Floating a Company

'Floating a company successfully requires a carefully planned pre-float preparation stage'

What Does Floating a Company Mean?

Floating a company on the stock market involves selling a percentage of your company in the form of shares to stock market investors. These could be institutional investors or private investors/ individuals.

In the UK, there is a choice for stock markets, each with their own characteristics and design to meet the needs of different types of companies. At the larger end is The London Stock Exchange’s Main Market which is generally populated by larger companies. The Main Market is also home to the top 100 largest companies known as the FTSE 100.

However, for the owners of smaller companies considering floating a company, there are also stock markets which are designed specifically with smaller companies in mind such as The London Stock Exchange’s AIM stock market, and the ISDX stock market operated by ICAP.

The UK is regarded globally as operating well regulated and transparent stock markets, which cater for the needs of not only UK companies, but also those based overseas. London, is home to all the major stock markets in the UK, and remains one of the largest and most vibrant financial centres in the world. London is also home to some of the deepest pools of investment capital in the world, making it a natural destination for the Directors and owners of companies who are considering floating a company.

Deciding whether floating a company is the right strategy

Choosing whether to float a company is one of the most important business decisions that the Directors and owners of a company will make, and whilst there are significant benefits in floating a company there are also some drawbacks.

Your company and your shareholders will have unique aspirations, and long term objectives which mean that the decision to float on the stock market must be based entirely on what is right for your particular circumstances and those of your stakeholders.

The first step in floating a company

In order to weigh up the benefits and drawbacks of stock market flotation for a company it is essential to undertake a feasibility exercise first, before making any decisions.

A flotation feasibility study may be undertaken by your company, if you have the financial and stock market expertise in house. Alternatively, Holland Bendelow can undertake a study on your behalf.

What are the key ingredients required in floating a company?

The Harvard Business School undertook a ten year study into the factors that affected the success of newly floated companies. Over 2500 senior executives were researched and asked to rate the success of their company’s flotation. The results were compared with objective performance reviews for a three year period following the initial flotation.

The key finding of this comprehensive research was that floating a company successfully required a carefully planned pre–float preparation stage, and that this may be crucial to the success of a stock market flotation for companies. Perhaps unsurprisingly, the most successful companies reviewed in the study were those that prepared well in advance of the flotation.

Importantly, the research also showed that a number of non-financial factors had a bearing on the success of floating a company. Many of the companies that had been most successful once floated had taken time to strengthen their senior management teams prior to the flotation, and had a record of retention of key staff, often through share-based inventive schemes.

Method of flotation

Depending on the size, nature and capital requirements of your company, there may be a choice of four different methods of floating a company.

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Floating a company via Stock Market Introduction

Existing shares in the company are admitted to trading on a stock market such as AIM, but no new shares are issued to stock market investors in the company. This method of floating a company is often suitable if the company has no short-term need to raise funds or extend the company’s existing share ownership more widely. Floating a company via an introduction is likely to be the most cost-effective method for a company to float on a stock market.

Floating a company via a Stock Market Placing

The company will issue new shares to a small group of stock market investors; usually these will be institutional investors. This will be undertaken by a Broker prior to the company being admitted to trading on a particular stock market. Floating a company by way of a stock market placing will enable the company to have greater discretion over the number and the nature of who the company’s new shareholders are. A placing also provides a company with the opportunity to raise capital through the flotation at relatively low cost. Floating a company via a placing is likely to be less time consuming and less onerous than undertaking an IPO (Initial Public Offering).

Floating a company via an Initial Public Offering (IPO)

An IPO describes a flotation in which shares in the company will be offered to the public, thereby attracting a wide range of shareholders. Because of regulatory requirements, IPOs tend to be the most expensive method of floating a company and therefore this method of flotation is more common for larger companies raising significant amounts of investment capital and seeking a broader shareholder base.

A reverse transaction into an existing Cash Shell

For some privately owned companies, using a cash shell can provide a less risky route to joining the public markets than the more conventional listing and fundraising. Companies are often attracted to floating via a reverse transaction into a cash shell as there is a transparent amount of cash on the balance sheet of the shell company ready to invest in the right company.

Who invests in a company when it is floated?

The process of floating a company provides companies with the opportunity to attract external investors from across a spectrum of the investment community.  The size of a company, and which stock market the company is floated on, will largely dictate the most appropriate balance of a company’s shareholder base.  Often company brokers will look to bring in a mixture of institutional shareholders, retail shareholders (individuals) and, in some cases, venture capital trusts (if the company meets certain criteria).

How stock market investors choose which floated company to invest in?

Stock market investors are looking for a balance of risk and reward for any sum they choose to invest. It’s helpful for a company to have a simple yet strong story about their business, its products and services on which investors may base their investment decision.

How many shares should a company sell?

During the process of floating a company it will be the directors of the company and its advisors that will decide what proportion of the company’s shares to sell. This may be influenced by the size of the fundraising required and the valuation of the business. Other factors too may influence this decision, such as whether to pay off existing shareholders, including venture capitalists, or bank debt.

What are the benefits of floating a company?

  • Raising initial growth capital. Floating a company enables a broad range of sizes and sectors of companies to raise substantial growth capital to grow their businesses.
  • Access to long-term investment capital. Providing capital via repeat fundraisings over the longer term.
  • A realistic exit option for existing investors. The opportunity for existing shareholders in a company to exit or part exit the company.
  • Creating a heightened profile and credibility for a company. Flotation creates a higher public profile for companies with the opportunity to use the enhanced profile to promote the company, and improve brand awareness.
  • The opportunity to introduce share incentive schemes. These schemes help to attract, incentivise and retain key staff.

What are the drawbacks of floating a company?

  • The process can be time consuming  However, this may depend upon the size of the company and the chosen stock market.  For example, large company undertaking a sizeable IPO on the London Stock Exchange’s Main Market will require considerable planning and resources. Alternatively, a smaller company joining AIM stock market via an introduction would require far less input.
  • Cost.  The costs involved in undertaking a flotation vary depending upon the size of the company, the size of the fundraising and the choice of stock market.  However, many of the costs associated with the flotation may be back end loaded and payable only on a successful flotation and fundraising.  Most companies choose to pay a proportion of the costs of floating out of the funds raised once they have joined a stock market.
  • Accommodating external shareholders. Usually floating a company will mean that certain Corporate Governance requirements will need to be met, for example the company’s board will be required to consist of both Executive Directors and at least one Non-Executive Director, depending on which stock market the company floats. Ultimately the company’s board will be answerable to all its shareholders.
  • Complying with on-going obligations. Directors considering floating a company will also need to take into consideration the frequency and nature of reporting obligations of the particular stock market they join. Stock Markets such as AIM and ISDX have reporting requirements, which are designed to be less onerous for smaller companies.