Propty Franchis Regulatory News (TPFG)

9 April 2019

The Property Franchise Group PLC

("TPFG", the "Company" or the "Group")

Final Results

The Property Franchise Group PLC, one of the UK's largest property franchises, today announces its final results for the year ended 31 December 2018.

Financial highlights:

· Group revenue increased 11% to £11.2m (FY 2017: £10.1m)

· Adjusted EBITDA* increased 15% to £5.1m (FY 2017: £4.4m)

· Profit before tax £4.3m (FY 2017: £4.3m included net exceptional gain of £0.7m)

· Operating margin increased to 39% (FY 2017: 37%)

· Management Service Fees increased 14% to £9.4m (FY 2017: £8.3m)

· Proposed final dividend increased by 11% to 6.0p, total of 8.4p (FY 2017: 7.5p)

· Strong balance sheet with net cash of £2.3m (FY 2017: £0.1m)

*Before exceptional items and share-based payment charges

Operational highlights:

· All six brands increased revenue with network revenue reaching £92m (2017: £85m)

· 60 franchisees had annual revenue in excess of £0.5m and, of these, 11 had revenue in excess of £1m

· Pay-per-click marketing delivered an 83% increase in leads to 30,474 (2017: 16,609)

· 28 acquisitions at the franchisee level added 3,115 managed properties (2017: 2,012 managed properties)

· The Group recruited 26 new franchisees (2017: 37) and completed 28 "resales" (same business, change of franchisee)

· EweMove grew sales' completions by 22% in a flat market and lettings' completions by 26%.

· There were 377 trading offices at year end (2017: 403) managing 55,000 rental properties (2017: 52,000)

Ian Wilson, Chief Executive Officer of The Property Franchise Group, commented:

"We are very pleased to be able to report another year of improvement across all key metrics. Our traditional high street brands benefited from further deployment of digital marketing "know-how" instilled by our hybrid brand. Encouragingly, EweMove grew its market share across those locations where it operates and delivered a pre-tax profit of £0.4m in a year when most competing hybrid estate agents produced losses.

We maintain tight financial discipline, reflected in a further strengthening in our balance sheet and an improved net cash position. Furthermore, this underpins the Board's ability to confidently propose a further, meaningful increase in the dividend for the sixth successive year since our IPO in December 2013.

We entered 2019 with a significant improvement in our positive net cash position and the highest level of recurring revenues in the Group's history. In addition, our profitable and established hybrid business provides further opportunities for growth. The Board is confident about the prospects for 2019 and envisage that the loss of tenant fee revenue and continued regulatory intervention in our sector will create opportunities for further consolidation and growth."

 For further information, please contact:

The Property Franchise Group PLC 01202 292829

Ian Wilson, Chief Executive Officer

David Raggett, Chief Financial Officer

Cenkos Securities plc 0207 397 8900

Max Hartley, Callum Davidson (Nominated Adviser)

Alma PR 0203 405 0209

Rebecca Sanders-Hewett

Susie Hudson

Jessica Joynson

Chairman's statement

Strong model continues to deliver.

In 2018 it was property franchisor businesses which continued to make progress despite less than conducive UK property market conditions. Every one of our brands saw revenue increase.

Performance

I am pleased to report that, in a year when both the level of residential sales and lettings transactions in the market were virtually unaltered from 2017, we grew our revenue by 11%, exceeding £11m for the first time, and our operating profits before exceptional items by 19%. Even more pleasing to see was the growth in Management Service Fees of 14%. Its testimony to the strength of our franchise model and its ability to adapt to the changing market conditions.

Franchising

I've personally been involved in franchising since the mid-1990's and I have always been convinced that it is the best business model for the development of a property brand. Franchising has several strengths which appeal to both the brand owner, the "franchisor", and the individual, who is seeking to develop their business under that brand within a local marketplace, the "franchisee".

Firstly, the franchisor is the senior partner and should have plenty of experience dealing with the challenges of building a business, including tactics to cope with the cyclical nature of the UK property sales market. We have encountered most situations before and the most frequent have documented solutions within the franchise operations manual.

Secondly, franchisors are ambitious people who have chosen a path that leads to the scaling up of the business they founded. They welcome like-minded people with the energy and drive on the journey to create a business of value for themselves and their family. By working together, enterprise and new ideas become a shared currency, to everyone's gain. Its reflected in our Management Service Fees growing every year since 2005.

Thirdly, franchisors invest in their central support infrastructure and leverage the benefits across (in our case) hundreds of local businesses. In an age when digital marketing technology is both essential but hard for small independent businesses to access at affordable prices, we have built better optimised websites, created a bespoke customer relationship management platform for all our traditional brands and invest £0.5m each year in a skilled central marketing department.

Strategy

We continued to look at both the acquisition of like for like businesses and those that were very similar or complementary. Unfortunately, with the uncertainty of Brexit, and notable non-franchise failures in our sector impacting investor confidence, we found none of our targets to be sufficiently earnings enhancing. With a strong balance sheet, and a growing cash surplus, we remain committed to expanding our market share of UK residential property transactions through this route. In the meantime, we continued our focus upon organic growth in 2018 and earning more from each transaction.

Our people

Over the last few years we have been strengthening our leadership team, now 7, so that we have the right strength and depth for the challenges and opportunities that we face. That allowed us, in 2018, to invest further in our marketing and digital teams with the addition of 6 new people targeted at increasing customer interaction and custom for our franchisees.

Growth

Our performance was underpinned by growth in lettings MSF of 12% and sales MSF of 18%. This in turn helped generate cash from operations of £4.5m and drove cash up to £3.9m at the year-end after £2m of dividend payments. The Board remains confident that the Group can generate similar levels of cash from operations in FY19 despite the tenant fee ban on 1 June 2019. As a result, I am pleased to announce that the Board has approved a final dividend for 2018 of 6.0p per share (2017: 5.4p per share) bringing the total dividend to 8.4p for 2018 (2017: 7.5p).

Outlook

The Group continues to be deliberately heavily weighted towards lettings, and the Directors believe that the private rented sector will continue to grow because of macro-economic drivers - continued high levels of net inward migration to the UK, the formation of smaller households because of changing family circumstances and lengthening life expectancy, the unaffordability for many people of owner occupation, negligible investment in social housing building programmes, and the lack of alternative investments with similar yields and potential for long-term capital gains. Whilst house sales may be impacted in the short-term, we still believe that the number of transactions will grow over the next 5 years.

And finally, I would like to thank my co-Directors, our staff and our many excellent, ambitious franchisees and their staff for their efforts over the last year. Together we have a determination to prove that the future of the UK property industry is franchising and that the best place to do that is within The Property Franchise Group PLC.

Richard Martin

Chairman

The Property Franchise Group PLC

Chief Executive's statement

Our assisted acquisitions programme gathered pace.

2018 was a tough market for UK estate agents and letting agents. Many businesses were proud to stand still or suffer only modest retrenchment. We continued to grow.

The Property Franchise Group made progress on many fronts including, most significantly, increased trading revenue at each of our six brands, a better than expected number of competitors businesses purchased under our "assisted acquisitions programme" and the enhancement of our underlying pre-tax profits for the fifth year in a row, since our IPO in December 2013.

Improving digital marketing

Turning to the operational details, we had invested in better optimised brand websites in 2017 and we built on this investment in 2018 by encouraging our franchisees to fund local area pay-per-click campaigns to generate new business leads. The results were impressive, as we generated over 30,000 leads.

Emboldened by this success we took the decision to invest in a bespoke Customer Relationship Management ("CRM") platform to operate across all 5 of our traditional high street brands, and nurture customers at key stages of their transactional journey with us. Franchisees warmed to the concept and pledged to fund the ongoing operating costs of the CRM. Over 2 million customers' data is held within our single customer view platform. There are 53,000 variants of emails being sent aimed at informing and supporting our customers' decision-making. We have achieved an average email open rate of 68% versus an industry benchmark of 26%.

The lettings market

The lettings market, which continues to dominate our revenue streams, grew at its slowest pace for a number of years. There were 3 dynamics at play;

· The reducing number of new "buy-to-let" mortgages being entered into (estimates are 60,000 for 2018 vs a peak of 190,000 in 2008).

· Marginally higher levels of managed property stock being withdrawn (which we term "attrition"). Attrition was 10.8% of all managed stock in 2018 vs a 10% long-term trend.

· Lengthening average tenancy terms which a recent YouGov survey put at 4 years across the whole of the private rented sector and which we calculate as 30 months across our Group. This may seem like good news for landlords and their agents, but in fact shorter tenancy terms have the benefit of more transactional "churn" which translates into higher tenancy set-up fees and more opportunities to take business from the competition when properties are lying empty. It's why the paradox of historically low levels of stock to let on Rightmove and the biggest private rented sector for a generation are both statements which are true.

Our response was to put extra energy into our "assisted acquisitions programme". Under the programme we have a retained business broker who networks with other brokers in the sector to find target businesses for sale. We also sent over 10,000 direct mail communications to competitors and engaged through social media platforms to spread the word that we are an active buyer. We have a panel of approved lawyers and funding providers. We assist franchisees directly with operational and financial due diligence and we pay "cash-back" on completion equivalent to a proportion of the additional royalties we will earn. We again made significant progress with a 55% increase in the number of managed properties acquired. In all, we assisted our franchisees to purchase 28 competitor businesses and add 3,115 properties by this route to our Group's managed portfolio.

Tenant fees

We face losing the fees that agents have historically charged tenants on 1 June 2019. We think this is part of a wider approach by government to encourage a smaller number of stronger, more professional and better regulated agents, and to discourage landlords from managing their own affairs. The short-term effect will be to drive some of our competitors out of business as they struggle to deal with extra regulatory hurdles such as mandatory Client Money Protection or face a significant loss of income because their business model has been predicated towards charging excessive tenant fees. As an experienced franchisor we have a track record of dealing with regulatory hurdles on behalf of our franchisees and we see opportunities to win increased market share over the next 2 years.

Hybrid agency model

2018 was also a watershed for the new "online" or "hybrid" estate agents who operate without high street presence. We saw a high-profile business failure in the sector and an online/hybrid market share growing more slowly at 7.2% of transactions compared to some expectations that it would breach double figures.

We invested in this space in 2016 with our acquisition of EweMove, a hybrid operator with a distinctive green sheep logo and the honour of being TrustPilot's No.1 most trusted UK Estate Agent and Letting Agent. EweMove made good progress in 2018, generated cash in every trading month and increased EBITDA by £0.5m over 2017. It occupied 118 franchise territories at the end of 2018 and had over 250 franchise owners and their staff working in the field, supporting customers to sell their properties.

Unlike other online/hybrid agents, EweMove operates a "no sale, no fee" model and a "happy customer guarantee" which means that dissatisfied customers can exit their contract without penalty. We disagree with the upfront fixed fee charging model offered by almost all other online/hybrid agents, as we do not believe it represents good value for customers, and is not sustainable particularly in a market with stagnant prices and fewer property sale transactions. We persist with a pure franchise model at EweMove. The lower setting up costs associated with a hybrid estate agency, and the "business in a box" benefits of website, operational software, 24/7 manned call centre and properties listed on Rightmove and Zoopla for a fixed monthly fee, currently £1,000 + VAT, is a compelling offer to experienced estate agents.

Future direction

In summary, the Group traded successfully in 2018 and is intent on turning regulatory threats into opportunities, whilst embracing digital marketing as a key component of its offering to all its franchisees whether based in traditional high street shops or part of the new breed of hybrid agents.

Ian WilsonChief Executive OfficerThe Property Franchise Group PLC

Financial review

EweMove's improved earnings and support for franchisee acquisitions drives growth.

Focus on our managed properties' portfolio, operating margin and return on capital employed underpins our investment decisions and delivery of growth in shareholder value.

In a flat housing market environment (fifth year at circa 1.2m** transactions) and with challenges to the viability of high street agents starting to crystalise we focused on winning more sales instructions (up 6%), growing our managed properties' portfolio (up 7%), consolidating offices and building EweMove's sustainable profit path.

** HMRC UK Property Transaction Statistics 21 February 2019.

Revenue

Group revenue for the financial year to 31 December 2018 was £11.2m (2017: £10.1m), an increase of £1.1m (11%) over the prior year. EweMove contributed £0.6m of the increase as its revenue increased 28% to £2.7m (2017: £2.1m).

Management Service Fees ("MSF") increased 14% from £8.3m to £9.4m and represented 84% (2017: 81%) of Group revenue with the remainder being from franchise sales and ancillary services to support MSF generation.

Lettings contributed 68% of MSF (2017: 70%), sales contributed 31% of MSF (2017: 29%) and financial services contributed 1% of MSF (2017: 1%). Lettings MSF grew by 12% in the year and sales MSF grew by 18%.

Revenues and MSF in the prior year are restated following the fully retrospective application of IFRS 15. The application of this standard has resulted in cashback payments and payments to brokers previously presented as intangible assets under IAS 38 being restated as prepaid assisted acquisitions support, as they represent consideration payable to a customer under IFRS 15 and costs for securing the acquisition. The impact on results for the current year was to reduce revenue and administrative expenses by £0.1m. There was negligible impact on revenue and administrative expenses in the prior year and no impact on profit or net assets in either year.

Operating profit

Although headline operating profit was unchanged at £4.3m, operating profit before exceptional items and share-based payments charges ("Adjusted operating profit") increased from £3.8m to £4.4m (16%) and the margin increased from 37% to 39%.

Administration expenses, increased by £0.5m (10%) with employee costs contributing £0.4m of that increase as we strengthened our leadership team, recruited a marketing team, reorganised our support services within the traditional brands and increased our IT capabilities.

* Before exceptional costs and share-based payment charges.

EBITDA

Adjusted EBITDA for 2018 was £5.1m (2017: £4.4m) an increase of £0.7m (15%) over the prior year. EweMove contributed £0.5m of this increase through additional gross margin.

Exceptional items

There were no exceptional items in 2018 (2017: net exceptional gain £0.7m). In the prior year EweMove's contingent consideration payable reduced by £1.2m and there was a write-down from a revision to valuation estimates of £0.5m against EweMove's master franchise rights.

Profit before tax

The profit before tax was £4.3m for 2018 (2017: £4.3m). Although the headline number remained unchanged from the prior year it should be borne in mind that the prior year included a net exceptional gain of £0.7m. Excluding this net exceptional gain and share-based payments charges, adjusted profit before tax increased £0.6m or 17%.

Taxation

The effective rate of corporation tax for the year was 19.0% (2017: 19.25%). The total tax charge for 2018 was £0.8m (2017: £0.6m). The increase of £0.2m is due to the growth in operating profits before exceptional items and, as no options were exercised in 2018, nil tax credit for the exercise of share options. In 2017 management exercised options over 522,000 ordinary shares generating a notional gain of £0.7m and tax relief of £0.1m.

Earnings per share

Earnings per share for the year was 13.3p (2017: 14.2p), a reduction of 6% based on an average number of shares in issue for the period of 25,822,750 (2017: 25,651,423). The profit attributable to owners was £3.4m (2017: £3.7m) with the reduction of £0.3m due to the increase in the tax charge.

Dividends

The Board is recommending a final dividend of 6.0p per share which, together with the interim dividend of 2.4p per share paid to shareholders on 3 October 2018, equates to a total dividend for the financial year of 8.4p (2017: 7.5p) an increase of 12%. If approved, it will be paid on 28 May 2019 to all shareholders on the register on 23 April 2019. Our shares will be marked ex-dividend on 18 April 2019.

Cash flow

The Group is strongly operationally cash generative.

The net cash inflow from operating activities in 2018 was £4.5m (2017: £4.4m) as the Group continues to generate strong operating cash inflows.

The net cash outflow from investing activities was £0.3m (2017: outflow £1.4m) mainly due to assisted acquisitions support payments. In 2017, £1.0m of consideration paid to the founders of EweMove in return for them forgoing any rights to contingent consideration, £0.2m was invested in new websites and £0.2m was paid in assisted acquisitions support.

Loan repayments totaling £0.9m (2017: £0.9m) plus interest payments of £0.1m (2017: £0.1m) were made on the Santander UK plc loans during 2018 leaving £1.6m (2017: £2.5m) outstanding. Dividend payments were £2.0m (2017: £1.7m).

Liquidity

The Group had cash balances of £3.9m at 31 December 2018 (2017: £2.6m).

Financial position

The balance sheet remains strong with total assets of £20.8m (2017: £20.0m) and a reduction of £0.6m in liabilities during the year. This reduction in liabilities was due to repayments of bank debt totaling £0.9m, an increase in accruals of £0.1m and an increase in tax payable of £0.2m.

The Group finished the year with the total equity attributable to owners of £15.7m an increase of £1.5m or 10% over FY17.

The Group is strongly operationally cash generative which, together with the facility from Santander UK plc of which £3.4m is undrawn, puts it in a strong position to continue to fulfil its strategy.

David RaggettChief Financial OfficerThe Property Franchise Group PLC

 Consolidated statement of comprehensive income

for the year ended 31 December 2018

Consolidated statement of financial position

31 December 2018

The financial statements were approved and authorised for issue by the Board of Directors on 8 April 2019 and were signed on its behalf by:

David Raggett

Chief Financial Officer

Company statement of financial position

31 December 2018

(Company No: 08721920)

As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of these financial statements. The Parent Company's profit for the financial year was £3,420,015 (2017: £4,393,361).

The financial statements were approved and authorised for issue by the Board of Directors on 8 April 2019 and were signed on its behalf by:

David Raggett

Chief Financial Officer

Consolidated statement of changes in equity

for the year ended 31 December 2018

 Company statement of changes in equity

for the year ended 31 December 2018

 Consolidated statement of cash flows

for the year ended 31 December 2018

Notes to the consolidated statement of cash flows

for the year ended 31 December 2018

A. Reconciliation of profit before income tax to cash generated from operations

B. Purchase of Subsidiary undertakings net of cash acquired

On 5 September 2016 the Group obtained control of EweMove Sales & Lettings Ltd "ESL" and its dormant subsidiary Ewesheep Ltd "EL".

Company statement of cash flows

for the year ended 31 December 2018

Notes to the Company statement of cash flows

for the year ended 31 December 2018

C. Reconciliation of profit before income tax to cash generated from operations

Notes to the consolidated and Company financial statements

for the year ended 31 December 2018

1. General information

The principal activity of The Property Franchise Group PLC and its Subsidiaries is that of a UK residential property franchise business. The Group operates in the UK. The Company is a public limited company incorporated and domiciled in the UK and listed on AIM. The address of its head office and registered office is 2 St Stephen's Court, St Stephen's Road, Bournemouth, Dorset, UK.

2. Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5.

The presentational currency of the financial statements is in British pounds and amounts are rounded to the nearest pound.

Going concern

The Group has produced detailed budgets, projections and cash flow forecasts. The Directors have concluded after reviewing these budgets, projections and forecasts, making appropriate enquiries of the business and having considered uncertainties under the current economic environment, that there is a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements.

Changes in accounting policies

a) New standards, amendments and interpretations effective from 1 January 2018

The following new or amended standards are mandatory for the first time for the period beginning 1 January 2018 and have been adopted in the annual financial statements for the year ended 31 December 2018:

IFRS 9 "Financial Instruments"

IFRS 9 supersedes IAS 39 in its entirety, and is effective for accounting periods commencing on or after 1 January 2018, as such these are the first financial statements under this standard.

The core areas addressed within IFRS 9 are as follows:

- Classification and measurement of financial assets and liabilities

- Impairment of financial assets

- Hedge accounting

The Group has not identified any adjustments are required to the classification and measurement of financial assets and liabilities as a result of adopting this standard. As such no adjustment to the opening balance sheet is necessary.

IFRS 15 "Revenue from Contracts with Customers"

IFRS 15 replaces IAS 18, IAS 11 and related interpretations, and is effective for accounting periods commencing on or after 1 January 2018, as such these are the first financial statements under this standard.

This standard establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for obligations only when they are satisfied and the control of goods and services is transferred. It applies to all contracts with customers, except those in the scope of other standards.

The Group has performed an assessment which has highlighted that the new standard impacts on franchise sales revenue recognition but not Management Service Fee recognition or the recognition of other income. Franchise sales revenue currently consists of 4 elements:

1. A fee to buy a new franchise territory which is recognised upon the earlier of receipt of funds or signing of the franchise agreement.

2. A fee to buy a franchise territory that is being sold through the exit of the current franchisee which is recognised upon the earlier of receipt of funds or signing of the franchise agreement.

3. A fee paid by the seller of the franchise which is recognised in the month that a contract for the resale of a franchise is signed.

4. A fee paid upfront by franchisees for the first 12 months use of its systems which is deferred and released over the first 12 months as the obligations are discharged.

The other area of impact is that of the presentation of the non-current asset in respect of acquired customer lists relating to cashback. Whilst this element had previously been presented as an intangible asset under IAS 38, the payments of cashback are now considered to meet the definition of consideration payable to a customer under IFRS 15.

Consequently, this asset is described as "prepaid assisted acquisition support" on the consolidated statement of financial position. The asset continues to be amortised over a five-year period, however, the amortisation is now recognised as a reduction in revenue rather than an amortisation charge to administrative expenses. As a result, 2017 revenue and administrative expenses have been restated by £0.2m; there has been no impact on profit or net assets.

The impact of this change at the opening balance sheet date, as at 31 December 2016, was an immaterial reclassification of £58,000 between intangible assets and prepaid assisted acquisition support and, as such, a third balance sheet has not been presented.

For the fees described at points 1 and 2 above the franchisors have some initial obligations that extend beyond the receipt of funds and the signing of a franchise agreement, including the provision of training and initial support. These obligations are discharged during a period of between 1 to 4 months with the majority released by month 2.

The impact on these financial statements of adjustments to defer income in relation to obligations not yet fulfilled was assessed as £4k, this was considered immaterial so no adjustment was made to the financial statements. No adjustments were made to the opening balance sheet.

b) New standards, amendments and interpretations not yet effective

The following relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2018, and endorsed by the European Union, and have not been early adopted:

IFRS 16 "Leases"

IFRS 16 requires that almost all leases will be brought onto lessees' balance sheets under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. IFRS 16 will be adopted in the Group's consolidated financial statements when it becomes mandatory. Currently, the Group holds some non-cancellable operating leases but no finance leases. For the Group's non-cancellable operating lease commitments of £0.1m as at 31 December 2018 (note 26), a preliminary assessment indicates that these arrangements will continue to meet the definition of a lease under IFRS 16. Thus, the Group will have to recognise a right-of-use asset and a corresponding liability in respect of all these leases - unless they qualify for low value or short-term leases upon the application of IFRS 16. The Group believes that the adoption of IFRS 16 will not have a material impact on the consolidated financial statements, if it were to have been applied at 31 December 2018 there would have been an asset and corresponding liability of £80k and no change to the charge recognised in the consolidated statement of comprehensive income which is estimated to be £45k for 2019, comprising depreciation and interest.

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

3. Basis of consolidation

The Group financial statements include those of the Parent Company and its Subsidiaries, drawn up to 31 December 2018. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary amounts reported by Subsidiaries have been adjusted to conform to the Group's accounting policies.

4. Significant accounting policies

Revenue recognition

Performance obligations and the timing of revenue recognition

Revenue represents income, net of VAT, from the sale of franchise agreements, resale fees and Management Service Fees levied to franchisees monthly based on their turnover, and other income being the provision of training and ongoing support to franchisees.

Traditional brands:

Fees from the sale of franchise agreements are not refundable. These fees are for the use of the brand along with initial training and support and promotion during the opening phase of the new office. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds.

Resale fees are recognised in the month that a contract for the resale of a franchise is signed. Upon signing of the contract all obligations have been completed.

Management Service Fees are recognised on a monthly basis and other income is recognised when the training and support is provided to the franchisee. There are no performance obligations associated with levying the Management Service Fees. For training and support all performance obligations have been fulfilled at the time of revenue recognition.

EweMove:

Fees from the sale of franchise agreements for the Ewemove brand are not refundable. Some new franchisees pay a higher fee to include the first 12 months license fee, in this scenario the license fee element of the initial fee is deferred and released over the first 12 months of trading of the franchise where no monthly license fees are payable. The franchise fee is for the use of the brand along with initial support and promotion during the opening phase of the new franchise. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds.

Management Service Fees consist of monthly license fees and completion fees. License fees are recognised on a monthly basis, completion fees are recognised when sales or lettings transactions complete and other income is recognised when the training and support is provided to the franchisee. There are no additional performance obligations associated with levying the license fee and completion fees beyond providing access to the systems, brand and marketing support. For training and support all performance obligations have been fulfilled at the time of revenue recognition.

Operating profit

Profit from operations is stated before finance income, finance costs and tax expense.

Business combinations

On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities and contingent liabilities unless the fair value cannot be measured reliably in which case the value is subsumed into goodwill. Where the fair values of acquired contingent liabilities cannot be measured reliably, the assumed contingent liability is not recognised but is disclosed in the same manner as other contingent liabilities.

Goodwill is the difference between the fair value of the consideration and the fair value of identifiable assets acquired. Goodwill arising on acquisitions is capitalised and subject to an impairment review, both annually and when there is an indication that the carrying value may not be recoverable.

Intangible assets

Intangible assets with a finite life are carried at cost less amortisation and any impairment losses. Intangible assets represent items which meet the recognition criteria of IAS 38, in that it is probable that future economic benefits attributable to the assets will flow to the entity and the cost can be measured reliably.

In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group.

Amortisation charges are included in administrative expenses in the Statement of Comprehensive Income. Amortisation begins when the intangible asset is first available for use and is provided at rates calculated to write-off the cost of each intangible asset over its expected useful life, on a straight line basis, as follows:

Acquired trade names are identified as separate intangible assets where they can be reliably measured by valuation of future cash flows. The trade names CJ Hole, Parkers and Ellis & Co are assessed as having indefinite lives due to their long trading histories.

Acquired customer lists are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. This valuation also assesses the life of the particular relationship. The life of the relationship is assessed annually.

Customer lists are being written off over a remaining life of 5 years.

Acquired master franchise agreements are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. The life of the relationship is assessed annually. Master franchise agreements are being written off over a remaining life of 15-25 years as historical analyses shows that, on average, 4% - 10% of franchises will change ownership per annum.

The cost of the new brand websites launched in 2017 have been capitalised and are being amortised over 3 years from launch date, being the expected period over which the websites are expected to generate economic benefit.

Subsequent to initial recognition, intangible assets are stated at deemed cost less accumulated amortisation and impairment charges, with the exception of indefinite life intangibles.

Impairment of non-financial assets

In respect of goodwill and intangible assets that have an indefinite useful lives, management are required to assess whether the recoverable amount of each exceeds their respective carrying values at the end of each accounting period.

In respect of intangible assets with definite lives, management are required to assess whether the recoverable amount exceeds the carrying value where an indicator of impairment exists at the end of each accounting period.

The recoverable amount is the higher of fair value less costs to sell and value in use.

Impairment losses represent the amount by which the carrying value exceeds the recoverable amount; they are recognised in profit or loss. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. Where an indicator of impairment exists against a definite life asset and a subsequent valuation determines there to be impairment, the intangible asset to which it relates is impaired by the amount determined.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

The master franchise agreement is assessed separately for the impairment as an independent asset that generates cash inflows that are largely independent of those from other assets.

Investment in subsidiaries

Investments in subsidiaries are stated in the parent company's balance sheet at cost less any provisions for impairments.

Property, plant and equipment

Items of property, plant and equipment are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is charged so as to write-off the cost of assets over their estimated useful lives on the following bases:

Prepaid assisted acquisition support

Prepaid assisted acquisition support represents amounts payable to franchisees in relation to their acquisition of qualifying managed property portfolios and amounts payable to brokers for assisting with the acquisition of those portfolios. The payments are recognised as an asset and amortised to the profit and loss account over 5 years. The amounts payable to franchisees are amortised as a reduction in revenue, whereas amounts payable to brokers are amortised through cost of sales.

Income taxes

Income tax currently payable is calculated using the tax rates in force or substantively enacted at the reporting date. Taxable profit differs from accounting profit either because some income and expenses are never taxable or deductible, or because the time pattern that they are taxable or deductible differs between tax law and their accounting treatment.

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except if it arises from transactions or events that are recognised in other comprehensive income or directly in equity

Deferred tax

Deferred income taxes are calculated using the liability method on temporary differences, at the tax rate that is substantively enacted at the balance sheet date. Deferred tax is generally provided on the difference between the carrying amount of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement. For share-based payments the deferred tax credit is recognised in the income statement to the extent that it offsets the share based charge, with any remaining element after offset being shown in the statement of changes in equity.

Operating lease commitments

Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to profit/loss on a straight-line basis over the period of the lease.

Cash and cash equivalents

Cash and cash equivalents are defined as cash balances in hand and in the bank (including short-term cash deposits).

Financial assets

The Group and Company only have financial assets comprising trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position.

These assets arise principally from the provision of goods and services to customers (eg trade receivables), 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.

Impairment of financial assets

Impairment provisions for current and non-current 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. 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 administrative expenses 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.

Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, 12 month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

Financial liabilities

Financial liabilities are comprised of trade and other payables, borrowings and other short-term monetary liabilities, which are recognised at amortised cost.

Trade payables, other payables and other short-term monetary liabilities, are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Share-based payments

The Company issues equity-settled share-based payments to employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments are amortised through the consolidated statement of comprehensive income over the vesting period of the options, together with a corresponding increase in equity, based upon the Company's estimate of the shares that will eventually vest.

Fair value is measured using the Black-Scholes option pricing model taking into account the following inputs:

· the exercise price of the option;

· the life of the option;

· the market price on the date of the grant of the option;

· the expected volatility of the share price;

· the dividends expected on the shares; and

· the risk free interest rate for the life of the option.

The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market conditions and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

5. Critical accounting estimates and judgements and key sources of estimation uncertainty

The Company makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment of intangible assets

The Group is required to test, where indicators of impairment exist or there are intangible assets with indefinite lives, whether intangible assets have suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Key assumptions for the value in use calculation are described in note 16.

Share-based payment charge

The aggregate fair value expense of each grant is determined through using the Black-Scholes model detailed above and an estimate for the attainment of the non-market based performance condition in FY20. The estimate of earnings per share, the non-market based performance measure, relies on the assumptions regarding the achievement of the current year's budget and a projection of earnings for FY20, taking into account available market data and performance trends. At this juncture it's estimated that 48% of the non-market based performance condition will be met.

6. Segmental reporting

The Board of Directors, as the chief operating decision-making body, review financial information for and make decisions about the Group's overall franchising business and have identified a single operating segment, that of property franchising.

7. Revenue

The Directors believe there to be 3 material income streams relevant to property franchising which are split as follows:

All revenue is earned in the UK and no customer represents greater than 10% of total revenue in either of the years reported.

Other revenue relates to training and ongoing support to franchisees.

See note 20 for details of accrued income and note 25 for details of deferred income.

See note 18 for the value of prepaid assisted acquisitions support amortised as a deduction from Management Service Fees.

8. Administrative expenses

Administrative expenses relate to those expenses that are not directly attributable to any specific sales activity.

Administrative expenses for the year were as follows:

9. Employees and Directors

Average numbers of employees (including Directors), employed during the year:

Employee costs (including Directors) during the year amounted to:

Key management personnel are defined as Directors and executives of the Group. Details of the remuneration of the key management personnel are shown below:

Details of the Directors' emoluments are disclosed in the Directors' remuneration report on pages 29 to 30. The share-based payments charge for the current year has been charged to the Statement of Comprehensive Income of this £21,772 (2017 £110,452) relates to Directors.

10. Exceptional items

There were no exceptional items in the year ended 31 December 2018.

The net exceptional income in the year ended 31 December 2017 of £701,463 all related to EweMove. It consisted of the reduction in contingent consideration payable of £1,179,146 and the associated unwinding of discounting on contingent consideration in the year (see note 12) and a write-down from a revision to valuation estimates of £500,000 against the master franchise agreement following evidence suggesting that the asset's value was impaired (see note 5).

11. Operating profit

12. Finance income and costs

13. Taxation

The tax assessed for the period is higher (2017: lower) than the standard rate of corporation tax in the UK. The difference is explained below.

14. Earnings per share

Earnings per share is calculated by dividing the profit for the financial year by the weighted average number of shares during the year.

Diluted earnings per ordinary share

The charge relating to share-based payments is immaterial and therefore the earnings used in the diluted earnings per ordinary share calculation are the same as that shown above.

There were options over 2,184,800 ordinary shares outstanding at 31 December 2018; 2,120,000 had not yet vested and have performance conditions which will determine whether they vest or not in the future. The remaining option over 64,800 ordinary shares was exercisable at 31 December 2018 but the average share price during the year ended 31 December 2018 was below the exercise price. For these reasons in 2018 there is no dilutive effect of share options on the earnings per share calculation.

In 2017 there were options over 2,204,800 ordinary shares outstanding at 31 December 2017; 2,140,000 had not yet vested and had performance conditions determining whether they vested in the future or not. The remaining option over 64,800 shares was exercisable at 31 December 2017 but the average share price during the year ended 31 December 2017 was below the exercise price. For these reasons in 2017 there was no dilutive effect of share options on the earnings per share calculation.

15. Dividends

The Directors propose a final dividend for 2018 of 6.0p per share totaling £1,549,365 , which they expect will be paid on 28 May 2019. As this is subject to approval by the shareholders no provision has been made for this in these financial statements.

16. Intangible assets

The carrying amount of goodwill relates to 4 (2017: 4) cash generating units, and reflects the difference between the fair value of consideration transferred and the fair value of assets and liabilities purchased.

Business combinations acquired October 2014

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisitions of Xperience Franchising Limited ("XFL") and Whitegates Estate Agency Limited ("WEAL") is based on the cash flows derived from the actual revenues and operating margins for 2018 and projections through to 31 December 2020. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%.

The cash flows arising were discounted by the weighted average cost of capital which included a small companies' risk premium to allow for factors such as illiquidity in the shares. These discount rates were 13.5% for XFL and 15.0% for WEAL, the latter higher rate reflecting WEAL's smaller size and more volatile earnings. This resulted in a total value for each company of the identifiable intangible assets that exceeded the carrying values of the respective companies' goodwill.

The Directors do not consider goodwill to be impaired. The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use to fall below the carrying value and hence impair the goodwill.

The master franchise agreements are being amortised over 25 years. The period of amortisation remaining at 31 December 2018 was 20 years 10 months.

The brand names under which XFL trades of C J Hole, Parkers and Ellis & Co have been in existence for between 70 years and 168 years. Management see them as strong brands with significant future value and has deemed them to have indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. As a consequence, management annually assess whether the carrying value of these brands have been impaired.

The Relief-from-Royalty-Method was used to value the brand names. Looking at independent research of royalty rates, management selected pre-tax royalty rates of between 3% and 5% for the above brand names.

The after tax royalty rates were then applied to the projected cash flows of each brand. The projected cash flows being the forecast growth in current revenues using market data through to 31 December 2020. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%. The after tax cash flows determined through this process were then discounted at 13.5% to determine a value for each brand name. This discount rate approximated the Company's WACC as the risk profile of the brand names was seen as commensurate with that of the overall Company. The values derived exceeded their carrying values.

The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use of the brands names CJ Hole, Parkers and Ellis & Co to fall below their carrying values and hence impair their intangible values.

The Whitegates brand was valued in a similar manner and deemed to have an immaterial value when the acquisition was made principally due to its lack of profitability over preceding years. It is therefore not recognised separately.

Business combination acquired September 2016

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisition of EweMove Sales & Lettings Ltd ("ESL") is based on the cash flows derived from the actual revenues and operating margins for 2018 and projections through to 31 December 2024. Thereafter projected revenue growth was assumed to 2.2% per annum.

A period of projected cash flows exceeding 5 years was deemed appropriate because the business has only been operating for 5 years, is continuing to recruit relatively high levels of new franchisees, each new franchisee should grow significantly in the first 5 years of operation and it has yet to develop the operational efficiencies of a mature franchisor.

The revenue growth rates used in the valuation range from 19% in FY19 to 4% in FY24.

The cash flows arising were discounted by the weighted average cost of capital being 14.07% which included a small companies' risk premium to allow for factors such as illiquidity in the shares. This resulted in the value in use exceeding the carrying value of the goodwill and separately identifiable intangible assets. The enterprise's overall value exceeds the cash generating unit's carrying value.

The attrition rate of franchisees existing at acquisition implied that the remaining useful life of the master franchise agreement may be shorter than that originally assumed of 21 years at acquisition. For this reason, the remaining useful life of the master franchise agreement was reduced to 15 years during the 2017 financial year. The period of amortisation remaining at 31 December 2018 was 12 years 8 months.

During 2017, the master franchise agreement was written down by £0.5m as a result of a revision to valuation estimates.

The remaining useful life of the brand name was also reviewed. It continues to attract and recruit the same level of franchisees as in previous years and to attract higher numbers of customers. Given these 2 factors the remaining useful life of the brand was considered to be unaltered at 21 years. The period of amortisation remaining at 31 December 2018 was 18 years and 8 months.

The following table reflects the level of movements required in revenue or costs which could result in a potential impairment per the value in use calculation of goodwill. A further percentage (fall)/increase, of the magnitude indicated in the table below, in any one of the key assumptions set out above would result in a removal of the headroom in the value in use calculation for goodwill in 2018. Thus, if the discount rate increased by more than 24% to above 17.44%, an impairment change would result against goodwill, all other assumptions remaining unchanged.

Goodwill and indefinite life intangible assets have been allocated for impairment testing purposes to the following cash generating units.

The carrying values are as follows:

Website Costs included in technology

In 2017 new websites were launched for each of the 5 traditional brands. The costs associated with these websites have been capitalised as intangible assets as the purpose of the websites is to generate leads and revenue for the network.

Company

No goodwill or customer lists exist in the Parent Company.

17. Property, plant and equipment

Group

18. Prepaid assisted acquisitions support

Group

Cashback and broker's commission is presented as prepaid assisted acquisitions support.

The additions represent sums provided to franchisees that have made qualifying acquisitions to grow their lettings' portfolios. The cashback sum provided is based on a calculation of the estimated increase in MSF as a result of the acquisition and the sum provided for the broker's commission is based on the charge payable to the broker. In providing these sums the Group ensures that franchisees are contractually bound to the relevant franchisor for a period in excess of that required for the economic benefits to exceed the sums provided.

Company

No prepaid assisted acquisitions support exists in the Parent Company.

19. Investments

Company

The Property Franchise Group PLC was incorporated on 7 October 2013. On the 10 December 2013 a share for share exchange acquisition took place with Martin & Co (UK) Limited; 17,990,000 ordinary shares in The Property Franchise Group PLC were exchanged for 100% of the issued share capital in Martin & Co (UK) Limited.

On 31 October 2014 the Company acquired the entire issued share capital of Xperience Franchising Limited and Whitegates Estate Agency Limited for a consideration of £6,110,284.

On 5 September 2016 the Company acquired the entire issued share capital of EweMove Sales & Lettings Ltd, and its dormant subsidiary Ewesheep Ltd, for initial consideration of £8m. Of the total consideration, £2.1m represented contingent consideration, of which £0.5m was paid out on 30 July 2017 and £0.5m was paid out on 31 December 2017. No further sums are due.

Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, EweMove Sales & Lettings Ltd and Ewesheep Ltd are exempt from the requirements of the Companies Act 2006 relating to the audit of accounts under section 479A of the Companies Act 2006.

At the year-end The Property Franchise Group PLC has guaranteed all liabilities of Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, EweMove Sales & Lettings Ltd and Ewesheep Ltd. The value of the contingent liability resulting from this guarantee is unknown at the year-end.

The carrying value of the investment in EweMove has been considered for impairment through value in use calculations and it was determined that no impairment was required in the year ended 31 December 2018. In the prior year a write-down of £500,000 against the carrying value of the master franchise agreement was appropriate (see note 5 - Impairment of intangible assets), this was accounted for in the year ended 31 December 2017.

The carrying values of the other investments (all companies except for EweMove) have been considered for impairment and it has been determined that the value of the discounted future cash inflows exceeds the carrying value. Thus, there is no impairment charge.

The Company's investments at the balance sheet date in the share capital of companies include the following, which all have their registered offices at the same address as the Company:

Subsidiaries

* indirectly owned

20. 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. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Group's historical credit losses experienced over the previous year. Forward looking factors are considered to the extent that they are deemed material.

The Group is entitled to the revenue by virtue of the terms in the franchise agreements and can force the sale of a franchise to recover a debt if necessary.

Ageing of trade receivables

The following is an analysis of trade receivables that are past due date but not impaired. These relate to a number of customers for whom there is no recent history of defaults. The ageing analysis of these trade receivables is as follows:

The Directors consider that the carrying value of trade and other receivables represents their fair value.

The Group does not hold any collateral as security for its trade and other receivables. In the current year a loan was made to a franchisee for £30k and is secured by way of a fixed and floating charge over their assets. At the 31 December 2018 £23k was outstanding in relation to this loan. In a prior year a loan was made to another franchisee for £147k and as at 31 December 2018 £11k (2017 £19k) was outstanding in relation to this loan.

Included within "Prepayment and accrued income" is accrued income of £663k (2017: £633k) in relation to Management Service Fees for some of our brands that are invoiced at the beginning of the month following the month to which they relate.

21. Called up share capital

Movements in shares are summarised below:

22. Share premium

For further details of share issues refer to note 21.

23. Other reserves

Merger reserve

Acquisition of Martin & Co (UK) Limited:

The acquisition of Martin & Co (UK) Limited by The Property Franchise Group PLC did not meet the definition of a business combination and therefore, falls outside of the scope of IFRS 3. This transaction was in 2013 and accounted for in accordance with the principles of merger accounting.

The consideration paid to the shareholders of the Subsidiary was £17,990,000 (the value of the investment). As these shares had a nominal value of £179,900, the merger reserve in the Company is £17,810,000.

On consolidation the investment value of £17,990,000 is eliminated so that the nominal value of the shares remaining is £179,900 and, as there is a difference between the Company value of the investment and the nominal value of the shares purchased in the subsidiary of £100, this is also eliminated, to generate a merger reserve in the Group of £179,800.

Acquisition of EweMove Sales & Lettings Ltd:

The consideration for the acquisition of EweMove Sales & Lettings Ltd included the issue of 2,321,550 shares to the vendors at market price. A merger reserve of £2,976,784 is recognised in the Group and the Company being the difference between the value of the consideration and the nominal value of the shares issued as consideration.

Share-based payment reserve

The share-based payments reserve comprises charges made to the income statement in respect of share-based payments and related deferred tax impacts under the Group's equity compensation scheme.

24. Borrowings

The Company has a loan facility of £5m, and has drawn down 2 term loans under this facility, referred to below as 'Loan 1' and 'Loan 2'. The loans are secured with a fixed and floating charge over the Group's assets and a cross guarantee across all companies in the Group.

Loan 1 - £2.5m drawn down on 30 October 2014 and is repayable over 5 years in equal instalments. Interest is charged quarterly on the outstanding amount and the rate is fixed during the term at 4.08%. The amount outstanding at 31 December 2018 was £0.5m (2017: £1m).

Loan 2 - £2m drawn down on 5 September 2016 and is repayable over 5 years in equal instalments. Interest is charged quarterly on the outstanding amount, the rate is variable during the term at 2.5% above LIBOR, at 31 December 2018 the rate was 3.41% (2017: 3.02%). The amount outstanding at 31 December 2018 was £1.1m (2017: £1.5m).

At 31 December 2018 the unutilised amount of the facility was £3.4m (2017: £2.5m).

The cash outflow for borrowings arising from financing activities during the year was £0.9m (2017: £0.9m).

25. Trade and other payables

The Directors consider that the carrying value of trade and other payables approximates their fair value.

Included in "Accruals and deferred income" is deferred income of £36k (2017: £117k) in relation to charges levied on franchisees in advance and EweMove license fees.

26. Leasing agreements

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

The lease arrangements above consist of those relating to land and buildings and office equipment.

Company

No leases exist in the Parent Company.

27. Deferred tax

Deferred taxation has been provided as follows:

 28. Financial instruments

Financial instruments - Risk Management

The Group is exposed through its operations to the following financial risks:

· Credit risk

· Liquidity risk

· Interest rate risk

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them.

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

Principal financial instruments

The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:

· Receivables

· Loans to franchisees

· Cash at bank

· Trade and other payables

· Borrowings

Financial assets

Financial assets measured at amortised cost: