FloatingYourCompany

What it means

Floating your company means applying for admission of its shares to one of three markets -the Main Market of the Stock Exchange, the Alternative Investment Market ('AIM') or PLUS (the "off-exchange" market). Admission means potential investors are more likely to buy your shares because they know:

• You have passed the stringent tests required to join the relevant market.
• There is a market for the shares, if they want to sell them.
• The price payable for the shares at any time is determined by the market, and publicly available.

This means you are better able to:

• Issue new shares to finance growth in existing markets, or new product or market development.
• Issue new shares as payment (or part payment) for an acquisition.
• Exit from your company. More marketable shares means you, and/or venture capitalists in your company, can sell their existing shares and realise their investment more easily.
• Realise part of the value built up in your business by floating, and selling some of your shares, retaining enough to maintain the degree of control and/or involvement you want.
• Tie key staff in - a public, market valuation for the company's shares means key employees can see the value of shares or share options which they have been (or will be) granted.
• Increase the company's public profile. Customers, suppliers, the press and others can see your new status, and how you are doing. You may find you can negotiate new, more favourable terms with customers and suppliers.

Most companies float to raise finance for growth. As part of the flotation process, they make an 'initial public offering' (IPO) of new shares. This will either be an offer of the new shares to the public (in which anyone can apply for them), or a 'private placing' (in which the new shares are offered to selected investors - usually a restricted range of institutions).

Reasons not to float

Floating your company can be exciting and rewarding, but it can also be the most expensive, time-consuming and risky thing you ever do. Reasons to think very hard indeed before floating are:

• You may not be able to offer a future return on investment sufficient to attract investors. Particularly, the market will need to see a strong management team, with a track record of generating profits, and a viable plan for achieving strong growth in earnings. The directors must make a hard-headed objective assessment of their company, including its business plan, growth forecasts, stage of development, management team and systems and procedures.
• There may be a better way for you to realise the value of your investment in the company. Another exit route, such as a trade sale, can be faster and cheaper and some companies - particularly mature businesses in non-growth industries or those whose value is largely based on their assets - may realise a higher price through a trade sale. A rigorous cost benefit analysis should be undertaken.
• You may need to change your management team - to make sure that the chairman and chief executive are not the same person and that your finance director has the necessary experience and skills, and to appoint non-executive directors.
• Your new shareholders' interests may not always be in line with your own. They may prefer short-term profits to your strategic goals, and expect generous, regular dividends, which could undermine cashflow.
• Flotation will lead to closer scrutiny of the company's performance and its directors - the company's finances, strategy and activities are more open to public view, as are directors' remuneration, and there is greater exposure to criticism from shareholders, employees, and other stakeholders, as well as the press.
• You run the risk of losing control of the company altogether. Substantial investors may want their own representatives appointed to the board and, if your (and other directors') shareholdings are diluted, it becomes easier for another business to make a takeover bid.
• There are hidden costs. Managers can be distracted from running the business during the flotation and there will be a continuing need to deal with investors afterwards, which is crucial, but can be time-consuming.
• There are additional regulatory requirements. You must publish full accounts twice a year (which will allow your competitors to see them); meet accepted standards of corporate governance, such as having independent non-executive directors; and ensure that important news, such as changes to your company structure or other price sensitive information, is promptly communicated to all investors.

Which market should I choose?

Companies tend to start by floating on PLUS or AIM and then graduating to the next market when they need to. Your market of potential investors increases as you move up the hierarchy, but costs and regulation increase too. You can also move back down the ladder if need be.

PLUS

PLUS (formerly OFEX - the 'off-exchange' exchange) is the most junior market. It is suitable for companies with a value of up to £20m. PLUS companies usually seek to raise between £300,000 and £4m, with an average of around £1.5m. There are currently around 160 PLUS companies with a market capitalisation of just under £1,800m.

A main benefit of PLUS is that, while you can raise funds and gain a market profile, you can also stay in control. However, the pool of potential investors is relatively limited - most investors in PLUS shares are high net worth private individuals (who can enjoy tax benefits because PLUS shares are not technically 'listed' or 'quoted' - they are merely 'traded' on PLUS) and retail investors - although more institutions are beginning to invest.

Technically, a trading history and profits are not necessary (though there are extra requirements in those cases) but they will clearly smooth the path. The company must have published audited accounts not more than nine months before admission to trading, and at least one non-executive director. There must be no restrictions on transferability of shares, and the shares must be eligible for electronic trading.

Advisers' fees for a flotation and fundraising are likely to start from £120,000 - they are usually around 8% or 9% of the funds raised. The annual fees payable to the corporate adviser (see below) will be around £25,000.

PLUS joining fees (via an admission document/prospectus) are £6,000, with an ongoing annual fee of £4,900 to £8,000, dependent on market capitalisation.

AIM

Larger companies with a value of £10m to £150m may prefer to float on AIM. They usually seek to raise between £2m and £20m, with an average of around £5m. As at July 2006 there were over 1,600 AIM-listed companies from over 30 different sectors.

The company will get a higher profile within the investment community and there are more potential investors, including Enterprise Investment Scheme and Venture Capital Trust investors - tax benefits are available as AIM stocks are not technically 'listed' or 'quoted', they are merely 'traded'.

No trading record is required for AIM and there is no minimum percentage of shares that you must make available to the public (although having fewer shares available can make the share price volatile). All the shares of the class to be traded must be admitted to listing but you can put contractual restrictions on dealings in those shares. If the company has been in existence for two years or less, existing shareholders must agree not to sell their shares for at least one year after flotation. There must be no restrictions on the free transferability of shares. AIM companies must be eligible for 'electronic settlement' - ie their shares must be capable of being transferred electronically. They must include certain information on their websites, including names and brief biographies of directors.

Total entry costs, whether fundraising or not, tend to start from the £300,000 level (of which legal fees will be from £150,000 to £250,000) - usually from 6% to 9% of the funds raised. Ongoing annual costs are around £30,000 to £50,000 per annum.

The AIM joining fee is dependent on your expected market capitalisation when you float. The joining fee is £4,535, and so are the ongoing annual membership fees.

The Stock Exchange

A full Stock Exchange market listing (or 'quotation') on the Main Market of the Stock Exchange is generally only suitable for the largest companies, with market values of, say, £100m or more and a three-year trading track record. There are some 2,000 companies listed (or 'quoted') on the Stock Exchange.

This is the most high-profile market and almost all investors will be prepared to invest in shares quoted on it (subject to the particular company's performance) - although many larger investors will only invest in companies, even Stock Exchange ones, whose market capitalisation (the total market value of all the company's shares) is substantial, say several hundred million pounds.

The Stock Exchange requires that at least £700,000 of shares be marketed, and at least 25% of the company's share capital must be held publicly (ie not by management or those connected with them). Prior shareholder approval is required for substantial acquisitions and disposals, and sponsors (firms approved to advise listed companies on the application of the Listing Rules) have to be involved for certain transactions.

Costs are likely to be around £750,000, most of which will be professional advisers' fees. So if you are raising £2m, around 40% of it will be swallowed up in costs. On average, costs are usually around 4% to 8% of the money raised. Brokers' fees, comprising 2%-5% of the funds raised, will be additional. Annual, ongoing costs thereafter will be around £250,000.

Admission to the main market means making both an application for admission to the Official List, to the UK Listing Authority, and an application for the shares to be admitted to trading by the London Stock Exchange. UKLA fees comprise an application fee of £225 and a vetting fee (if there is to be a public offer) of £5,700. There are also ongoing annual fees of several thousand pounds. In addition, one-off admission fees and annual fees are payable to the Stock Exchange, depending on the market capitalisation. A calculator at www.londonstockexchange.com/feescalculator will help you work them out.

What advisors will I need?

PLUS companies must have a 'corporate adviser', who must be a member of PLUS. If you are a start-up, the adviser must be retained for the term of the business plan, or for a minimum period of three years. The corporate adviser will assess the company's suitability for admission to PLUS and project-manage it through the flotation, advising the board on its obligations and responsibilities.

AIM companies must have a 'nominated adviser', or Nomad - a firm of experienced corporate finance professionals approved by the London Stock Exchange - who will carry out much the same role as the corporate adviser. Once admitted, the Nomad must stay involved on a continuing advisory basis or the shares will be suspended.

Clearly, your ability to work with the corporate adviser or Nomad is critical to the success of your flotation and ongoing success afterwards.

A Main Market company must have a sponsor, whose role is similar to that of a Nomad for an AIM company. This is usually an investment bank, broker or other financial adviser.

An AIM company must also retain a nominated broker, who may be the Nomad. It is highly desirable to appoint a broker generally. He will help find and interest potential investors, and help maintain your profile with investors once the company has floated.

Other advisers include the reporting accountants, who independently review the company's financial records and prepare financial information for publication. They also assess your management information systems and accounting policies.

Your solicitors advise on and prepare the terms of engagement for other advisers, and advise on the admission documents, and prospectus or private placing memorandum. They advise on and prepare documents to authorize and implement the public issue or placing.

They also advise on any constitutional changes required, such as re-registration as a public company, group reorganizations, and changes required to the board and its practices to comply with corporate governance best practice. Changes to service contracts and/or employee share schemes may be necessary.

Most importantly, they carry out due diligence into the company and its business, and ensure verification of admission documents, and prospectus or private placing memorandum.

You may also want to involve a financial PR company, particularly if you are raising significant amounts of money.

Pricing your shares

Pricing a new flotation is complicated. The price may continue to be a matter for negotiation between you and your corporate adviser or stockbroker right until the last minute.

Most companies are valued on their historical and expected future earnings. Your advisers will help put together projections of future earnings and you can choose whether or not your prospectus contains an earnings forecast (which you must be confident of meeting or exceeding).

Investors will pay more for shares if your company is a market leader in its sector or is involved in a growth or fashionable industry.

You may choose to sell for a lower price to ensure a successful flotation and provide a good after-market in the shares - especially if you plan future share issues and want to keep investors keen.

Getting ready and floating

Start preparing up to three years before the flotation. Make sure your business plan is up to scratch and that you have proper contracts with key customers, suppliers and business partners. Review your systems and controls. Start to introduce corporate governance standards appropriate to your intended market, and consider and introduce changes to the board, including recruitment of non-executive directors and splitting the roles of chief executive and chairman. Make sure you have contracts in place with key staff.

Once you are ready to float, nominate an individual to lead your flotation team (usually the finance director) and identify, and invite tenders from, prospective advisers. Appoint advisers, and agree a flotation timetable.

Start 'due diligence', reviewing your business for problem areas and ensuring you can give the necessary assurances regarding the company and its business in your admission documents/prospectus. There will be a number of reports, forecasts and statements for the directors to approve.

Draft admission documents applying for your shares to be traded, and comply with any legal requirement for a prospectus. These are crucial - it is not only vital to get them right for compliance purposes, but they are also your selling document. You, together with your legal advisers, will invest a great deal of time in their preparation and verification.

Prepare any other documents such as a pathfinder prospectus (a draft for potential investors, omitting information not yet available, such as price), roadshow presentations for potential investors, etc. Start considering the price at which your shares will be offered, and hold PR and other presentations.

Keep the exchange informed - your advisers will be filing draft and final documents at various stages. Upon admission, make the public offer.

How long will it take?

The typical timescale from appointment of advisers to successful flotation is three to six months, but it is not unknown for the process to take 12 months.

Always take legal advice.