corporate finance Aim to be the Best

Aim to be the Best

For FDs of companies who are thinking about floating on AIM

The advice to finance directors contemplating such a flotation is to remember that the process has a large number of requirements that need to be met, and this requires extremely tight project management.

To provide an understanding of the overall requirements, below is a list of some of the more important documents that you need.

Business Plan. This basic plan shows how the business will generate (in time) profit and cash flow that will support returns to investors. The company’s professional advisers will want to see it at the outset to ensure that a flotation is feasible.

Long-term report. A potentially lengthy document providing a thorough description and analysis of the business, organisation, marketplace and the company’s financial projections.

Working capital board memorandum. A memorandum adopted by the board prior to flotation justifying its view that the company will have sufficient funds for at least 12 months’ trading.

Financial procedures board memorandum. This details the major internal controls and reporting arrangements. Its object is to document that the directors have established procedures on which to provide a reasonable basis for them to make proper judgments on the company’s financial status (required as part of the Stock Exchange’s admission application).

Prospectus. This is the key document produced for company investors, including detailed information on the company, its business, management team, products and markets. This may be produced initially in a ‘pathfinder’ form, essentially complete with all major facts apart from final pricing and share issue details.

The investor presentation pack. The management team will make presentations to explain their business and prospects to potential shareholders.

Broker’s research note. Although this is not completed by the company, it represents an important part of the marketing process. The note may contrast the company’s market position and financial valuation with a peer group of companies.

Nominated adviser / broker agreements. These are the legal agreements reflecting the services the company’s advisers will supply, and undertakings on the company’s behalf.

Placing agreement. This governs the details of the share placing and the relevant fee arrangements. It is signed personally be each of the directors, including the non-executives, who give detailed and extensive warranties to the financial advisers, including accuracy of information included within the prospectus.

Verification notes. These are extremely detailed notes produced to support the statements contained in the prospectus to ensure that the facts, statement and opinions are correct. It is an important step in mitigating directors’ potential liabilities by ensuring that investors receive such information as they might reasonably require before deciding to invest in a company.

One step proves to be very helpful at an early stage is to get the lawyers to brief the board on their potential liabilities under the prospectus.

Coming to terms with the different standards required between private and public companies can be an important transitional process for founding directors, who may well not have direct experience of life in a plc. If this is the case, then the finance director can have a valuable role to play in judging what regulations, contractual arrangements and governance structures are appropriate for the company, given its heritage.

WHAT ARE THE DIFFICULT BITS?

Stock market conditions

There are a number of practical judgments that management must make during the course of a float. Chief among these relates to uncertainty surrounding stock market conditions.

The uncertainty surrounding market conditions is such that one can not be sure whether a successful flotation can be accomplished at a particular time. As a result develop a range of business plans and financial models dependent on the amount of share capital actually raised. The more capital raised, the faster one can afford to invest in and develop activities. As always, one needs to assess the best balance between risk and reward for the business and its shareholders. In addition, contingency plans are developed in case investor interest is not sufficient to support a flotation within the desired timeframe.

Valuation

Valuing the business, esp. if at an early stage of development, proves to be a subject of some discussion. At the time of flotation, one does not always have a historical profits record that investors can refer to. Proxy valuation criteria need to be sought, and in some cases valuations based on projected turnover relative to a peer group prove to be most useful. There is a natural tension in pricing discussions between the directors (who are concerned about under-pricing the shares) and the brokers, who want to ensure that the share price remains strong after flotation.

Dealing with advisers

A company inevitably relies heavily on its professional advisers. They will have completed flotations and share placings on a regular basis, and will be in close touch with market conditions.

This does not mean that all their advice should be taken without question. All companies have their own individual characteristics or needs, and often specific items can be accommodated. There is often no absolutely correct answer to a situation – more usually there is an acceptable range of outcomes and it is up to the company and its advisers to agree where in the range the company wants to be.

Investors

Despite all the above, the fundamental point is that you are trying to sell the company as an attractive investment for investors. Different investors will be concerned about different factors, some of which may be unrelated to your company (for example, they are already overweight in your sector and want to sell rather than buy such shares).