In the UK, we have the most developed public equity capital markets in Europe and, in AIM, the most successful junior stock market in the world. Undertaking a flotation of your company may, therefore seem like the most obvious way to raise capital and to enhance its profile. But such a decision should not be taken lightly – you should assess the advantages and disadvantages carefully before proceeding and a final decision should be based on discussions with your directors, your shareholders and your advisers.
So what are the principal advantages and disadvantages of a flotation?
Advantages
(a) The new shares that your company issues in the flotation can finance organic growth and enable your company to grow at a faster rate than might otherwise be the case.
(b) Being quoted places a market value on you shares and so if you want to grow by acquisition, you can issue new shares to the vendors of target companies instead of using cash or borrowings. This will also help “tie in” the owners of the acquired company if you consider that they are important to its success. This may be particularly important in “people” businesses.
(c) You and your fellow shareholders may be able to realise part or all of your existing investment in the company and establish a market value for your retained shareholdings. But you should note that if you are to have an ongoing management role in the company after the flotation, it is unlikely you will be allowed to sell more than a small proportion of your shares, if any. You will also have to agree not to sell any further shares for anything between six months and two years after the flotation. If you want to sell all your shares, you should consider a trade sale instead.
(d) The status of your company will be enhanced – in the eyes of your customers, suppliers, the financial community and the media – giving your products or services a higher profile and improving your credit rating. Some customers prefer buying from a public company.
(e) A flotation enables you to motivate management and employees with more attractive share participation schemes. Management and employees will be able to see the market price for their shares and options on a daily basis and will be able to sell their shares more easily than if the company was private.
Disadvantages
(a) Once your company is quoted, it will be subject to public scrutiny. In addition, the need for accountability to outside shareholders means you must distinguish more precisely between company and private assets. You must also expect and accept criticism when the company has a bad year.
(b) Your vulnerability to an unwelcome takeover bid increases according to the percentage of the company’s share capital in public hands. If another company can buy 51% of your issued share capital, it will be able to take control of your company.
(c) A flotation may not necessarily increase the marketability of your company’s shares. This is particularly the case for small companies where trading can be ‘thin’ and, in many instances, effectively only undertaken on a matched bargain basis. This means that even the purchase or sale of a small number of shares can cause big swings in the share price.
(d) As well as the significant financial cost, you should not underestimate the hidden cost of the extensive time that your company’s management will have to devote to the flotation – time that could otherwise be spent running and developing the business. However, this will only last for the duration of the flotation, say two or three months, and there are ways around it if your management team is big enough – for example, a small team could be assigned to project manage the flotation. This is therefore more of an issue for companies with smaller management teams.
(e) Your company’s costs will increase because of the need to strengthen its reporting function and because you will have to appoint non-executive directors. Quoted companies have to release their results every six months and even between these dates, they must keep the market informed of anything that may affect the price of their shares. You will also be expected to have a robust and reliable accounting and internal control system in place prior to flotation.
(f) There will be increased outside pressure on your company’s directors, especially concerning profit levels and dividends expected by outside investors. Unwelcome or unexpected news can cause a sharp reduction in your share price – and it may take a long time for it to recover.
These are just some of the factors that should shape your final decision but should provide some initial guidance. A flotation certainly widens the future options available to your business but it should be weighed against the extra pressures and responsibilities that ‘going public’ places on a company and its management. All of this should be explored carefully with you advisors and shareholders in order to be sure which road is best for you.
