What does it mean?
Floating a company – also known as “going public” – is the legal process by which a company goes from being privately to publicly held. The floating process culminates with a percentage of the company (in the form of shares) being made available for purchase by the general investing public on a public investment exchange (such as a stock exchange). This sale of stock which was previously privately held is called the Initial Public Offering (IPO).
In the UK there are three principal markets on which a company can choose to float:
- The Official List at the London Stock Exchange
- The Alternative Investment Market (AIM)
Going public is viewed by many as the epitome of financial success and reward. However the decision to float a company must be carefully considered from both a business and legal perspective. Flotation is a complicated and costly process which, if it is to be successful, will require the appointment of independent legal and financial council and a dedicated IPO team.
Why go public?
To raise capital
Flotation provides broader access to the raising of capital for several reasons:
- The IPO itself generates a large amount of capital for the company. This is often a way of generating a return for those (owners, venture capitalist, etc.) who provided the initial capital. Becoming “liquid” is a big reason for going public – investors need to get paid back.
- For private companies with debt, selling shares is a cheap source of capital because money is raised without incurring interest payments (as with loans etc.)
- Going public makes alternative sources of capital available. For instance, the public debt markets are more accessible to public companies than to companies without a listing.
- Going public generally improves a company’s debt to equity ratio and may enable it to borrow from more conventional sources (ie: banks) on better terms in the future.
- The use of incentives such as stock options and stock bonuses to attract and retain employees and management became very popular in the 1990s. Equity based incentives have proven to be particularly good for attracting sought-after candidates to higher tier managerial positions.
- Press coverage of public companies is typically greater for public than for private companies. This leads to increased public visibility. There is also significant prestige attached to being publicly listed company, and a widespread conception that these companies are stronger and more substantial which often helps to secure long-term customer and investor relationships.
The problems of going public
- High initial cost (potentially 15-25% of money raised by IPO) and recurring costs such as annual audit fees, increased PR fees and higher salaries for financial personnel. Length of process – typically 3-6 months but often over a year – which is likely to consume the attention of the management for long periods, potentially distracting the, from other areas of business development. High levels of disclosure leading to information about any financial losses, criminal actions, lawsuits etc. being in the public domain. Pressure of the market – management will be under intense pressure to deliver results which may lead to focus on short-term rather than long term development.
For more information on:
- In Order to float:
- Due diligence
- Important due diligence steps include: