- Franchise acquisitions audited so far can be deemed as positive
- Spot checks and proof of incoming lessee payments are used to validate lease contract portfolio
- No business model or business organisation anomalies found to date
Baden-Baden, October 20, 2020: GRENKE AG, a global financing partner for small and medium-sized enterprises, reports on the preliminary interim status of the audits commissioned by the Supervisory Board of GRENKE AG. The auditing company Warth & Klein Grant Thornton (WKGT) is reviewing the advantageousness and market conformity of the franchise company acquisitions, while KPMG AG Wirtschaftsprüfungsgesellschaft (KMPG) has significantly expanded its auditing activities within the scope of its role as the auditor. Priority is being given to validating the existence of cash and cash equivalents and the viability of the leasing business. Selected aspects concerning the regularity of the business operations and certain business processes are also being reviewed.
As the audit is still underway, interim reports from the auditing companies are not yet available – with the exception of the partial report on the proof of cash and cash equivalents based on bank account balances. Therefore, the Board of Directors and the Audit Committee of the Supervisory Board of GRENKE AG are providing a statement giving their assessment based on the initial interim findings and the ongoing status reports of the commissioned auditors.
"Over the past few weeks, we have been working intensively on the audits, and I am confident that all of the investigations will be completed as soon as possible. At the same time, we are looking ahead and seeing this situation as an opportunity. We are working on a vision for the future that, above all, will meet the higher expectations of governance and transparency of our rapidly growing company", commented Antje Leminsky, Chair of the Board of Directors of GRENKE AG.
Member of the Board of Directors Sebastian Hirsch added: "We prefer not to comment prematurely until the availability of the final audit results. We will therefore wait to report on the results conclusively only once they have been validated and substantiated. At the same time, however, we would like to provide some information on the current status. Furthermore, we are examining a variety of options to develop our franchise model further and plan to make rapid progress in this area as well."
Franchise acquisitions audited so far can be deemed as positive
WKGT has received information on all of the franchise acquisitions and is initially auditing four selected transactions that took place in the period 2008 to 2018 (no further acquisitions were made after 2018) in detail. These four acquisitions represent the largest acquisitions and together account for approximately 60 percent of the purchase prices paid for all franchises acquired to date. Proof of outgoing payments for the purchase prices of the franchise acquisitions under investigation have been provided and will be conclusively audited.
WKGT has informed the Company’s Supervisory Board of its preliminary interim findings. According to these findings, the franchise companies acquired since 2008 together contribute to the Consolidated Group’s profit through either the earnings generated directly by the individual local subsidiaries or through those from other companies within the Consolidated Group. Overall, these are within the range of expected results that justify an investment in participations. As a result, these acquisitions can be described as positive for the GRENKE Consolidated Group.
The starting point of determining purchase prices was the so-called multiplier method, which is a generally common method for company valuation. This method was categorically outlined at the beginning of the franchise partnership within the scope of the purchase option. The potential future profit of a franchise company was determined on the basis of the company’s new business development and multiplied by a multiplier. This multiplier was derived in a market-oriented manner and, in the case of the most recent acquisitions, from the mean value of the price-earnings ratio (PE) of the GRENKE share and the EURO STOXX 50. A discount of 25 percent to this valuation was stipulated as a general rule. Consequently, this method includes specifics that take into account the business model and the focus on young, fast-growing companies. This approach for determining the purchase prices of franchise companies was therefore described by WKGT as a fundamentally sound method.
Lease contract portfolio is audited through spot checks and incoming lessee payments are verified
KPMG is reconciling the payments received from lessees on July 1, 2020, August 1, 2020 and October 1, 2020 in the economically largest markets of Germany, Italy, France, Great Britain, Spain and Portugal. In addition to validating the incoming payments, this includes the posting and corresponding reconciliation of contract data record-keeping. For each reporting date, the incoming payments for the above-mentioned countries amounted to a total of EUR 353.0 million on July 1, 2020, EUR 59.6 million on August 1, 2020 and EUR 383.3 million on October 1, 2020.
At GRENKE, lease payments are generally made directly to GRENKE by the lessee, whereby for 90.2 percent of the lease contracts, the payments are collected directly by the GRENKE Consolidated Group by direct debit from the bank accounts of lease customers.
In addition, KPMG is analysing the existence of lease contracts initially by random sample on a case-by-case basis, and key contractual documents and selected payments within the sample are being examined. KPMG also contacted lessees directly to confirm the lease contracts and outstanding lease payments.
No business model or business organisation anomalies found to date
KPMG’s review of the business organisation includes the handling of legal cases and customer objections, the know-your-customer rule (KYC), money laundering and fraud prevention. At the present time, no significant anomalies in the business model or business organisation are discernible. The number of legal cases is at a low level, both in terms of business volume and the number of transactions in the low-volume business.
Proof of cash and cash equivalents based on bank account balances completed
KPMG has also intensified its audits of proof of cash and cash equivalents far beyond what is required by law and supervisory regulations. An initial partial report on the early audit of bank and central bank balances as of June 30, 2020 and September 15, 2020 was finalised on October 14, 2020. In this report, KPMG confirmed 99.4 percent of the balances based on bank confirmations as of June 30, 2020 and 99.2 percent as of September 15, 2020.
Previously, on October 5, 2020, GRENKE AG announced that KPMG had provided evidence corroborating more than 98 percent of the GRENKE Consolidated Group’s bank balances. For more information on this announcement, please see the press release here.
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