Introduction
 
A stock market flotation involves selling a percentage of your business in the form of shares on one of the stock markets. There are three stock markets in the UK. At the top is the main market of the London Stock Exchange, which is generally populated by large companies, and then there is the Alternative Investment Market (AIM) and PLUS, both of which are specifically designed for smaller companies.

Floating on the stock exchange can be time-consuming and costly so is not suitable for all businesses. You might consider it if you want to raise capital, or have private investors or an owner-manager that wants to cash in on their investment. It can also help you increase your business' profile and motivate your employees by issuing them with shares.

This guide explains the advantages and disadvantages of floating on a stock exchange. It sets out the features of the different UK markets, how to appoint advisers and how to prepare for a float.

Is your business suitable for flotation?

Stock market flotations are unlikely to be suitable for most smaller businesses. Before you even consider a flotation, you need to determine whether your business is a suitable candidate.

Investors will only be interested in buying shares in your business if it has 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 have to assess whether your business can deliver that rate of return. Ask yourself whether:

• the 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 can't deliver the necessary growth and that it's in a relatively unattractive sector for investors, a trade sale - where the business is sold to another outside party - might be a more viable option.

Find out whether your business is suited to flotation on the London Stock Exchange website.

What is a flotation and why consider it?

A stock market flotation involves selling a percentage of your business in the form of shares on one of the stock markets. There are three stock markets in the UK. At the top is the main market of the London Stock Exchange, which is generally populated by large companies. The other two markets are aimed specifically at smaller companies - the Alternative Investment Market and PLUS.

When you decide to float a business, you get it independently valued and then decide what proportion of shares to sell. The amount you decide to sell will depend on how much money you want to raise. You might need enough to buy a piece of plant, for example, to pay back a venture capital investor who wants to realise their investment, to expand your team or to launch a product overseas.

There are additional benefits to a stock market float besides raising funds. It can result in your business gaining a higher public profile and can also raise its status with customers and suppliers. Many companies that float on a stock exchange also find that it increases staff motivation - especially if you issue your employees with shares in the company.

Advantages and disadvantages of flotation

Even if your business is suited to flotation, it may not be the right choice for you. There are a number of key advantages and disadvantages to weigh up.

Advantages:

• You get access to new capital to develop the business.
• A float makes it easier for you and other investors - including venture capitalists - to realise their investment.
• You can offer employees extra incentives by granting share options.
• Being a publicly quoted company can provide customers and suppliers with added reassurance.
• Your company may gain a higher public profile.
• Having your own traded shares gives you greater potential for acquiring other businesses, because you can offer shares as well as cash.

Disadvantages:

• Your business may become vulnerable to market fluctuations beyond your control.
• The costs of flotation can be substantial and there are also ongoing costs such as higher professional fees.
• You will have to consider shareholders' interests when running the company - which may differ from your own objectives.
• You may have to give up some management control of the business and ultimately there's a risk the company could be taken over.
• Public companies have to comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance.
• Managers could be distracted from running the business by the flotation process, and by dealing with investors afterwards.
• Employees may become demotivated. If shares are only offered to selected employees, those without shares may resent those who have them if the flotation is successful. In addition, shareholding employees could feel that there is little left to work for if they are sitting on valuable shares.

Choose the right market

There are three main options when floating your business - PLUS market, the Alternative Investment Market (AIM) or a full listing on the Stock Exchange Main Market.

PLUS

• Aimed at smaller companies wanting to raise up to £10m.
• Regulated, but requirements are not as stringent as those of AIM or the Main Market.
• 
  Flotation and ongoing costs are lower than AIM or the Main Market.
• Pool of investors primarily limited to private investors, although this may change.

AIM

• No prior trading record required.
• Higher profile than PLUS, with more interest from the investment community.
• Part of London Stock Exchange, but with more flexible regulatory environment than the Main Market.
• AIM-listed companies are attractive to a wide range of investors, including institutional investors.
• No minimum percentage of shares needs to be made available.
• Nominated adviser required at all times.
• If trading for less than two years, existing shareholders can't sell their shares until at least one year after flotation.

Stock Exchange Main Market

• Only suitable for the largest companies.
• The company needs to have been trading for at least three years.
• Minimum of 25 per cent of the company's equity must be floated.
• Widest possible audience of potential investors.
• Professional fees and costs much higher than for flotations on PLUS or AIM.
• Stringent regulatory requirements.
• Shareholder approval needed for some transactions.
• Admission documents need to be pre-vetted by the UK Listing Authority.

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.

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.

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.

If you're floating on PLUS your adviser will need to be a member of PLUS. Companies opting for an Alternative Investment Market (AIM) flotation require a nominated adviser (NOMAD) who is on the London Stock Exchange register of advisers.

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 review and audit the company's finances.

For large-scale floats it's worth considering the services of a financial public relations company to reach wider audiences of investors.

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Prepare for a flotation

In preparing for a flotation you must ensure your business complies with the legal and regulatory standards required of a public limited company.

You need to ensure that your annual accounts and reports comply with the generally accepted accounting principles (UK GAAP) of the London Stock Exchange.

It's important that your business complies with all the rules and regulations of the market you are joining, whether this is PLUS, Alternative Investment Market (AIM) or the Stock Exchange Main Market.

Your business also needs to have the right legal structure. Sole traders and partnerships can't float – only companies.

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

Price your business' flotation

Deciding on the right price for your business can be one of the most difficult aspects of a flotation, and can be a matter of intense discussion between you and your advisers.

Most companies are valued on a multiple of their historical and expected future earnings. If you set a value more geared to future earnings it's often best to err on the side of caution, because if you fail to achieve those earnings your share price is likely to fall.

A number of factors can influence the pricing decision. If your business is in an exciting, fast-growing sector or is market leader in its field, investors may be willing to pay a premium for the shares.

Sometimes it's best to set a share price at a level lower than you would normally value the business. This may help your share price to rise after flotation - making a good impression on potential future investors.

Many companies often don't find out whether they have got their pricing decision right until a week or so after the flotation has taken place.

The flotation process

A typical flotation will take at least three months to complete, but could take as long as a year to ensure that everything is in place and the company is ready to go public. For this reason, it is important to ensure that you do not let the flotation distract you from the day-to-day business of running and growing the company.

When undertaking a flotation, you should:

• Choose the right advisers to guide you through the process.
• Make sure your accounts and legal structure comply with the rules and regulations of the market you're joining.
• Nominate someone in the company - typically the finance director - to take responsibility for the process.
• Decide what type of flotation you want. An introduction is the easiest and cheapest option, and is used if enough of a company is already in public hands - perhaps for a move from Alternative Investment Market to the Main Market, for example. In a private placement your shares are offered to selected institutional investors. This allows you to raise capital with lower costs - but the reduced shareholder base could mean a reduced market in your shares further down the line. In an initial public offer (IPO) shares are offered to the public and investing institutions. This can help you raise more capital but is the most expensive route to market.
• Prepare a prospectus which will contain the key information about the company and the share offering. Remember that you're legally responsible for the accuracy of any information within this document.