You don’t need to IPO to achieve rapid growth. Just ask Richard Branson.
Founders generally also want to keep their equity close, both for control and so they can enjoy as big a percentage of any value growth as possible. But for some businesses, floating on the stock market can be the ideal way to unlock the capital necessary to realise their ambitions.
How can you tell when you’re ready? It is not all about size. There are costs to listing shares – both initially and over time – that could make it prohibitive if you’re too small, but the whole point of a market like London’s AIM is to enable companies that are relatively small today to achieve scale. AIM shares are naturally more speculative, which is why HMRC accepts them as unquoted stock for tax purposes.
More important as a founder is that you’ve decided to float for the right reasons.
Entrepreneurs tend to try to finance their expansion from their own cash flow for as long as they can. When that’s no longer possible or growth isn’t happening quickly enough, they’ll consider debt. Many firms, particularly those with predictable revenues that can service the interest, will be able to borrow. But others will need to look elsewhere: to venture capital or private equity (especially more early stage enterprises), and to the public markets.
This process is usually self-selecting, and not all firms that reach this stage will be ready to list. If you’re considering an IPO, I would always suggest getting as much free advice as possible. Speak with a few corporate finance brokers about the valuation metrics of the business. They will volunteer a range to give you a ballpark, but more important is understanding the things a potential investor will care about that will improve that valuation.
Also ask for advice more widely – from lawyers, accountants and nominated advisers (“Nomads”, the corporate finance advisers that regulate admission to AIM). A flotation is all about human relationships. Once it starts, the three to six month process will swallow up the lives of all concerned. You want to make sure you get on with the people involved.
Pre-IPO due diligence is also highly advisable. If you list on AIM, a detailed legal and financial due diligence report on your business will be undertaken so the Nomad can determine that you are suitable to be listed. You don’t want to spend a lot of money with accountants and lawyers only to discover an issue that means you have to delay. Engaging your advisers to perform a high level review pre-IPO will give you the best chance of ensuring that doesn’t happen.
Management needs to be awake to what listing will mean for the business post-IPO. For a founder used to having his or her own way, float preparation will usually involve supplementing the board with non-executive directors and plugging weak spots in the executive ranks. A new finance director may be required, for example. There are good corporate governance reasons for this, but it can lead to combustible situations between board and founder that can take up mental energy and management time.
Some will also be frustrated by the obligation to make announcements to the market of any news that could be considered price-sensitive, alongside regular financial reporting. Again, there are good reasons for these rules: people trading shares in your company should have full knowledge. But they can be seen by someone not used to these public market disciplines as a distracting nuisance, even though the consequences of non-compliance can be serious.
Listing is a tough process, but it can also be a catalyst for rapid growth and an opportunity for a founder to realise value from a company while maintaining control over it.
Despite some nervousness about the political and economic situation, the market for new flotations remains healthy for the right business. Investors love a story about pent-up potential that can be unlocked by an IPO. Critically, it is all about the credibility of the management team, and what they could do if only they had the cash to do it.