Should I float on AIM?

Neil Shah discusses the potential benefits a float on AIM can bring to your company and how to mitigate risks when listing

Taking the public route is a dream for many business leaders. Naturally, there are a significant number of positives including the tax advantages for AIM stocks.

Not only do investors of the stock qualify for inheritance tax relief, but the stock also qualifies to be held in an ISA, meaning there are larger pools of investors a company can tap into. But aside from the potential financial rewards, listing publicly can be a serious test of your business acumen.

The Alternative Investment Market (AIM) continues to be the junior stock market of choice for ambitious companies from the UK and from around the world. In its 27 years of existence, it has raised some £123bn for 3,922 companies of all shapes and sizes, with 3,226 of those being UK based firms. Between January and April 2021, there were 21 new issues, with total money raised for the period amounting to £2.07bn. So clearly, the AIM market remains a strong option for young businesses looking to float.

A freer spirit

While the regulations for listing on AIM have tightened, it remains closer to the values of pioneering entrepreneurs. On AIM, one of the new requirements for its 826 companies is that they must have a website with good corporate information. In comparison, the US market’s Sarbanes Oxley Act continues to produce high compliance costs for CEOs and financial directors – a country where you could also receive a large fine, bad press or a prison sentence for faulty compliance statements on internal controls.

In addition, AIM is a cheaper option when you put it next to going public on the Official List (you will spend between eight and 12 per cent of the money you hope to raise on your nominated adviser, broker, accountant and lawyer). Clearly, whatever your reasons for considering a float, you can save time, money and anguish by studying the dos and don’ts of companies which are listed or have previously listed.

Many firms in the past have discussed the idea that you must first establish your motive for going public – if you see a flotation as a potential exit, then it is probably the wrong move. Equally, going into a floatation with the attitude of working out what the maximum you can realise here and now is a massive turn off for investors. If a business leader wants to cash in, then a trade sale would be much more suitable than a float.

Selling it right

However, on the other hand, there is an exception to the rule. If you want to exit and pass the business on to dynamic young managers in a growth phase, that is a different proposition. Sometimes, if a dominant shareholder wants to retain good managers, he could consider backing a management buy-out, which could then be followed by a float.

>See also: How to conduct a management buy-out

If followed by a float, then selling a small part of your stake in the business might make sense, with the opportunity to sell some more later once the company has grown and increased in price. What’s key here though, is that investors are looking for business leaders and management teams who see a float as a way of supercharging their business with a dose of capital and corporate rigour.

In all elements of business, forward planning is crucial, even when you take into consideration AIM’s lighter regulation. When it comes to financial controls and corporate governance, it can take between 18 months and two years to make the changes necessary to make a private company suitable to float. It would also be wise to recruit non-executive directors well ahead of flotation, and to shop around and pick advisers with care and attention.

Alongside the planning dedicated to listing on AIM, management teams need to allocate significant time to engage with current shareholders and prospective shareholders. As a result, it is always worth considering investing in investor relations resources to support that effort more broadly.

If you get it wrong, there can be some significant consequences. For example, losers on AIM include Patisserie Valerie. The firm, which listed in 2019, plunged from a value of £580m to zero in less than four months when it was found that there were thousands of false entries into the company’s ledgers, including manipulation of balance sheets and profit and loss accounts.

Mitigating risk when things do go wrong

Clearly, things outside of your control can happen, but when going public you must prepare for every eventuality. As your business is in the public eye, you and your management team must be prepared for exposure in every sense, not to mention the anxieties around share price movements and results every six months.

It is also vitally important that a company has at least two non-executive directors on the board – as companies often list with a very sound chief executive officer but need a stronger board. This can take time but will absolutely be worth it in the long term.

Due diligence and dirty laundry

Rather than hiding any unpleasant findings, when doing your own due diligence, it is helpful to disclose these to your advisers. Not only will your advisers thank you, but you will also avoid any questions raised to your advisers that they cannot respond to when at a roadshow for the floatation, for example.

A common complaint made by the CEO of a public company is that the stock is undervalued. However, advisers are clear about the need to realistic company valuations at float – the stock market has not seen the business perform as a public company and to float you need to accept that there will be a discount to your quoted peer group.

With this in mind, it would be good to work out what your own minimum price to earnings valuation is. For example, things could go wrong, and the stock market could wobble, or there could be a poor presentation for investors – however you must plan ahead for these eventualities and have thought in advance about whether to persist at the lower end of a predetermined price range or to pull out.

Evidently, there are some significant benefits to growing businesses looking to float on AIM, but before listing, there are a few priorities business leaders must consider to avoid being a loser of the market. Planning and due diligence are the key to navigating the intricacies of becoming a publicly listed company, without them you may risk becoming an AIM loser.

Neil Shah is the director of research at Edison Group.

Further reading

Is AIM still fit for purpose as a growth company exchange?

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Neil Shah

Neil Shah, Director of Research at Edison Group.