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How viable is listing as an exit strategy?

Jonathan Jenkins is joint managing director of OFEX.

Public markets are not only an attractive alternative source of finance for family or owner-managed businesses but provide a cost-effective exit strategy for the founders without losing control of the business, explains Jonathan Jenkins

Among family- and owner-managed small and medium businesses there is a common misconception that an admission to a public market means a loss of control of the business for the founders, as well as incurring considerable costs. Many family businesses take the view that the sole benefit of being admitted on a public market is the ability to raise equity-based finance. However, by doing so, businesses are restricting the company's growth opportunities and therefore in the long run restricting the growth in their own shareholder wealth.

Several of these concerns are not entirely unfounded, but they are too general. Increased regulation of listed companies over the years in the UK and across Europe is making a listing increasingly unattractive to small and medium businesses whether they are family businesses or entrepreneurial companies. This is why self-regulated markets, such as OFEX, that are able to dovetail their regulation to meet the individual needs of the companies they serve have become so attractive to family- and owner-managed businesses.

The two largest European self-regulated markets are AIM and OFEX. If the two markets have the same regulatory environment, the admission and on-going requirements for companies admitted on these markets differ. On AIM the responsibility lies with the Nominated Adviser whereas on OFEX it is shared between the directors of the company, together with the corporate adviser.

Companies looking to join OFEX by way of introduction, are not required to produce an admission document. Instead, the company's corporate adviser is required to submit basic documentation to the OFEX application team. This application process provides a cost-effective venue for companies to be admitted and can result in significant savings.

Examples of family companies that have successfully used this platform include Weetabix, Shepherd Neame and Daniel Thwaites. Other companies keen to provide trading mechanisms for employees and other shareholders include Arsenal FC, National Car Parks and SquareSum. Many of these have then used the profile of being traded on a public market to achieve full exits through trade-sales, for example Weetabix, National Car Parks and SquareSum.

An introduction on a public market provides a company with additional benefits such as: an independent valuation of the business; employee share schemes to retain key employees; a currency for future acquisitions; higher profile amongst customers. In addition in the UK, there is currently a number of tax benefits associated with an admission to a self-regulated public market such as OFEX in relation to inheritance tax and capital gains tax, among others.

The admission requirements of both these markets are straightforward and simple. They require no minimum trading record, no minimum market cap and no minimum free share float (minimum percentage of shares to be held in the public domain). However, they will require companies to appoint and retain an adviser to manage the introduction to the market and advise on compliance with the rules on an on-going basis, in particular with continuing obligations. Family businesses may join these markets by way of introduction only or with a fund raising.

If a company joins a market by way of Introduction only, the admission will provide a market for trading shares and an independent valuation of the family business. It will allow family members that wish to realise some value in their investment to do so. It enables family businesses to attract new employees and directors, if this is what is needed, and to take the business to the next stage of development. It provides an opportunity for a trade sale if this is what the family believes will serve its interest best. In summary, it provides a range of opportunities that are not available to a private family business.

The key attraction of a public market for family- and owner-managed businesses is that all the benefits achieved via an admission can be achieved without losing control. It is essential that the family agree on the purpose of the introduction in order for it to be successful. A key component will be the relationship with corporate advisers. They understand that bringing family businesses to market may be dependent on the family retaining a leading role in the management of the company and therefore will act in accordance with that condition. Placing a minority stake to the market to provide liquidity in the company's share does not affect control.

From experience (OFEX floated in April 2003), the founding Jenkins family found the flotation process productive, although at times very challenging. Despite the family shareholding being reduced from 90% to around 65% (and then to 55% on a further fundraising), at no point did we feel we 'lost control'. On the contrary, we were excited by the potential that joining the public markets created for our own business, and have never looked back.

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