Flotation is the process of transforming a private company into a public company by issuing shares for public purchase. This opens the door for companies to obtain external financing, thereby reducing their dependence on retained earnings to fund new initiatives or expand operations. In the UK, this process is commonly referred to as “flotation,” while in the US, the term “going public” is more prevalent.
Key Insights
- Going Public: Flotation involves the process of converting a private company into a public entity by promoting shares to the public.
- New Capital: Flotation provides new capital avenues but comes with additional costs associated with public shares issuance.
- Growth Phases: Companies in mature growth stages often pursue flotation to secure funding for expansion, R&D, inventory, and new equipment.
Understanding Flotation
Flotation requires considering various elements such as timing, company structure, resilience to public scrutiny, regulatory compliance costs, and the time required to execute the flotation successfully and attract investors. The additional expenses associated with issuing new stock also need to be accounted for.
Companies that have reached a mature growth stage may opt for flotation to secure additional funding for several reasons, such as expansion, inventory, research and development, and acquiring new equipment. For many, the investment in becoming a publicly-traded entity is worthwhile.
Typically, when a company decides to pursue flotation, they engage an investment bank as an underwriter to lead the Initial Public Offering (IPO) process, helping to determine the amount of money to raise. The bank assists in developing the required documentation, creates an investment prospectus, and markets the company’s offering via an extensive roadshow. This roadshow is a presentation to potential investors to gauge demand, which helps set the final IPO share price and determine the number of shares to be issued.
The Pros and Cons of Flotation
Before committing to flotation for capital raising, companies should also explore private funding options such as small business loans, equity crowdfunding, angel investors, and venture capital investment. It’s important to note that even private funding scenarios entail legal fees and costs for deal structuring and accounting.
Many private companies prefer continued private funding to avoid the demanding transparency requirements of being a public entity. The restructuring cost and the Initial Public Offering (IPO) expenses can be quite substantial, making the decision to stay private equally appealing to some businesses.
Flotation isn’t without its own set of costs and regulatory hurdles, but for companies seeking significant growth and capital injection, becoming a public entity remains an exciting and worthwhile goal.
Related Terms: Investment Bank, Underwriter, Roadshow, Angel Investor, Venture Capitalist.
