Risk management

As with all businesses, we face a wide range of risks and uncertainties on a daily basis.

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 table opposite summarises 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.

Going concern statement

The Group’s business model has proved to be a robust and successful model for over 23 years. The Group’s corporate strategy has been clearly set out to investors since flotation in 2012 and has resulted in Belvoir becoming the largest franchise property group within the UK. We continue to open new agencies across the UK and to support growth by assisting our franchisees to make local portfolio acquisitions and by making corporate-level acquisitions of other property franchise networks and property services-related companies. The Group has demonstrated strong growth from a mixture of like-for-like and acquisition-based growth as evidenced by increasing revenue and profitability over many years.

At the year end, the Group had cash at bank of £1.4m and a bank term loan of £6.5m. On 28 March 2017, the Group entered into new banking arrangements with HSBC which included a £12.0m loan facility and a £5.0m accordion facility to replace the existing lending by NatWest and to provide further access to funds to support Group growth plans.

Based on their assessment of prospects and viability above, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due.

Potential impact

There is no certainty that the Group will continue to expand its share of the residential property market through organic growth or by acquisition. The Group derives its main source of income from its MSF chargeable at a percentage of franchise network revenue. This depends upon market conditions and the willingness of landlords to pay commission to lettings agents and of vendors to pay commission for a traditional estate agency service. Our forecast growth relies on the continued commercial success of our franchisees to outperform the underlying market growth and to diversify their property-related service offering in what is a highly competitive residential property market.

Mitigating activities

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. However, the Board does prioritise 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. Furthermore, the Board identifies additional property-related services and supports the roll out of such new services to franchisees.

Potential impact

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.

Mitigating activities

The Board continually monitors the performance of the recruitment team and is focused on identifying innovative ways of attracting successful new franchise owners.

Potential impact

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, tenants, buyers and sellers may have a material impact on the reputation of the brands within the Group.

Mitigating activities

The franchisees join subject to an intensive 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.

Potential impact

The Group needs to continue to identify suitable acquisition targets for its franchisees through its Assisted Acquisitions programme and to be able to support the franchisee to fund the acquisition through both third party and Belvoir lending. The competitive process in the marketplace might increase the acquisition price and the tight lending criteria of major lenders might limit resources available to our network.

Mitigating activities

The Board monitors the Assisted Acquisitions programme to target a return on investment in excess of 25%. Belvoir saw acquisition activity double in 2017 and only provided 10% of the deal value as loans to franchisees. The year ended with a strong pipeline of potential acquisitions for 2018.

Potential impact

Tax changes on interest relief against buy-to-let (BTL) 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, now expected in 2019 following a period of consultation, has led to uncertainty for both existing and potential new franchise owners.

Mitigating activities

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.

Potential impact

Online agencies offering a low cost solution are likely to increase their market share. The Group needs to ensure that it can meet the demands of a new generation of landlords, tenants, buyers and sellers for whom a technical platform is second nature, and for whom a physical office presence is less critical.

Mitigating activities

The Board is pursuing a strategy of improving the customer journey via its traditional agency service through a better technology platform to give landlords, tenants, buyers and sellers greater online visibility and interaction.