Sign up to access the complete lesson and track your progress!
Unlock This CourseWhen businesses need large amounts of money to grow, they often look beyond banks and traditional lenders. One of the most significant ways to raise external finance is through stock market flotation - also known as "going public" or an Initial Public Offering (IPO). This involves selling shares in the company to the general public for the first time.
Think of it like this: imagine you started a successful cake business from your kitchen. As demand grows, you need £2 million for a proper factory, equipment and staff. Instead of borrowing this huge amount, you could sell parts of your business (shares) to hundreds or thousands of people who believe in your company's future.
Key Definitions:
When a company floats on the stock market, it sells a percentage of its ownership to the public. The money raised goes directly to the company, whilst investors receive shares that they can trade on the stock exchange. The company's value is determined by how much investors are willing to pay for these shares.
Going public isn't something a company can do overnight. It's a complex process that typically takes 6-12 months and involves several key stages.
Before even considering flotation, companies must meet strict requirements. They need a proven track record of profits, strong management and clear growth plans. The business must also be large enough - typically worth at least £50 million - to justify the costs involved.
Companies must show at least three years of audited accounts, demonstrating consistent profitability and growth potential.
A strong, experienced management team is essential to convince investors the company can deliver future growth.
The company must reorganise as a public limited company (PLC) and meet all regulatory requirements.
Companies need expert help to navigate the flotation process. Key advisers include investment banks (who help price and sell the shares), lawyers (who handle legal requirements) and accountants (who prepare financial documents). These professionals don't come cheap - their fees can easily reach millions of pounds.
Determining the right share price is crucial. Price too high and investors won't buy. Price too low and the company raises less money than it could. Investment banks use various methods to value the company, including comparing it to similar businesses and analysing future profit potential.
Food delivery company Deliveroo floated on the London Stock Exchange in March 2021, raising £1.5 billion. However, the flotation was considered disappointing as shares fell 26% on the first day of trading. Investors were concerned about the company's profitability and treatment of delivery riders. This shows that even well-known companies can struggle if market conditions aren't right or if investors have concerns about the business model.
Despite the complexity and costs, many companies choose flotation because of the significant benefits it can provide.
Flotation can raise enormous sums - often hundreds of millions or even billions of pounds. This dwarfs what most companies could borrow from banks and provides funds for major expansion, research and development, or acquisitions.
Unlike loans, companies don't pay interest on money raised through shares. This improves cash flow and reduces financial risk.
Public companies gain prestige and media attention, which can help with marketing, recruiting staff and winning customers.
Public companies can more easily raise additional funds in future and use their shares to acquire other businesses.
However, going public also brings significant challenges and costs that many business owners find difficult to accept.
When founders sell shares to the public, they give up some control over their business. Shareholders can vote on major decisions and if they're unhappy with management performance, they might even force changes in leadership. Many entrepreneurs find this loss of autonomy difficult to accept after years of making all decisions themselves.
Flotation costs typically range from 5-10% of money raised. For a £100 million flotation, this could mean £10 million in fees.
Public companies must publish detailed financial information regularly, giving competitors access to sensitive business data.
Shareholders expect regular profit growth, which can force management to focus on short-term results rather than long-term strategy.
Stock exchanges have strict rules about which companies can list their shares. These requirements protect investors by ensuring only legitimate, well-run businesses can access public markets.
The main UK stock exchange has two markets: the Main Market (for larger, established companies) and AIM (Alternative Investment Market, for smaller, growing businesses). Each has different requirements, but both demand high standards of corporate governance and financial reporting.
Online fashion retailer ASOS floated on AIM in 2001, raising just £3.25 million when the company was worth £12 million. The timing was perfect as online shopping was beginning to take off. By 2021, ASOS was worth over £4 billion - a return of more than 30,000% for early investors. This demonstrates how successful flotations can create enormous value for both companies and shareholders when the business model and timing align perfectly.
Whilst flotation can raise large amounts, it's not suitable for all businesses. Companies should consider other external finance options before deciding to go public.
Professional investors who provide funding in exchange for shares, but without the company going public. They often bring expertise and contacts alongside money, making them valuable partners for growing businesses.
Traditional borrowing remains important for many businesses, especially for smaller amounts or shorter-term needs.
Similar to venture capital but typically for larger, more established businesses looking to expand or restructure.
Raising money from many small investors through online platforms, often used by consumer-facing businesses.
Deciding whether to pursue stock market flotation requires careful consideration of the company's situation, goals and readiness for public ownership. Successful flotations can transform businesses and create substantial wealth, but they also bring permanent changes to how the company operates.
The key is ensuring the business is genuinely ready for the responsibilities and scrutiny that come with being a public company and that the benefits outweigh the significant costs and loss of control involved.