AIM report 2007

As it approaches its 12th birthday, this ‘junior’ market, the younger, more entrepreneurial sibling of the London Stock Exchange (LSE), lists about 1,650 companies. Businesses from all major economic countries plus many developing ones trade on it.

However, not all have been what they were cracked up to be and notable failures have led to some harsh criticism of this ‘under-regulated’ market. AIM has responded to the concerns over member quality by tightening up the rules that Nomads must follow. The new rules, announced in February, have also made it compulsory for AIM-listed companies to have a website, on which key documents regarding their AIM status must be displayed.

IS AIM RIGHT FOR YOU?

The market has changed considerably. It is now a place where investors can make serious money and businesses can raise big amounts, too. This has had the side-effect of driving up costs and smaller fi rms might find these to be prohibitive to a float.

You will also have to put more effort into your profi le because so many companies are now listed on AIM it is easy to get buried beneath the pile. Investors aren’t always enthusiastic about companies with a market capitalisation of less than £5m. Larger companies offer bigger returns, so the little guy has his work cut out when making a pitch.

Some of the companies on AIM are huge, with market capitalisations in excess of £100m. These seem likely candidates for the Main List, but as some have a trading history of under three years, they fail the LSE’s criteria. AIM’s attitude is you can list here, but once you have the necessary trading history you should move up. “There’s certainly been a shift in the kinds of businesses coming on the market and costs are creeping up as a result,” says Richard Metcalfe of AIM accountants Mazars. “If you are raising smaller amounts – less than £10m – then proportionally the costs are higher.”

A good trading history is clearly a big plus when you are pitching to the City. However, there are plenty of pre-revenue companies on AIM. These are usually raising money for ‘discoveries’, be it technological or natural resources. In such cases, the credentials of the board will come under scrutiny because they are more risky than companies that have already proven themselves to be profi table.

The process of floating on AIM is easier than on the Main Market and this has led to some unsuitable companies floating. Increased internationalisation has also caused a few problems and as a result some investors are now yearning for more home-grown talent. Jai Bal, partner at AIM law fi rm Farrer & Co, says UK companies are popular because some investors and advisers feel more comfortable with home-based opportunities. “If you are a UK company and have a strong story then people will bite your hand off to list you because you are from the UK,” he says.

ARE YOU RIGHT FOR AIM?

If you are looking to raise additional funds and wish to boost your public profi le then AIM offers both. It is a good place to raise cash and you might also be targeted by companies looking to sell, as well as those looking to buy parts of your business.

Dominic Berger, founder of £5.8m turnover business Venue Solutions Holdings, bought up an American- based business, Your Day Inc, following his company’s flotation in December 2005. He feels that being on the market makes it easier to buy. “AIM makes you more attractive to other companies looking for mergers and acquisitions,” he says. “We now see opportunities in the market we wouldn’t otherwise have seen. There’s a perception that you have the financial muscle to make acquisitions.”

However, not everyone is suited to AIM and some companies should count themselves out from the start. First up, it is a public market, so like any other stock exchange, it is not a place to be if you want to remain circumspect. Discussions with investors and journalists and any other interested parties are a part of being listed and you simply cannot afford to neglect your public persona.

“I probably spend about one day each month talking to journalists and about two weeks each year on face-to-face meetings with investors,” says Elizabeth Gooch of AIM-listed operations management company eg Solutions.

If you are used to operating in a lowkey way, only answerable to yourself, this will be a sea change in your modus operandi. “PR is something you have to do,” Gooch asserts. Therefore AIM is no place for shrinking violets.

You must follow rules when listed and entrepreneurs can find these frustrating and constraining. For example, you cannot reveal all details of your company all of the time – there are non-reporting periods when you cannot speak to the media. In addition, you can only disclose details to investors that are ‘material’ and not tell them about speculative deals, and if you are under-performing, it pays to be open and honest with shareholders.

“It can be really frustrating taking criticism from investors when you know you are waiting for a deal to come through but you aren’t allowed to say so,” Gooch warns.

As a result, other options besides AIM may prove more suitable, such as a float on PLUS where the costs are far lower. PLUS may also be a place to prepare for AIM – there are plenty of cases of companies starting there and moving up.

Another option is to look for private equity funding. “On AIM, you will spend a lot more time and effort with rules designed to protect investors,” says Tony Edwards of law firm Stephenson Harwood.

“Things can be a lot more predictable with a VC, although that is not to say it is a walk in the park – things can get pretty heated. It’s just that if things are going wrong, then it is just between the two of you.”

GETTING INTO SHAPE

Your company will change considerably when you are getting ready to float on AIM, although this can be a good thing since it will make procedures more formal and precise. Linda Main, of KPMG, says there tends to be a major cultural change in the business as it prepares for market. “Companies often have an informal structure in place as the owner already knows everything,” she says. “However, once on AIM, there needs to be regular management information given to all the people on the board.”

You will need to appoint an accountant to get the books in order and ensure all relevant information is available to prepare your admission document. Don’t underestimate how much time this will take. “In an ideal world you would start six to 12 months before the company wanted to do the IPO and deal with any red flags. However, companies are usually looking at three to six months,” Main says.

Those months will be busy and it is essential you keep driving your business forward.“My recommendation is to make sure you have a team in place to keep the business going when you are going through the process,” Berger says.“Entrepreneurialsays.“Entrepreneurial. Entrepreneurial businesses are often driven by the person at the top. However you will be spending a long time on the process – 80-90% of your time will be taken up.”

VALUATIONS

Getting the right valuation for your company is often an area that unnerves entrepreneurs. It is done after the business has been through the due diligence process and owners are sometimes aggrieved when their companies are valued lower than expected, especially after all that work. Valuations are not an exact science and involve several factors.

The most commonly used valuation method is price-to-earnings ratio. Another is a company’s net profits multiplied by a number of years, with projections made about future profits. Comparative evaluations, where you are matched to another company in the same sector, are also used. However, a business is worth as much as someone will pay for it and your broker is there to assess what the appetite for your company is likely to be.

In the end it comes down to a debate that involves you, your FD, the broker and the accountant. However don’t be tempted to try to push up your share price too high. If you go in selling at a pound per share when you are only worth 50p, it will only be a matter of time before you underperform. This could start a slide and you might end up being valued at less than you should be.

NON-EXECUTIVES 

You will need to add members to your board to satisfy the City that you are a competent business. There also need to be board members who are responsible to shareholders and can offer an impartial view. This is the role of the non-executive. Although they are not a legal requirement it is expected that you will have at least one and usually more. Often a non-exec will take on the chairman’s role as this and the role of chief executive officer must be separated.

The appointment of non-executives should be seen as an opportunity to boost your company’s expertise as well as a chance to have more analysis of operations. Some entrepreneurs will mix their non-executives, so one has a particular skill-set such as law and another has market experience.

Non-execs will question your ideas, so it is important to find ones where their style does not grate and who have the soft skills to be critical but not destructive. Having a board with strong credentials will help in the City, so if your current team doesn’t look great on paper – if it isn’t very experienced, for instance – a few older and wiser heads added to the team might allay investors’ fears.

When selecting non-execs it is best to have a proper look at the market. Companies such as Exec Appointments offer to publicise a position to an audience of more than 1,000 potential candidates for a maximum of £1,000. CVs will then be sent through to you and you can make your evaluations. Your Nomad will also be able to offer the names of some candidates, therefore it is possible to hold a beauty parade before you make your choice.

FINANCIAL PRS

Financial PRs are different from commercial PRs in that they provide information to investors rather than just dealing with the press. As AIM is now comprised of so many companies, getting your message out to investors is even more important. They will help you to refine your story and will be responsible for relaying and publicising key announcements such as results, appointments and new contracts.

Finding the right firm is tricky, so be prepared to meet a number before selecting. Track record, experience in your sector and contacts are critical. What coverage has the firm generated for other clients and has it ever helped to get a client out of trouble when the share price has taken a tumble?

Seek recommendations and find out who your competitors are and evaluate a company accordingly. In addition, ask to meet the executives who will handle your account. Some PR firms grow fast and a company with a great name might not be the best one for you if you get one of their less experienced or able staff. Whether you go small or large is a matter of personal taste. What is more important is that you have a good relationship with them, and relationships can take time to foster.

COST OF LISTING

A figure often bandied around for the cost of floating is that it will be about 10% of the money raised. However, the percentage will be higher for companies looking to raise less. Costs can really vary because of the nature of the company. A pre-revenue business will have less due diligence to do than a company with 10 years’ trading history. However as a guide here are some approximate figures:

Nomads: £100,000+

Brokers: 3-5% of the money raised

Lawyers: £50,000-£500,000 (average £200,000)

Accountants: £40,000-£100,000 Financial

PRs: £10,000 (six months)

Non-executives: £75,000-£100,000 per annum

THE RISKS

Floating is always risky, so prepare for the worst and know how to resolve it or hopefully avoid it entirely. There are two types of worst-case scenario. The first is that you fail to gain backing for the float and don’t list. You will have lost a lot of time and money in the process and a serious drop in morale is likely. Not all of the costs will apply; for example, brokers often work on a list-only basis. However, don’t expect to get out of paying the lawyer.

Dealing honestly and openly with all parties from the outset is the key to avoiding such a foul-up. You can also sound people out a long time before a float. Advisers are often happy to hold a meeting even if you haven’t yet decided to float. “We spend a lot of time meeting companies in the very early planning stages,” says Philip Secrett of business advisers and Nomad Grant Thornton. Pre-marketing is an opportunity to gauge interest and to learn.

The second scenario is your stock going on the slide. A profits warning will usually prompt a fall in share price and a major shareholder bailing out could trigger a collapse. However, in such circumstances don’t expect investors to simply hand over their stock and allow you to de-list from the market. Many will want you to dig in your heels and bring the company back up to scratch.

The very worst thing is being sacked by your own board. Admittedly, this is not common but it does happen. As regular readers will know, Martin Higginson was fired as chief executive of mobile content business Monstermob following a dip in share price.

It is essential you are open and forthcoming in your dealings with shareholders. There are few things the City dislikes more than being kept in the dark. With good relationships in place you should be safe even when performance is not optimal. Shareholders are often sympathetic when profi ts aren’t huge and will offer constructive advice rather than calling for heads to roll at the fi rst opportunity.

CONCLUSIONS

Though bigger and pricier than it was, AIM remains a great place for businesses to raise cash and grow. You need a good story to succeed and be prepared to get the message out. It’s not for everyone though, and if you think the costs are too high but like the idea of fl oating, then a PLUS flotation is a possible option. However, if the City doesn’t have much appeal then equity funding might be a better choice.