Coming up fast: A section for entrepreneurs - Crash course - Preparing for a flotation

Coming up fast: A section for entrepreneurs - Crash course - Preparing for a flotation - You've weighed up the options and decided that going public is the way forward. The venture capitalists are itchy for an exit somewhere along the line and you feel th

by ALEXANDER GARRETT
Last Updated: 31 Aug 2010

You've weighed up the options and decided that going public is the way forward. The venture capitalists are itchy for an exit somewhere along the line and you feel the company would really benefit from the enhanced profile it would get on the stock market. The question is: when is the right time to launch your IPO?

PLAN WELL AHEAD. It may take only a few months to get your share offer off the ground, but the decision to float has repercussions on subsequent business strategy. 'You need to decide your financial strategy two to three years in advance,' says Howard Leigh, a partner of Cavendish Corporate Finance. 'If you were opting for a trade sale, you might want to maximise your profits at that point, but with a flotation, you might want the business to peak some time afterwards.'

CONSIDER THE WHY. If you want to float the business just to raise your own profile at the golf club, or simply to make a quick buck and then leg it, think again. 'An IPO is not an end in itself - it's the start of the second stage of your development,' says Graham Rose, director of corporate finance at broker Beeson Gregory. The stock market is best suited for companies that have long-term growth prospects and a repeated need for capital - not just a one-off injection. The reason for floating may be funding the roll-out of a service or marketing of a new product.

DON'T JUMP THE GUN. The stock market is unforgiving. 'It's a bit like getting married,' says Rose. 'Do it in haste and you will repent at leisure. If you set expectations and then fail to meet them, you will have a mountain to climb in order to regain respect. You will be damned for a long time.'

ARE YOU BIG ENOUGH? 'Five years ago, you could float with a market capitalisation of pounds 20 million or so,' says Ian Nolan, MD of 3i in the North-west. 'Currently, if you are a non-tech company, you need to be pounds 1 billion to get serious interest from institutions, but that could fall back to around pounds 500 million if sentiment swings back from tech to more conventional businesses.'

OVER-INVEST IN MANAGEMENT. It's a good idea to be top-heavy in management before you float, says Nolan. 'You cannot afford to go on the market with a management that will be stretched. First, you will have to spend considerable time attending to shareholders, and, second, you cannot afford any slip-ups.'

GET YOURSELF INTO PLC SHAPE FIRST. Assemble a board with some independent directors and a chief executive who reports to the chairman. Start to think and behave with the transparency of a public company. If you find it hard to stomach, maybe flotation is not for you.

ENSURE THERE IS GROWTH AHEAD. If there's one thing that the stock market is not interested in, it's an ex-growth company. Profits today are not essential - especially if you are in a high-tech area - but, unless you're a dot.com enterprise, you will need to demonstrate that there will be profits within, say, five years.

TAKE YOUR CHANCE WHEN YOU CAN. Most companies look for a moment when their sector is in favour and they are likely to achieve a high rating. But the market isn't always open to new issues, says Nolan, so you may have to take the opportunity when it arises. The priority is not to get the best price but to get your flotation away successfully.

DO SAY: 'Investors have the opportunity to participate in the next exciting stage of our growth.'

DON'T SAY: 'Shareholders can contact me on my yacht.'

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