReportGovernance
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