The UK’s second largest leather sofa retailer, Land of Leather, floated in July 2005 in a tough retail climate. Fundamental to the float’s success was establishing the business’s suitability for float and the investor appetite. Another significant challenge was convincing analysts that Land of Leather had a strong growth proposition despite the numerous retail failures dominating the media. Finance Director Clive Hatchard explains.

Why we floated

We took the decision to float to provide an exit for our venture capitalist. Our VC had invested in Land of Leather as part of a grand plan to consolidate the furniture sector. They already had Furniture Land, they had 50 per cent of us and they wanted to bring together £500-600 million of turnover into one group because the furniture sector is quite fragmented, and then they were going to float the whole thing. It became quite evident to us that they weren’t going to go through with it as they were missing out on big groups that were in play. So we went to them and suggested the float. /p>

Testing the waters

Once we’d decided to float we spent a day with Ernst & Young at one of their bespoke Float Rooms™. Five partners and our management team tested our suitability for IPO. They tested the business in terms of the market competition and future trends. They questioned our management team on both the business reasons and our personal reasons for floating. They talked about the shareholder objectives and how we were going to align those and helped to pressure-test whether flotation was the right exit or whether we should be taking a different route.

It is important to only kick-off the float process if you know that you are going to get to the end game. When you start the process you open a can of worms in terms of people’s emotions. Everybody suddenly wants to take that next step and leave their private environment to become a public company. And that is probably half of the pressure pot that you put yourself in. You don’t want to go back having failed and try to reassemble a jigsaw from a pile of pieces with very different objectives.

Testing the investment appetite

We went for a pilot fishing trip because the retail environment was so bad. We did a mini roadshow – eight presentations – and we got seven out of eight saying they would play at the right price. The most disinterested, stony-faced investors can often be your best investors, and those who appear to love you, are really engaged and ask all the questions, often don’t invest.

Timing it right

We had a strong growth story to take to market. Over the prior three years our financials showed £80 million, £100 million, £156 million in turnover, profits had quadrupled. The trends looked good.

Making money is all about timing. Our figures were perfect for float. I didn’t want to risk waiting another year that might be stagnant or show a contraction in growth – and then your record looks horrible so it takes another three years to get into a position to float again.

Timing it right also requires a decent future of growth – don’t leave it too late, until after the business is exhausted or near the end of your growth trajectory. We had very obvious medium-term growth prospects. The market was growing, leather was still a popular product and we had a very simple store rollout plan. You can’t go to market having already exhausted all the obvious gains.

Challenges

The short period between buy-out and float was an initial concern for investors. We found the market was very cynical about venture capital-owned companies. They think venture capitalists know exactly when to get in and when to get out, so there is always concern that the market will be left with the baby.

We had the additional challenge of trying to float in a tough retail climate with newspapers splashed cover to cover with stories about retail doom and gloom.

The first thing we had to do in each presentation was explain why we were coming to market one year after an MBO and in a depressed retail environment. We had to show that our value proposition had potential and we had to educate the market that buying patterns had changed and sofas are now more disposable products.

Benefits for management

Beyond the obvious prospect of capital gain, float represented an opportunity to retain control rather than selling the business. Some of the team had been there since we’d had three stores, and had grown it to 72. The business was their baby and they wanted to see it through and to be able to look back and say ‘I created that’. And for some of us, including me, it was the next challenge. We’d done private, we’d done venture capital, and the next step was to play in the public arena.

What we learned

• The right broker/analyst is vital
• Get to know the sales team
• Get a good company secretary
• Invest in a good chairman
• Pick non-execs with a name in the City
• Appoint project director to run company involvement
• Use experienced advisors
• Do what you can upfront (Recruitment, tax planning, share option schemes, committees/governance rules, alignment of shareholder expectations, due diligence, property/pensions/legal due diligence)

This article was originally published in Masterclass magazine.

Land of Leather is the UK’s second largest retailer of leather sofas. The group currently trades from 85 retail outlets in the UK and the Republic of Ireland. In July 2005, the company floated on the main market of the London Stock Exchange as Land of Leather Holdings plc with a market cap of £77.5m. Since flotation, the company has rolled out 18 additional store locations.