Floating your business on a stock market involves selling a percentage of your business in the form of shares, which are subsequently traded. There is a choice of stock markets in the UK, but the two largest are the London Stock Exchange and PLUS Markets Group.
Joining a stock market turns your business into a ‘public company’. This presents a range of benefits, including access to capital, and the opportunity to increase your businesses profile and motivate staff through the introduction of share option schemes. There are also additional responsibilities and costs which come with being a publicly quoted company and these require careful consideration. You should note that floating on a stock market is not always the best option for obtaining growth capital and you should make sure to consider all your options before making a final decision.
This guide explains some of the benefits and matters for consideration, when thinking of floating your business on a stock exchange.
Table of Contents
Is your business suitable to be a public company?
Before you even consider floating your business, you need to determine whether it is suitable and ready for life on a public market.
Investors will only be interested in buying shares in companies that have secure earning streams and strong growth prospects. They will look for a good rate of return on any investment but will require a higher rate of return from an unproven, smaller business than from a large established company to compensate for the greater risks involved.
It is harder to guarantee a successful investment in companies new to the market. Smaller companies are more likely to suffer should market or financial conditions change – making investment in them risky.
You will need to consider whether your business can deliver that rate of return. You should ask yourself whether:
- your business has a strong record of delivering profits and growth
- your sector is attractive to investors
- your business plan sets out how you will deliver strong growth in earnings in the future
- your management team is up to the task of delivering the performance required
If you feel your business is not at the right stage of development or will not be able to meet investor expectations of growth, you may want to consider other financing options.
Advantages and disadvantages of stock market flotation
Even if your business is suited to flotation, it may not be the right choice for you. Being a public company can present a range of benefits to your business, but there are also issues that might require careful consideration.
The benefits of stock market flotation could include:
- giving access to new capital to develop the business
- making it easier for you and other investors – including venture capitalists – to realise their investment
- allowing you to offer employees extra incentives by granting share options – this can encourage and motivate your employees to work towards long-term goals
- placing a value on your business
- increasing your public profile, and providing reassurance to your customers and suppliers
- allowing you to do business – eg acquisitions – by using quoted shares as currency
- creating a market for the company’s shares
However, you should also consider the following potential problems:
- Market fluctuations – your business may become vulnerable to market fluctuations beyond your control – including market sentiment, economic conditions or developments in your sector.
- Cost – the costs of flotation can be substantial and there are also ongoing costs of being a public company, such as higher professional fees.
- Responsibilities to shareholders – in return for their capital, you will have to consider shareholders’ interests when running the company – which may differ from your own objectives.
- The need for transparancy – public companies must comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance including transparancy, and needing to make announcements about new developments.
- Demands on the management team – managers could be distracted from running the business during the flotation process and through needing to deal with investors afterwards.
- Investor relations – to maximise the benefits of being a public company and attract further investor interest in shares, you will need to keep investors informed.
- Employees may become demotivated – if shares are only offered to selected employees, there could be resentment. Shareholding employees could feel that there is little left to work for if they are sitting on valuable shares.
The process of floating on a stock market
When seeking to join a stock market, your business will be subject to legal and financial due diligence to help attract investor interest and to fulfil the entry requirements and documentation of the relevant market.
Your business also needs to have the right legal structure. The legal structure of a sole trader or a partnership is not suitable for a public market listing and as such a change to the company’s legal structure would be necessary.
Public companies have different obligations to private companies under the Companies Act 2006. For example, private companies are no longer required to hold an annual general meeting (AGM) though they may opt to do so or be required to hold one if sufficient shareholders demand one. However, all public companies and private companies with traded shares must hold an AGM. See our guide on company administration: the basics.
You will also have to make the following key information available:
- who the directors are and what service contracts they have with the company
- who the major shareholders are and details of the new and existing shares being offered for sale
- information on the company’s key contracts
- the memorandum and articles of association
Typically, the admission process may take between three and six months to complete, but it could take as long as a year to prepare the business and conduct the due diligence. To help with this process, you will need to appoint a set of advisers with relevant experience in helping businesses like yours seek capital via the public markets.
Appoint your advisers
Getting the right advisers is key to a successful flotation. They are the experts who will guide you through the demanding legal, regulatory, financial and marketing processes.
A corporate finance adviser will be the central adviser to your company during the admission process and throughout your company’s life on a public market. A range of other advisers will also play integral roles in supporting you through the admission process and thereafter. These usually include a broker, a reporting accountant, and legal, public relations and investor relations companies.
Bad advice, or using an adviser with a poor reputation, could seriously affect your business’ reputation, ability to attract investors and float successfully. Some prefer to choose companies who have worked together previously as teams.
Advisers’ professional fees, which can run into six-figure sums depending on the size of the flotation, will be the main cost in floating your business.
Adviser roles
The corporate adviser will be responsible for guiding your company through the application and admission process. They work closely with the company and its lawyers to compile the necessary admission documents and make the formal application to the stock exchange.
Most companies seeking a flotation use a corporate adviser to guide them through the process. The corporate adviser makes the application to join the stock market on behalf of the company. They are responsible for ensuring all the information in the application is complete and dealing with any requests for additional information.
Companies floating on AIM must appoint a nominated adviser (nomad) who is approved by the London Stock Exchange to act in such a capacity. Find information on advisers for AIM on the London Stock Exchange website – Opens in a new window.
If you’re floating on PLUS, your adviser will need to be a member of PLUS.
You’ll also need a stockbroker to generate interest in your business in the investment community.
Your corporate lawyer will be responsible for the due diligence process and for verifying statements in the prospectus and other documents.
An accountant will be needed to conduct the financial due diligence and prepare any financial statements needed for the admission documents. You will also need to appoint the services of a corporate broker to seek investor interest in your business – the key reason for floating on a stock market.
For large-scale floats it’s also worth considering the services of a financial public relations company to reach wider audiences of investors.
CASE STUDY
Here’s how we prepared our business for flotation
Sumus, a Bristol-based independent financial advice company with 160 employees, raised £3 million by floating on the Alternative Investment Market (AIM). Here, group chief executive, Allan Rosengren, explains why it was the right option for the business and how they managed the process.
What we did
Consider our options
“We first started thinking about floating in 2000, because we wanted to raise the capital to acquire other businesses and expand our group. Unfortunately, around that time, the stock market crashed and it meant the conditions were no longer favourable.
“In October 2004, we decided the time was right. It took a further four months to get everything in place and Sumus plc was admitted to AIM on 17 February 2005 at 40p a share.”
Ensure the company was ready
“Before floating on any stock market you have to ensure the company is in a strong position – in profit and with a credible track record. We researched our options very carefully and decided AIM would be the best option for us because of our size and the plans we have for growing our business.”
Select the right team
“Once you have decided to float you need to select brokers, nominated advisers, corporate finance specialists, solicitors to the company and to the placing, reporting accountants and registrars. We chose advisers who were Bristol-based, except our broker who is in London, and employed the services of the very best people we could afford. Floating on the stock market is certainly not a cheap option – it can cost anything up to £1m depending on how much you are looking to raise. Trying to save a few thousand pounds on your advisers can be a false economy. If you are going to do it, you want to make sure you get it right.
“From the company, three executive board members were put in charge of the float. That was myself, our operations director and financial director. In the four months it took to get admitted to AIM we each spent anything between 30 to 100 per cent of our working week on it.
“In terms of the business benefits, the float obviously enabled us to raise the money we were looking for, but there are many other positive factors. As a listed company you are more likely to get PR and be thought of as more credible than a privately owned company. Businesses seeking a strong partner or looking to merge with us are also more likely to approach us directly now as they will know we have the funds and capabilities to complete a transaction.”
What I’d do differently
“If we’d had more control over the conditions, and we had identified what we wanted to do sooner, it would have been beneficial to have floated in 1999. However, at that time our turnover was only £4m, so we probably wouldn’t have been large enough at that stage.”
Note – As of 2 May 2008 Sumus Plc changed status to Sumus Ltd. On 6 May 2008 Sumus Plc and Lighthouse Group Plc merged to create the largest autonomous listed independent financial advice/wealth management group in the UK. The enlarged group now trades as Lighthouse Group Plc.
Related Guides
-
Outsourcing
Outsourcing is when you contract out a business function – a particular task, role or process…
-
Responsibilities to employees if you buy or sell a business
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), when all or part of…
-
When an employee resigns
When an employee wants to resign, you can try to persuade them to change their mind…