Normally, when you first start up a business, you tend to keep it small and pretty simple. The company is formed and registered, shares are allocated as directors see fit and you begin trading. Within a few years, though, if business booms and you have a particularly innovative product or service, it might be possible to float on the London Stock Exchange. This is not for the faint hearted. Floating your company can be one of the most exciting and exhilarating experiences in business but it can also be time consuming, expensive and stressful. It will also change the shape of your company forever.
The companies with most to gain by going public have strong and substantial earnings growth or large quick growth potential. Having something unique or special is vital to put you ahead of the competition. Other essentials include a strong, stable management team and good internal controls and systems to handle the increased growth and financial changes.
Obviously, the main reason to float your company is to raise cash. The money raised can be used for buying other companies, paying off debt, funding huge advertising campaigns etc. When companies raise money by issuing shares they can still keep control. A company worth £100 million may raise £50 million by making, for example 50 million shares available at £1.00 each. Therefore the company still owns 50% and there are many shareholders helping to fund the growth of the company. Private limited company shares are normally restricted to its members, to staff and their families etc. They may only be sold or transferred with the permission of the directors.
There are three different share types. Ordinary shares have no special rights or restrictions and may be divided into classes of different value. Preference shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes. And, finally differential share rights/values which are ordinary shares with differential voting and/or dividend rights.
Apart from raising capital a float can provide an exit for existing investors who sell their shares as part of the floatation as well as allowing investors to trade shares. Of course floating a company also provides a market valuation for the company’s shares as well as increasing the company’s profile with customers, suppliers and business associates.
Disadvantages of floating a company can be many. Most companies cannot offer a return on investment sufficient to attract investors, so it is essential to have a good record in generating profits. Initial costs can be massive. Advisors fees can be between £150,000 to £350,000 for a small firm. After the float you need to pay commission on new money raised (this can be 5%), plus you will need to advisors after the float (corporate advisors charge at least £25,000). Even if you can afford it, you will have to submit to the rules for publicly listed companies, and also have to satisfy shareholders’ interests which may be quite different to yours. Shareholders may want to focus on short-term profits, or expect generous, regular dividends, which could undermine cash flow. Control can be lost, particularly if substantial investors want their own representatives appointed to the board and it can then be easier for another business to make a takeover bid.
Also consider the hidden costs. During flotation managers will be distracted from the daily running of the business and there will ongoing dealings with investors afterwards. Regulatory requirements include publishing full accounts twice a year and follow certain standards of corporate governance. Shareholders also need to be regularly and speedily kept informed of new developments.
If you are not put off these gruelling procedures, and are prepared for the costs and the stress involved then maybe floating your company on the stock market is real option and you can look forward to inviting all shareholders to the first Annual General Meeting.