Flotation
The idea of being listed on one of the stock markets with the public trading in your company’s shares can be an exciting one. However, the costs of preparing for a listing and then meeting the regulatory and corporate governance obligations of a public company can be at best daunting and at worst prohibitive, not just financially but in terms of management time, too, for a small company.
The process can take anything from three months to a year and it is not a
step which can be taken without a banking, broking, legal and
accountancy team. You will have to produce a prospectus for potential
purchasers of the shares and the statements in that prospectus will have
to be tested by a process of due diligence to ensure they present an
accurate picture of the company, its past performance and the outlook
both for the company and the sector in which it operates.
The value of the company, as measured by the price at which the shares
trade at listing, will be uncertain. Markets can be influenced by
factors which have nothing to do with your company or your sector and
events and sentiment on the day of listing can move the valuation
substantially up or down. Small companies are more likely to suffer in
an uncertain market climate.
A flotation does make it easier for you and other investors to realise
their investment. It will also raise your company’s profile, give you
access to new capital to expand the business and probably make it easier
for you to acquire other businesses because you can offer quoted shares
as well as cash.
Listing on the main London Stock Exchange is the most expensive
flotation route and requires the largest continuing commitment, both of
cash and management time. There are stringent regulatory requirements
both pre and post flotation which make this a suitable route only for
the largest companies.
AIM listings are intended for smaller companies. Initial and continuing
costs are lower and regulation more flexible. However, the average size,
in terms of market capitalisation – that is, the market valuation – of
AIM companies has increased over time with smaller companies dropping
out of the listings.
The Plus market is designed to meet the needs of smaller, growing
companies with a valuation below £10 million seeking to raise equity
finance to expand and to trade their shares. There is no requirement to
issue a full prospectus to join Plus, making it cheaper and more
straightforward for companies to achieve a flotation. Once listed, the
rules for companies are similar to those of AIM but ongoing costs are
lower. Plus is the third largest stock market in the UK, behind AIM and
the main market, with about 200 companies listed across a broad range of
sectors. Investors are primarily private individuals.
Trade Sale
For many small to medium size companies, the most favoured and most likely exit for shareholders is by a trade sale.
If you have created a successful start-up, turned around or developed an
established company, then you and your business will be known to others
operating in your sector and, of course, to your customers.
It is not unknown for a company to buy a key supplier but, more often,
trade interest comes from a competitor or from a company making a
related product. Key factors in deciding a potential purchaser to make
an approach will be the synergies which can flow from putting the two
companies together and the benefit of removing a competitor from the
market.
A trade purchaser, familiar with the sector and making an opportunistic
bid, may occasionally only require minimal information before proceeding
with further verification of financial performance, contracts,
ownership of assets and legal liabilities as the sales process
progresses.
However, if you have not been approached by a potential purchaser or you
believe you can maximise the price by stimulating competing bids, you
will need to produce a Sales Memorandum. This is similar to the
prospectus required for flotation but subject to less formal regulation.
A key difference between a trade sale and a listing is that members of
the public can buy shares at a flotation and it can be assumed that they
may have little expert knowledge about the trends for companies in your
sector. In contrast, a trade buyer will almost certainly have a clear
view about whether the sector in which you both operate has a buoyant
future or faces the challenge of managing decline.
Financial Sale
A planned flotation or a trade sale can both be derailed by interest from a financial buyer.
Private equity houses purchase businesses in diverse sectors as vehicles
for investment and therefore have very specific requirements of their
target companies.
Some private equity houses specialise in specific sectors; most,
however, have a diverse portfolio of companies and are differentiated by
the size of the deals that will interest them. Some, for example, will
not consider any deal of less that €500 million.
Private equity houses look for companies which have an above average
potential for profit growth, either because they are in burgeoning
sectors of the market or because they have been inefficiently managed
with either too high a cost base or poor sales revenues compared to
similar companies in the sector.
The companies also have to be cash generative to meet repayments on the
substantial lending which forms part of the private equity purchase
package.
Private equity houses are not long term owners of a business, typically
looking to exit with an above average return on their investment in
three to five years. Management is incentivised to reach this target by
being allocated shares at a favourable price at the time of purchase.
In theory, a private equity purchaser should not be able to outbid a
trade buyer. The financial buyer does not usually have the cost
synergies which come from putting two similar companies together nor the
benefits of combing sales or manufacturing work forces.
However, before the banking crash, private equity houses helped by
ingenious and ultimately risky financial instruments were able to emerge
as the highest bidders or, in some cases, to succeed by offering a
seller the certainty not available either through flotation or from a
trade buyer requiring clearance by the competition authorities.
Following the banking crash, the private equity market has changed with a
return to more conservative financing of deals and a downgrading of
expectations of the timing and size of returns on the investment. The
number of private equity deals has begun to increase quarter by quarter
during 2010.
If you want to attract a private equity buyer, you will have to prepare a
case to show your business is capable of exceptional growth – and
explain why you do not want to be around to enjoy the benefits of that
growth – or, alternatively, rely on the private equity experts
perceiving a potential which has escaped you.
Management buyout (MBO)
For many business owners who have created an enterprise from scratch and are keen to see it continued with the same values and personnel, a management buyout is the preferred sale option.
Selling your company to a family successor or to a group of employees
within the organisation can be a good way of receiving value for your
company and securing its independent future.
The decision about whether this route is available, however, is largely
out of your hands. It requires a management team to have the
entrepreneurial spirit and confidence in the future of the business to
invest a potentially significant amount of their own assets or take the
risk of substantial borrowing to raise the necessary purchase price.
Some owners help by retaining a shareholding alongside the new
management owners, but you may find it hard to have a proportion of your
assets tied up in a company which you once controlled but in which you
now play no executive role.
Most advisers would counsel against relying solely on a management
buy-out, even if your management team is keen to pursue this route. In
the present climate, raising the bank finance may prove difficult for a
team with no track record of having discharged financial obligations to
major lenders.
There is no harm on running a trade sale process in parallel with
allowing a management team or the wider body of employees to put
together its own bid for the company. There are various tax advantageous
Trust structures to assist employee purchases.
Even if your business was a management buyout originally, secondary MBOs
are now not unheard of. Certainly, if your management team do see
themselves as purchasers, you will understand the thrill of becoming an
owner of the company in which you have worked and taking it forward to
new success.
