How to Float Your Company
We take a look at the key steps to floating your business (and keeping it afloat) on the market...
Unlike floating on a lilo there’s little relaxation to be had when floating your business. The process can be simultaneously exhilarating and terrifying, and unless you get it right, could see you spending vast amounts of time and money.
You should always seek professional advice when planning a float. However, it doesn’t hurt to understand the basics. This guide will help you decide whether floating is a good option, choose a market, appoint advisers and manage the process.
What are the benefits to floating my company?
There are a number of different benefits that come with floating a company. One of the main reasons for floating your business is to raise capital. Floatation often involves the creation of new shares, the purchase of which can bring in much needed cashflow, and help offset any borrowings you have. You can also use these shares as acquisition currency, for instance future acquisitions can be funded in part, or even wholly, by acquisition shares.
However, it’s not just about raising money as going public will also help you to raise your profile and get the market valuation of your company. A float can big news – putting your company in the public eye and bolstering your reputation amongst your customer base. Furthermore you and your employees can more clearly see the value of the shares or options they own, or will own in the future. A small starting float can also make it easier to sell shares during future floatation.
Finally floating will offer an exit to current investors and give them the opportunity to realise their investment by selling shares on.
What are the drawbacks to floating my company?
When floating, you risk losing control of the company as diluting you shares makes a takeover bid by another company a more likely scenario. Shareholders with a substantial stake in the company may also want to appoint their own representatives to the board.
Floating can also accrue hidden costs. Floatations tend to swallow up the time your managers would otherwise be spending running the business. Managing your new investors after the floatation will also cost you added time and money.
Furthermore you may become responsible for satisfying the interest of shareholders and must comply with new regulations. Shareholders’ interests may conflict with your own – for example, a shareholder might want regular dividends which will cripple your cashflow, or wish you to concentrate on short-term profit rather than strategic growth.
Finally floating Regulations involve publishing you accounts twice annually (meaning that your competitors can now measure your performance), meeting standards of corporate governance, and ensuring all relevant news is communicated promptly to investors. Whilst Annual General Meetings (AGMs) are no longer mandatory for private companies, directors and shareholders who own more than 10% in the company can demand you hold them.
What market should I float my business on?
If you are a small company you can float your business on the AIM, meaning that your shares can be traded ‘off-exchange’. The AIM involves fewer requirements than the Main Market and lower flotation costs than the Main Market.
Businesses which float on AIM also get an exemption from stamp duty. Since April 2014 growth markets have been exempt from stamp duty. Furthermore there are no restrictions on the free transfer of shares but specific restrictions on the immediate sale of shares. If your company is less than two years old shareholders cannot sell their shares during the year following the floatation.
Finally, there is no minimum percentage of shares that must be made available. Be careful – fewer available shares can make the share price increasingly volatile.
The Main Market
If you are an established company with a track record of at least three years, you can float your business on the Stock Exchange Main Market. The Main Market involves higher profile companies. Floating on the main market will always be big news.
It is also means likelier investment. If you represent a good investment, then shareholders are practically guaranteed to want to invest but there are higher costs involved than the AIM.
How do I prepare for floating my company?
Start by making sure you meet the admissions criteria. Contact the AIM and get a copy of the criteria before you make the decision to float and contact the applications department if you have no prior trading record.
Also ensure your annual accounts/reports meet the accepted Stock Exchange accounting principles. They must conform to International Accounting Standards (ASA). The prospectus will usually include an accountant’s report on your trading record, and if you are a newly established business, you must include a business plan.
Furthermore, check that your legal structure is in order. If you are not yet a fully formed company (i.e. if you are a sole trader or a partnership), you must form one.
After this it’s important to publish key information. You must declare who your directors are, who your shareholders are, what service contracts exist, what shares are for sale, and details of your key contracts. Include articles of association, and the memorandum.
Finally, employ a CREST-compliant registrar as hey will be responsible for registering the new shares, and ensure you meet all additional market requirements – Research these to establish how to meet them.
Advisers to have when floating a company
One adviser a business should have when considering floating is a corporate adviser. Your nominated adviser (‘Nomad’) should be on the London Stock Exchange’s register of advisers.
Another is a stockbroker. They can help you locate and interest potential investors, as well as maintaining your profile once the floatation is complete.
Consider getting an auditor, lawyer and financial PR company. If you want to raise a substantial amount of capital, a PR company can be very useful.
How will my flotation be priced?
You should discuss and negotiate your price with your advisers/stockbrokers in depth prior to floatation – it can be a fraught area. Pricing will be based on several things.
For one, your past and predicted future earnings. Use your advisers to aid the assembly of future earnings projections. You can choose whether or not to include an earnings forecast in your prospectus. Your reputation will also play a key part in figuring out your price. If your business is ‘exciting’ (i.e. if it is in a fast-growing industry, or a market leader) your shares will be worth more.
Your own input also factors in pricing. If you want a successful floatation, you might want to lower the price slightly to encourage new investors.
How do I start the process of floating my company?
Start by choosing an individual responsible for the float. This will usually be your finance director – they should ideally have prior experience of floating a business.
After this it’s important to choose the type of floatation you want. You can choose either an introduction, a private placement, or an offer for sale. Unless you are looking to raise capital, an introduction is the cheapest and easiest option. If you want to offer shares only to selected investors, choose a private placement. If you want to offer shares to the general public and investing organisations, choose an offer for sale?
The next step is to create a prospectus and include all the key information about the share offering and the company. Be careful – you are legally responsible for the accuracy of any information you include.
Floating a company typically takes around three months – but can take up to twelve, or even more so you have to be patient! For more information on floating and the markets available, check out our sister site Growingbusiness.co.uk’s section on Going public here.