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Floating on AIM, a panacea for companies in the past few years, has become something of a joke in recent months as values plunge and recent initial public offerings that were once considered an example to all crumble to dust. Consider Floors-2-Go’s collapse for starters.

AIM transactions hit their lowest level in 2008 since 1999, according to Paul Johnson, corporate finance partner at accountancy firm Baker Tilly. Which is why even he is surprised by the findings of the firm’s latest Taking AIM survey of AIM-listed companies. Seventy-four per cent of more than 150 business leaders surveyed said they would still have listed even if they had known how hard 2008 was going to be. Sixty-nine per cent are also expecting some kind of recovery this year.

So why are they so optimistic? Johnson says AIM still fared better than “almost any other growth markets”. And Charles Cattaneo, partner at Grant Thornton’s office in Birmingham, says the market’s attractions are still there.

“There is cash available for the right companies,” he says. “You still have quite significant cash flows going, for example, into pension funds. Those companies have been nervous about equity so they have been holding this as cash. That could change.”

Sue Summers, chief executive of InvestBX, the Midlands’ own trading platform, says that with interest rates so low, “investors are looking at where they can diversify their interests”, which could include looking again at small cap floats.

Another attraction of being listed is that you can acquire new business using shares as well as money, so you do not have to keep borrowing to acquire. All the acquisitions EDI, based in Coventry, has done have been completed this way.

“You don’t dilute your existing shareholders’ stock if the acquisition is earnings enhancing,” says chief executive Nigel Snook. “If our share price is 70p and the acquisition we are making is £7m, we pay £3m and issue an extra six million shares. Because that is still less than 10 per cent of our share base it will enhance earnings per share.”

Now, of course, would be a good time to go hunting. But you need to be clear about what you are going to market for. AIM is a means of raising capital, not a means for you to exit the company.
It may be possible to take some money out after a float, says Cattaneo, “but it’s really mortgage money you get, not beach money”. In other words, not enough to retire on.

Charles Bond, a partner at law firm Cobbetts, adds that: “With AIM now there is a lock-in period for directors of any company that has been on AIM for less than three years. That’s why it’s a risky venture for directors.”

Those looking for a cash-out may be better off with a trade sale. On top of that, there will be many months of planning before you get to float – at the least six months, possibly 18. It’s all about grooming your business to make it acceptable to the institutional and private investors, although David Grove, former chief executive of safety barrier manufacturer Hill & Smith in Bilston, is dubious about these ideas in the wake of The Royal Bank of Scotland (RBS) collapse.

“It makes me laugh that RBS did the biggest rights issue in history,” he says, “and I know the sort of things they would have had to go through, yet four months later that company was bankrupt.”

But Elizabeth Gooch, chief executive of AIM-listed software business EG Solutions, based in Stafford, whose shares were once at £1.72 and are now 14p, says overlooking planning is where her float went wrong. “They spent at best 25 to 30 minutes on what we would do in the future,” she says. “All the due diligence was concerned about was the past history of the business only.”

Shortening preparation in this way could lead to problems where you end up doing the due diligence and preparing the admission document at the same time. Stephen McElhone, an associate at legal firm Harvey Ingram, says: “A good example is where a private company has bought back shares and thought they were cancelled. All too often you find that if this has not been done properly those shares are still technically in existence. That needs sorting out.”

Your accounting systems could also need an overhaul. “All companies that float on AIM have to use IFRS procedures,” says John Stephan, partner at accountancy firm BDO Stoy Hayward. “Most private companies in the UK are still using UK GAAP, so you need to prepare for conversion.”

Other nasties include making sure you have a proper board structure and, above all, appointing at least one non-executive director. There is also the cost of going through the float in the first place.

“For AIM we say that’s 10 per cent of your capitalisation – let’s say £500,000,” says Bond. But there’s also the cost of being publicly quoted – EG spends £250,000 to £300,000 a year on that.

Choice of platform to float on is also an issue: the consensus seems to be that the PLUS market is snapping at AIM’s heels, offering lower fees and sometimes more liquidity. A lack of liquidity among small cap stocks on AIM is something Paul Cliff, partner at legal firm HBJ Gatelely Wareing, says is “still not being addressed”.

But Tim Cofman, director at stockbroker W H Ireland, warns anyone thinking of floating on PLUS that some institutions will be barred from investing on companies in that market. Many of them had to change their articles so they can invest in AIM.

An early entrant on the PLUS market – or OFEX as it was known in 2001 – was rugby club Northampton Saints. But chief executive Allan Robson says this was a special case to raise money mostly from supporters for stadium development, yet still offered them a way out. He would have chosen another way to raise finance had a similar situation arisen today.

Cofman is equally scathing about InvestBX. The exchange opened in July 2007 and has won £3m in funding from the regional development agency (RDA) Advantage West Midlands. So far only three companies have floated, but Summers says there are others in the pipeline.

Cattaneo, Cliff and Bond all insist the exchange is not a white elephant, saying it has been a victim of the market and European regulation, highlighting how successful other regional exchanges around the world are, such as the Newcastle exchange in Australia.

But Cofman says the idea of there being enough support for a regional exchange in the UK is nonsense. “I don’t see any liquidity in InvestBX. The great and the good were possibly putting pressure on the first company to float, but I would have hated to be the second,” he says.

Grove, now chairman of Key Technologies, was the second to float a company on InvestBX in 2008. He insists he was not put under pressure by the RDA to use InvestBX, adding that “my views on RDAs are best kept to myself”.

The company managed to raise £2m, mostly from what he terms sophisticated private investors, not all of whom were based in the Midlands. But what attracted him most was the costs.

“The fees on AIM are much too high,” he says. “Perhaps the financial crisis will persuade the lawyers and other professionals that they are paying themselves far too much money.”

In the end it seems the decision on whether you float or not is often personal. “You have to decide: are you an entrepreneur or a salaried chief executive in a listed company? Culturally they are very different things,” says Gooch.

Others say much of what is happening to companies on the public markets – wild fluctuations in value and so on – happens off the market, too. “There is always a cost in raising finance,” says Cattaneo. “A private equity house and an institutional investor will be looking for similar returns on their investment, so their valuing will be close. You get more freedom as a director on the open market.”