Principal risks and uncertainties
The Board has determined the most significant risks to achieving the business objectives, including those that would threaten its business model, future performance, solvency or liquidity. The details below summarise these principal risks and how they are managed or mitigated. The risks listed do not comprise all those associated with the Group and are not set out in any order of priority. There could be additional risks and uncertainties, which are not presently known to management or currently deemed to be less material, which may also have an adverse effect on the business.
There is no certainty that the Group will continue to expand its share of the residential property market. The Group derives its main source of income from its MSF chargeable at between 10% and 12% of franchise income. Network revenue depends upon market conditions, including rents remaining at or increasing from current levels, and upon landlords being willing to pay commission to lettings agents in the upper quartile of rates charged for such services. Our forecast growth relies on the continued commercial success of our franchisees in a competitive residential lettings market, growing their business in excess of the underlying market growth.
- The risks are mitigated by the Board regularly monitoring the revenue from the MSF and the Group management accounts, and taking the appropriate action when variances are identified.
- Given that some of the risk arises due to extraneous factors, there may be limits to the level of direct action that can be taken.
- The Board prioritises the work of the business development mentors who work closely with franchisees to target and address how they grow their business and respond to market conditions.
The ability of the Group to attract new franchisees with the appropriate expertise and skills, in available and suitable locations, cannot be guaranteed. Given the prevailing market conditions, the Group may experience difficulties in finding appropriate franchisees and failure to do so would have a detrimental effect upon trading performance.
- The Board continually monitors the performance of the recruitment team and is focused on identifying innovative ways of attracting successful new franchise owners.
The Group’s reputation, in terms of the service it and its franchisees provide, the way in which it and its franchisees conduct their business, and the financial results which they achieve are central to the Group’s future success. Failure by the franchisees to meet the expectations of their landlords and tenants may have a material impact on the reputation of the brand.
- The franchisees join subject to a rigorous three-week training programme and subsequent monitoring and support from a dedicated business development mentor.
- The Group also offers ongoing training courses to ensure continuing professional development.
The Group needs to continue to identify suitable acquisition targets for its franchisees through its research programme and to be able to support the franchisee to fund the acquisition through both bank lending and Belvoir financial assistance. The competitive process in the marketplace might increase the acquisition price and the tight lending criteria of major banks might limit resources available to our network.
- The acquisitions programme has been extended to include all new brands within the Group.
- The Board monitors its acquisitions programme to target a return on investment in excess of 25%. Belvoir saw increased acquisition activity in 2016 and has a strong pipeline of potential acquisitions for 2017.
The recent tax changes on interest relief against buy-to-let mortgages and higher stamp duty on second homes have cooled BTL landlord activity in the market. Furthermore, the introduction of a ban on tenant fees in 2018 following a year of consultation has led to uncertainty for both existing and potential new franchise owners.
The Board is focused on supporting the network in expanding their service offering:
- Property sales still represent a viable new revenue stream for our many lettings-based franchise owners.
- A drive to engage with our franchisees on the upsale possibilities in the financial services sector including the commission on insurances, conveyancing and mortgages.
- Local acquisitions to expand their lettings portfolios.