October 2007 - Raising Money

So, you have a great business, great contracts and potentially a great future …all you need to make that leap to becoming the company you want to be is a cash injection.

The cash might to create a new building, kit it out, employ key personnel or it might allow you to buy more material to produce more product or set up another branch in a different part of the country or the world.

Let’s face it though, raising money is probably one of the most provocative subjects that businesses ever have to deal with. The number of options available to the average company can be quite restricted and the limitations imposed by certain institutions can be even more disturbing.

Quite often lending institutions work off a scoring system and if you don’t score correctly then you don’t get through. The problem with many of these scoring systems tends to be that they negate the vision which the individual businesses and entrepreneurs have for growth.

This “computer says no” approach is abhorred by small business and increasingly companies feel more comfortable dealing with the stockmarket.

Why? Well the stockmarket has the polar opposite view on investment. If the management or manager of a business has a good commercial case for improving the prospects of their income, the growth of their company or indeed significantly increasing the value of the business then they will have a captive and receptive audience in the shape of the stockmarket. Of course as highlighted in the popular series “Dragons Den” the stockmarket is not for handing out money simply so that the managers of a business can increase their own wages.

Critically though the stock market will expect results. If a business does not deliver after having received investment then expect the value of the business to be seriously affected.

If however the company does deliver the improvements the stockmarket was looking for then there is a high probability the company’s value will improve and the door for future fund raisings will remain open, further improving the company’s potential to grow.

The Alternative Investment Market or AIM as it is more commonly known, is one of the most attractive markets to be listed on for SMEs as unlike the main FTSE markets there is no minimum market capitalisation (stock valuation) requirement. Theoretically a company could list on the AIM with a company valuation of as little as £500,000 although typically the value of AIM listed companies range between £1Million-£1Billion.

Floating your company on the stock market is not always an option open to all companies. You will have to seek approval from the regulators and banks before asking the public for money. You also have to issue a prospectus, which explains what the company does, why it is raising money and what opportunities and risks there are to investors from buying shares in the firm.

One of the most important considerations for the company is the cost of listing which can be around £400,000. This covers hiring a nominated advisor, (usually a stockbroker employed by the London Stock Exchange (LSE) to advise on IPO documentation), broker fees, legal fees and the annual listing fee. Of course, it is likely this will be more than covered by the sale of shares. There is no minimum obligation for share availability on AIM as opposed to the main market which requires at least 25% to be released.

So what are the key benefits of a stockmarket listing?

• Immediate cash flow injection through the sale of shares
• A listing would immediately raise your company’s profile
• The company’s success is transparent which makes it easier if you plan to sell in the future
• A successful stockmarket performance would make any further fundraising for future expansion or acquisitions very attractive to investors
• You are not obliged to appoint anybody on to your board that might have an influence on decision making

Listing on the stockmarket brings about significant advantages as is evident above however, it is important to note that becoming a PLC means complete transparency and regular reporting. The main positive though from a businesses perspective is that you have a dialogue with an institution which is more than happy to consign the “computer says no” mentality to the scrap heap.