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How to float successfully on a sea of new issues. By Justin Lewis

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11th Jul 2006
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Justin Lewis, Chief Executive of AIM specialist stockbrokers Corporate Synergy, discusses what companies seeking to list on AIM can do to maximise their chances of a successful float, particularly when there is intense competition for funding.

In 2005, 518 companies joined the AIM market, compared with 355 in 2004 and 162 the year before. Debutants in 2004 raised around £2.8 billion, but AIM's success during 2005, and its increasing international profile, resulted in a staggering £5.6 billion being raised ' more than in the previous four years combined.

Despite a growth in the number of investors willing to back new issues, competition for these funds is getting tougher by the moment.

The sheer number of SMEs vying for the finite pool of funds from institutional investors means that not all of them will be successful in raising the money they need. However, do not be disheartened. There are some simple steps you can take to maximise your chances of a successful Initial Public Offer (IPO).

Before doing anything else, consider whether this is the best time for your company to float. Look at your business objectively. Do you have a strong business plan and a clear growth strategy? Are your operational and financial systems robust enough for a listed company? Are you prepared for your business and its directors to be put under the microscope?

If you decide to join the stock market, it is essential that you can communicate the investment case for your business effectively. You may have a fantastic business but if you cannot sell your story to potential investors they won't give you a penny.

You must convince investors of the strength of your investment proposition. Clearly demonstrate detailed knowledge of your market. Show that you know all about your competitors, particularly those that are already listed, and that you are aware of all the macro issues affecting the sector. This will reassure potential investors that you are in control of the company's destiny and can deliver on the promises you make.

Choose your City advisers carefully. Many small companies looking to float are better served by a smaller bank or broker with ambitions to become bigger players. It may sound trite, but advisers who are hungry for your business and growing themselves are more likely to be in tune with the challenges you face. Ultimately they will probably do a better job.

Do not be seduced by advisers suggesting an unrealistically high valuation for your company. You should already have a good feel for what your company might be worth on the market. Some less than scrupulous advisers may offer to raise money at an overly-optimistic valuation in order to win your business. Do not be greedy!

First impressions stick. Be aware that if you approach potential investors with an unrealistic valuation they will immediately form a negative view and will not be willing to gamble on your business.

Most importantly, appoint advisers that you can trust and who you feel will give the business a realistic valuation. You will be working very closely with these people during a very busy, and often stressful, period. So be sure that you get along.

It is vital that your advisers are honest about any weaknesses in the business. If necessary, they can advise on alternative sources of funding if a public listing is not appropriate for your company at this time.

Most City advisers would admit that investment banking is not rocket science! The trick is to make sure they give fund managers the opportunity to invest in attractive businesses.

In volatile markets, fund managers frequently change their investment criteria, so keeping track of what they are looking for is more difficult. It is essential therefore that you choose advisers who know which fund managers are most likely to invest in your business.

Your advisers also need to demonstrate that they are responsive to ever-changing market conditions and can adapt quickly if necessary. This means that when the time comes to approach institutional investors about your business they can complete the process quickly and make the most of this one-off opportunity.

As a small company seeking an AIM listing you are often better off appointing a firm to act as both your nominated adviser and broker. This reduces the risk of miscommunication and of delays in the flotation timetable.

As well as choosing the advisers, companies must have their own house in order to maximise their chances of a successful float. Ensure that you have the right Board in place. Include experienced non-executive directors with proven track records and backgrounds in the City and your industry. Even the most compelling business proposition can be let down by doubts about the management team's ability to deliver.

The Board must also show its faith in the company's prospects by risking some of their own money in the new issue. How can you expect others to take the risk if you are not prepared to do so yourself?

Finally, keep a tight control on costs and ensure that your advisers are equally frugal on your behalf. Potential investors like to see that you will not be reckless with their money. If cash is tight, ask your advisers if they would be prepared to take some of their float fee in new shares rather than cash.

To sum up, a successful float will be the result of a strong partnership between a company and its City advisers. They will introduce the right investors at the right time and support you through the process. But you must present your company as a compelling growth prospect and distinguish it from the competition. You only get one chance to get this right, so make sure you are getting the correct advice.

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