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Is your business ready to risk floatation?

The decision to float your company on the stock market is an important one, possibly the most important one your business will ever have to face, and one that most successful privately-owned companies will need to consider at some stage. Five years after start-up is a common time for companies to start considering floatation, once any teething troubles are ironed out and more capital is required to expand the business.

The Toronto Stock Exchange (TSX) is the seventh largest in the world, the third largest in North America and the largest in Canada. The Toronto Stock Exchange lists more mining, oil and gas exploration and production companies than any other market worldwide. Toronto stock market equity exchanges were ranked first in the world for their number of new listings in 2012, for the fourth consecutive year.

Canada has an international reputation for financial excellence – in 2011, Forbes rated Canada as the number one country to do business with, and the World Economic Forum has rated the Canadian financial system as the ‘soundest in the world’ for the last five consecutive years.

Floating on TSX – The benefits

For companies with a solid history of business management, floatation on the Toronto Stock Exchange can provide dynamic market investment to raise capital and enhance market liquidity. Floatation also increases the visibility of your business, providing greater credibility thereby generating further demand for shares in the future. A float can provide existing investors with an exit strategy, who sell their shares as part of the float. Floatation also provides investors with an attractive mechanism to trade shares. Through an employee remuneration package, your employees can participate in ownership of the company and benefit from being shareholders.

The risks and costs of floatation

There have been many examples of unsucecssful stock market floatation. Mark Zuckerberg floated social networking website Facebook in May 2012, when the company was valued at $20 billion, but by September that figure had fallen to $9 billion. In its first day of floatation, facebook made $135.1 billion, a gain of one third on the original share price listing. So what went wrong? The day before the IPO (initial public offering), General Motors announced that it was pulling all advertising from the site. Perhaps the initial estimation of Facebook’s market success was overinflated, and it is only now settling into a more appropriate level for today’s economic climate. Lastminute.com also suffered at the hands of floatation, meeting its demise by an acquisition by Travelocity the following year, after a £54 million loss.

Floatation can be an expensive business. As well as the initial cash costs of the floatation itself, other costs need to be considered, such as the time cost of managers being distracted from running the business during the initial floatation, and dealing with investors afterwards. The cash costs of paying advisers for the IPO and the period after floatation are substantial, and should not be underestimated.

Despite attractive incentive schemes and remuneration packages for staff, initially some employees may be resistent to the idea of floatation, and this may even demotivate key members of the workforce. Once floated, your company has a responsibility to shareholders, which may differ from company priorities. Some shareholders may expect regular dividends, which could undermine cashflow; others might focus on short-term profit rather than strategic goals. There is also always the risk of losing control of the company altogether, as major investors may want their own representatives elected to the board. Public companies are subject to additional regulations, additional corporate governance requirements (such as having non-executive directors) and an annual general meeting for shareholders.

However, floatation is not the only option for businesses looking to raise capital – trade sales may provide an alternative solution, where companies find certainty and potential in the arms of a larger company, often much faster than a stock market floatation. The typical timescale from the start of the process to successful floatation is at least three months but can take as long as twelve months.

Checklist for floatation

  • Does your company have significant growth potential?
  • Has your board of Directors invested its own capital in the business to support growth?
  • Has your company developed suitable financial reporting and the controls required by a public company?

Evelyn Harkness is a freelance writer and mother of two from Lansing, Michigan, but who now finds herself on the sunny island of Euboea in Greece. After working in finance, she now specializes in writing on financial and investment topics.

Occasional Contributors

In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.

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