Flotation

Exiting the technology business

A stock market flotation involves selling a percentage of a company’s shares on a stock market. In the UK, the main options are the London Stock Exchange’s (LSE) main market, typically for large companies, and the Alternative Investment Market (AIM), often chosen by early-stage technology companies. UK technology and life science businesses are also increasingly floating on overseas markets, especially if seeking access to international funds or planning to operate in another jurisdiction.

The success of a float depends on company characteristics, market conditions, and economic factors. Investors seek strong growth prospects, and if a business lacks these or operates in an unattractive sector, a trade sale may be a better option.

Preparing to float

When preparing to float a business must ensure it is able to comply with the legal and regulatory standards required of a public limited company. It will also need to ensure that its accounting systems are able to produce the information required to prepare annual accounts and reports which comply with the generally accepted accounting principles of the market upon which the company seeks to float.

During preparation, the management team should address any potential risks for investors, including updating regulatory filings, settling outstanding penalties and fines, and resolving any existing litigation. The aim will be to present the company as an ideal, well run, investment opportunity.

Appointing professional advisors

Having the right advisors is a key element to a successful flotation. The management team may have limited experience of the demanding legal, regulatory, financial and marketing processes associated with a flotation and external help, whilst more expensive, will be invaluable for several reasons:

• An advisor who provides poor advice could seriously affect a business' ability to attract investors and float successfully
• In addition a stockbroker will be required to generate interest in the business in the investment community 
• A corporate lawyer will be responsible for the legal 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 and perform financial due diligence

The flotation process

A typical flotation will take an absolute minimum of three months to complete, but usually longer (6 months is typical) and it 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 the management team do not allow the flotation to distract them from the day-to-day business of running and growing the company.

Advantages

• Access to capital enables the development of the business
• Once shares are traded on an open market they are easier to buy and sell, which will make them more attractive to investors
• If the management team intend to make acquisitions it is easier to offer shares in the company as consideration instead of, or as an alternative to, cash
• Offering employees extra incentives, such as share options, when there is a market for the shares is more attractive than offering share options in an unlisted business
• The greater status afforded to listed companies will raise the profile of the business

Disadvantages

• Flotation may result in a lower business value, especially in an unfashionable market, and makes the company more vulnerable to market fluctuations
• Only certain businesses are suitable for floating - it requires strong growth prospects and a solid management team to attract investors
• The original management team may lose control due to the need to consider external shareholders' interests 
• The initial costs are substantial (typically in excess of £300,000)
• Ongoing costs for listing and regulatory compliance are also significant, demanding time from management
• The exit may only benefit initial investors, with the management team possibly needing to remain during a post-IPO lock-in period