Don’t let your float sink
Gary Ashworth, chairman of InterQuest Group
A 12-point guide to avoiding flotation pitfalls.
I’ve been involved with companies on three UK stock markets. And, like everyone, I’ve made plenty of mistakes. If you ever consider floating your company, here are 12 tips.
A lot of people think it’s a way of cashing in. It isn’t. It’s one of the longest earn-outs in history. Floating isn’t a way out; it’s a way further in. And it’s very expensive. Apart from the initial costs of between £300,000 to £1m, plus up to 5% of the money raised, the on-going costs – in terms of investor relations, compliance, higher audit fees, road shows, taking journalists to lunch – can be between £50,000 and £100,000 a year for a small company.
If you have a clear-cut growth strategy that requires funding (like making acquisitions), or you want to incentivise your staff via ownership, then there are good reasons to float. If, however, you want to cash out, consider a trade sale.
There are many alternatives to floating if it’s development capital you’re after. Peer-to-peer lending, crowd funding, private equity involvement, invoice discounting and straightforward bank debt are worth considering.
A flotation takes an enormous amount of time. I’ve seen many boards put all their attention into the float, only for the business itself to take a turn for the worse. They may succeed with the float, but the vital first set of results aren’t good. It’s imperative to have one point of contact who’s responsible for the float. If necessary, buy in the experience of a non-exec or some kind of interim help.
The barber syndrome
It’s very difficult to get independent advice about floating because most of the people who understand it are the people who will gain financially from the float. It’s a bit like asking a barber whether you need a haircut. The answers are usually pretty predictable. So where do you go? First, network. Ring up the chief executive of a recently floated company and ask them about their experience. I have always found them to be receptive.
Choose the right market
Should you be heading for AIM, or ISDX, or Nasdaq? Pick the market that has the right sentiment towards your company, sector and size. Some are straight equity markets, whilst some focus on debt instruments.
Many people trip up here. Choose advisers that you get on with (and who have quality research in your sector) because you’re going to be spending an awful lot of time with them. Find ones with competencies in the areas that you need. Sorry, your friendly auditor may have to go, as a trade-off of cost vs. credibility.
Try to secure your advisers on a fixed-fee basis – and get it in writing up-front. If they don't want to play ball, find someone who does. The worst situation is when you're in a room full of advisers, with plates of sandwiches appearing every four hours; you look around the room and the cumulative costs of all these corporate people can easily be £5,000 an hour.
If you’re a small company with a market cap of less than £100m and little free market float, there will be no liquidity in your stock. It will be very difficult for staff or directors to buy or sell chunks of stock without affecting the share price. So get bigger. You need profits of £10m even to start to become liquid. Market-makers move the price up or down to hustle trade, not to suit you or even reflect reality.
This is incredibly time-consuming. While I’m very keen to protect shareholders’ interests, I reckon the pendulum’s swung too far. Deal times can increase; “class” tests need to be observed when considering an acquisition. Be careful to choose an advisor or nomad that acts as a referee, not a policeman.
Estimates and forecasts
For the first three reporting periods, you’re in “show-me” mode. Always under promise and over-deliver.
Find ones who know something about your sector, who can bring in business, or who have City contacts. Don’t just stick them there for compliance reasons. Independent non-execs are a key part of the board make up since they protect the shareholders who aren’t in the room. Choose carefully.
Be very, very careful. A lot of entrepreneurs like talking about their successes. But you can’t mouth off about your profits if the information isn’t in the public domain.
There’s very little loyalty among shareholders, some are patient, some will dump stock mercilessly. Retail investors might prefer to sell your shares and move onto the latest fashion or newspaper tip, so build very strong investor relation bonds and have good lines of communication. Articulate the strategy properly. Not all plans work out in the timeframes envisaged, some acquisitions disappoint, staff change. Keep the investment community up to date at all times. Tell them the good news – and the bad.
Have you got one? Because you will be asked. Some shareholders would prefer to see you invest retained earnings into growing your company, whilst others are motivated by yields, especially in this time of low interest rates.
One final thought. Never borrow against your shares. Lots of people use their shares as collateral, only to see the share price collapse. By then they’ve spent the money and own more than their shares are worth.