AIM report 2004

The Alternative Investment Market (AIM) has come of age. Entering its 10th year of operation, the market launched for small growing businesses now constitutes nearly a third of all trading companies listed on the London Stock Exchange (LSE) and is Europe’s leading growth market.

It has outgrown accusations in its infancy that it was too high risk and had low liquidity. In 2003/2004, investment doubled, boardroom satisfaction reached record levels and companies stopped using it as a stepping stone to the main market – indeed, 47 moved the other way. But now AIM has grown-up, has it outgrown the businesses it was originally launched for?

The fact the price gap between floating on AIM and the main list has closed might suggest so, and there have been whispers from the City that with AIM’s ambition to appeal more to international investors, small businesses might be better off entering junior market OFEX. But according to Andrew Wright, head of the public company team at law firm Cobbetts, concern over rising costs is misleading. “AIM is suitable for businesses of all sizes – it’s a great mix,” says Wright. “So long as the figures being invested are going up at the same time as costs, then where is the problem?”

A market open ‘for all’ is the thinking behind AIM. Unlike joining the main list there is no obligation for businesses to be at least three years old, have a market cap or 25% of their shares in public hands. However, despite its laissez-faire attitude, AIM does require members to operate in a way alien to most private firms. And with costs so high, how do you decide if AIM is right for you, and just as importantly, if you are right for it?

WHY JOIN AIM?

Raising funding to expand remains the primary reason most companies go public. According to Baker Tilly’s 2004 ‘Taking AIM’ annual survey, over half of the companies that joined AIM in 2003/2004 did so to raise funds. In 2003, the average figure raised by new admissions to the market was £7m. However, few companies float for this reason alone. While debt finance remains relatively inexpensive, it remains an expensive form of borrowing. For example, if you’re only looking to raise £1-2m, it doesn’t make sense to incur costs of up to £600,000.

For most companies there are other incentives. Joining a stock market such as AIM will significantly raise the profile of your business – not only during the float but afterwards. Having transparent audited accounts will earn credibility from suppliers and is appealing to investors.

Being a public company also allows you to trade with shares, making it much easier to complete acquisitions – the prime reason for joining for an increasing number of companies. You’ll also be able to issue shares to employees, a proven incentive to attract skilled workers and motivate staff.

Tax breaks, such as the Enterprise Investment Scheme (EIS), are also available to investors backing AIM companies, making your business a far more attractive option.

IS IT FOR YOU?

It’s certainly not for everyone. While there is no official criteria, there are several characteristics you’ll need to display in order to impress an AIM-affiliated nominated independent adviser (Nomad) that you’re in a fit state to join.

“Any company that can demonstrate the potential for growth in a good developing market, with a strong management team and financial control, will have the right ingredients for joining AIM,” says Chilton Taylor, head of capital markets for Baker Tilly. “And it will also have a credible story to present to investors.”

If you don’t meet all these requirements you’re either not suited to public life or aren’t yet ready. Even if you have the ingredients Taylor describes, turning them into a proposition that will tempt investors to bite isn’t straightforward – and is where many entrepreneurs decide AIM isn’t for them. To present the package investors are looking for not only involves substantial costs but dramatic changes to the way most private businesses operate.

Investors, as well as the Nomad, will want to see a highquality management structure in place – and that means one that is experienced in life on AIM. If a Nomad doesn’t think the current management team could cope with the rigours of public life, they won’t put their reputations on the line.

As well as a Nomad, you’ll need to employ the services of a broker (some Nomads offer this as a combined service), whose job it is to attract investors; an accountant to audit your finances; and a financial PR agent, who will manage your profile and make key company announcements.

You should also have a minimum of two non-executive directors. Some businesses opt for well known or celebrity non-execs in a bid to ride off their profiles, but the cost of this can often outweigh the benefits.

In addition to appointing the appropriate management, you will need to prove you can operate as a public company. The adage ‘you’re only as good as your figures’ is especially prevalent when floating, as you’ll be required to fully reveal the financial details of the business.

You must also accept that once you go public, you’re no longer responsible to just yourself but to the company’s shareholders. As a result, any key business decisions and financial transactions must be officially announced. It’s a huge obligation and not one to be taken lightly. Managing these obligations can also be incredibly time-consuming before, during and after joining AIM.

“Unless you’re prepared to accept the downsides – the scrutiny, the corporate governance, the intrusion by the City – you shouldn’t expect to get the advantages,” warns Taylor.

ALTERNATIVE ROUTES TO AIM

Reverse Takeover: This occurs when a smaller company takes over a larger listed one. This normally happens when a company has plenty of capital but no strong business. A failed dot com, for instance. It appeals as a quick way to access cash without going through the drawn-out orthodox process.

However, it’s not cheap. When an announcement of a reverse takeover is made, shares are suspended so the costs of a readmission will be incurred. There are also the uncertainties and risks associated with a takeover – these are often multiplied when buying a business with few tangible assets.

An introduction: This is where you obtain a listing on AIM without raising cash. This is a growing trend, particularly for companies looking to grow by acquisition using their own paper, and those eloping to AIM from the main list.

It also allows you to delay raising funds until you have a higher profile and proven track record. However, it’s not a cheap option, as you’ll still need to pay for the necessary advisers (apart from the commission for funds raised).