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The principal reason for engaging in an initial public offering (IPO) is to raise extra capital to finance expansion of the business, either organically or by acquisition. An IPO can also give existing investors an opportunity to realise part of their investments and may increase the impact of staff incentive schemes by giving access to a liquid market. Less tangibly, being listed may also improve customers’ and suppliers’ perceptions of the company’s stability and can raise the profile of the business generally. However, listing is not right for every business.

Are we ready to float?

Although different markets have different requirements, fundamentally, you need to be the sort of business that market participants want to invest in. Otherwise there is a risk that the benefits of capital raising and liquidity will be lost as investors turn their back despite the listing. You need a strong and experienced management team who will be comfortable in the glare of publicity. A viable business plan is a must and, after the hype of the dot-com boom, there is now more scepticism about companies promising the earth without a sound financial track record. And bluntly, market sentiment is such that even some very well run and profitable businesses can fail to take full advantage of a float because their sector isn’t ‘sexy’ enough.

Which market?

There are three principal options in the UK. The Official List of the London Stock Exchange (LSE) is where the big beasts are. Market capitalisation for these companies is usually upwards of £20m and a three year track record is generally required. AIM is the junior market of the LSE and is more flexible and better suited to small or emerging companies. According to a recent study, half of the new listings which took place in 2004 were on AIM. PLUS market is an independent market which is again better suited to small or emerging companies — of the three it currently has the lowest public profile. Continuing obligations for AIM and PLUS market are less stringent than the Official List. Also, shares listed on PLUS market and AIM are regarded as unquoted for tax purposes which may have advantages for investors. There may be a particular reason to raise the profile of the company in a particular jurisdiction, which may affect the decision about which market to choose. It is not uncommon now to consider listing on an overseas market such as NASDAQ or the Icelandic Exchange.

What’s the downside?

The IPO process is costly, both in terms of management time and advisory fees. The costs vary depending on the market. The LSE estimates a minimum of £300,000 to float on the Official List with total costs between 4-8% of the sale proceeds. By comparison an AIM float might be £100-200,000. Looking forward, there are substantial continuing obligations for listed companies, which again vary from market to market. Managing these will involve still more management time and advisory costs. And, more generally, you will have to get used to running the business in public, justifying the decisions you take and considering what impact they will have on market confidence. Not everyone relishes this.

How long will it take?

The time taken will vary for every company. Floating on the Official List will usually take around six months, though you can expect to spend up to 2 years preparing the business beforehand. Timescales are shorter on AIM and PLUS market but much will depend on how ready you are to float.

Talk me through the process

Once you have decided that an IPO may be for you, you will need to appoint advisers. As a minimum you will need a corporate finance adviser and solicitors (again different markets have specific requirements). There will then follow a great many meetings and discussions as the business is thoroughly reviewed and a prospectus and other legal and financial documents are prepared. The marketing of the issue will also be critical and much time will be spent preparing the presentations that will be made to potential investors, press and analysts during the latter part of the IPO process. Perhaps paradoxically, although you will start discussing valuation with your advisers very early on, final decisions as to pricing will come late in the day (probably in the week before the IPO) so as to match market sentiment as closely as possible. Then, probably sooner than you think, documents will be finalised and published, the shares sold and the market authorities will admit them to trading. Job done? Not quite.

What happens next?

Being publicly traded is an ongoing process. Quoted companies are subject to a number of ongoing obligations — more so on the Official List than on PLUS market or AIM — principally designed to ensure that the markets are kept properly informed about the company. Price sensitive-information must be promptly disclosed. Directors’ share dealings will be restricted. Certain major transactions will require shareholder approval and you will be expected to adhere to good corporate governance standards generally. And besides these legal obligations, management will have to make a substantial effort to make the most of the opportunities that an IPO offers — communicating with investors on a regular basis and continuing to demonstrate why they should back this business.