Preparing for the market

Source: Stock Market Digital

Date :22/05/2007 14:38:34

Gary Houghton takes us through the decision to float.

The decision to float on AIM is significant and a board must consider very carefully whether this is the right option. Gary Houghton considers some questions the board should ask itself prior to embarking on the AIM process

Is the business suitable for AIM?

The AIM market has progressed strongly over recent years. This partly reflects the now famous ‘light regulatory touch’ of AIM. The criteria for admission under the AIM rules may not be as onerous as for admission to the main market. For example there is no requirement for a company to have been in existence for three years and there are no rules regarding minimum free float. A Company does need to appoint a Nominated Adviser (Nomad), who is responsible for ensuring that the company is suitable to be admitted to AIM. Prior to the listing the Nomad will carry out extensive due diligence procedures aimed at establishing suitability. These wide ranging procedures will include:

• An assessment of the dynamics of business and its commercial opportunities

• An assessment of the historic financial position of the company and a critical assessment of the financial projections

• A detailed review of the legal status of the company

• An assessment of the company’s financial reporting procedures and systems and controls

• An assessment of the management structure and its effectiveness

Does the business represent an attractive investment opportunity?

Almost certainly, a key reason for the float will be a related fund raising, whether it be to raise capital to fund growth or to partially fund an exit for current shareholders. Be absolutely clear that investors will look at the opportunity in a cold and calculating way – investors want to achieve a healthy return on their investment, so the answers to the following questions need to be ready

• Is there a growth strategy? Most AIM investors look for capital growth, you will need to convince them of the potential for your business to grow, and deliver enhanced shareholder value.

• Is the business strongly profitable? Some investors look for strong dividend yields, but in this scenario the underlying earnings must be sizeable and robust, with clear visibility of future revenues.

• Is the management team strong enough? The strategy may be sound, but it will only be as good as the management team which has the responsibility for its delivery. Many AIM companies are initially led by single minded entrepreneurs – investors will want to see that there is a genuine depth in the management team, and not an over-reliance on a single individual.

Is AIM the right option?

The float should assist the business to achieve its objectives – it is one step in a long term strategy and not an end in itself.

Is the board fully aware of the responsibilities of being a public company?

AIM Rules are not onerous, compared to the full list, nevertheless there are continuing obligations and the board must be aware of these and be prepared to comply with them. Advisers will fully brief the board on their ongoing responsibilities. The financial results and prospects for the business will be subject to regular scrutiny and press comment. Whilst this can have benefits, remember that there is a downside too.

Top preparation tips

Preparation is the key to a successful float. SO REMEMBER

• Consult early – advisers will always be happy to talk to you. Make sure you speak to AIM specialists with a depth of experience.

• Make sure you fully consider all the funding options, such as Venture Capital or a Structured Debt package.

• Be aware of costs and workloads.

• Appoint advisers with the right credentials.

• Timing is very important. Prepare early, appoint advisers early and give yourself plenty of flexibility in your timetable.

• The float process is time consuming and intense. It is also great fun – once you’ve embarked on the assignment make sure you enjoy it!

Gary Houghton has specialised in AIM transactions since working on his first AIM float in 1997. He is a Corporate Finance Partner at Baker Tilly’s Manchester office and is Head of Capital Markets in the North of England and Scotland.