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The City investment houses are very good at telling companies why they should join the stock market. A flotation enhances the company’s profile, they explain, it raises new capital, permits takeovers to be paid for in shares and allows management to motivate staff through the issue of shares and options. What’s more, ‘plc’ status should cut the cost of the money the company borrows.

But if flotation is so good, why are more companies not doing it? Indeed, why are so many quoted companies choosing to go private again in P2P deals (public to private transactions)? An increasing number of companies are finding that a share quotation is not the easy answer to their problems.

Undoubtedly there is some prestige in being a quoted company, even if only because there are so few compared with the vast number of private companies. It is also seen as a progression: the businessman who started as a sole trader, turned into a partnership and evolved into a limited company still regards becoming a public company as a further demonstration of his success on the route to being a FTSE 100 multinational. The benefits of capital raising, cheaper borrowing, takeovers and share options for staff are real too, but there is a downside which is often forgotten in the euphoria of joining the stock market and which is not pointed out by the City investment bankers.

For a start, while the entrepreneur who checks his share price every day has a warm feeling of success and increasing wealth when the price is moving upward; he suffers opposite emotions when the price slides. He may be able to put up with the down days when they are only blips in a broadly rising share price, but in the years following the millennium, the days when share prices rose became the exception. Even though an individual business was doing well, its shares still fell along with the market. It does not stimulate an entrepreneur to see his own wealth constantly declining, and it does nothing to motivate staff who have been given share options  or bought actual shares at high prices that may not be seen again for a long time. And, while plc status raises the company’s profile with customers, suppliers and even potential employees a reputation as a stockmarket disaster does nothing to enhance the image of the business.

Flotation can soon make directors appreciate the privacy of running a private company. There is no daily valuation of an unquoted business to alert outsiders to problems, there is no need to publicly announce falling profits or to produce accounts that breakdown figures to levels that reveal poorly-performing divisions or provide rivals with useful information.

Full disclosure is the foundation of a flotation and it can involve the private entrepreneur having to divulge more than they want. To get a business into shape for a stock market listing, the investment advisers will demand that the company is cleaned up to meet the best accounting and corporate governance standards. At a family company, this may mean: a wife who has served loyally on the board alongside her husband is asked to leave; terminating arrangements whereby the entrepreneur personally owns the premises from which his company operates and lets the building to it; the businessman’s children can no longer run cars on the company. The flotation prospectus must provide every possible relevant piece of information on the company and its directors, including material legal cases against the business, significant contracts and even board members’ past brushes with the law. There is no privacy.

The City advisers may also insist on installing an outside chairman to the company on what seems a fancy level of remuneration – plus a couple of other non-executive directors. And they may demand that the local firm of accountants who have audited the accounts for years and who are well-known to the entrepreneur are replaced by a bigger (and more expensive) national firm.

All in all, the businessman may well feel that he is losing control of the company that he has founded and nurtured. And indeed, that is exactly what the flotation may involve – losing not only control of the boardroom, but control of the ownership too. Bringing in outside shareholders means giving them a vote and, in some instances, even though the founder has retained a majority of his company, his holding can be outvoted by the minority. Losing control of their own business is frequently the key factor that makes directors disillusioned with going public. In the extreme, it can mean that an entrepreneur is ousted from his or her own business when trading is difficult, even though had it remained private the founder would have ridden out the storm.

Over the years several high-profile entrepreneurs, including Richard Branson and Andrew Lloyd Webber, have been lured by the glamour of floating their businesses only to take their companies private again subsequently.

Nor does the detailed disclosure end when the company has joined the stock market. The company will have to report its trading results at least twice a year and produce a full annual report that divulges salaries and other benefits. There will be regular meetings with investors or City analysts interrogating the directors on past performance and future prospects. There are strict controls on when shares can be bought or sold, plus a myriad of other rules devised by the regulators.

Companies will also find themselves torn between commercial confidentiality and the requirement to inform the stock market first of any major deals. Further, any failure to meet forecasts, reporting lower than expected profits, reduced dividends or incurring write-offs will result in highly-publicised bad publicity that can further damage the underlying business. Running a public company is very different to managing a private firm.

And there are costs in going public. The accountants, stockbrokers, bankers, valuers and other professionals all expect fees. There may be also underwriters City investors who promise to buy the newly issued shares in case no one else wants them. Most smaller companies will join AIM, the London Stock Exchange’s Alternative Investment Market, which has fewer rules other than demanding full disclosure and requiring companies to use a nominated adviser (usually a stockbroker), but even there costs are not cheap.

They can account for £1 million for a £50 million company raising £10 million. Costs of 10 per cent of funds raised are not untypical, but some companies join the market through what is called ‘an introduction’ and raise no cash at all yet still have to pay these costs. The management time diverted to preparing the flotation will be not inconsiderable for a small company either.

During the 1990s stock market boom companies were eager to obtain listings. Firstly, it was easy because investors readily subscribed for shares without asking too many questions, secondly it was tempting for entrepreneurs to sell down their holdings at high prices and thirdly it gave them the paper for the many acquisitions they planned. The collapse in the market has changed that. Investors, sitting on past losses, are not eager to buy, owners are unwilling to sell at low prices and takeovers have dried up. Further, staff who were keen to participate in options schemes when share prices were soaring now want to be remunerated in safe cash. Many of the few companies that have tried to come to market in recent years have, after proudly announcing their grand plan, had to cancel or postpone their share issue or reduce the offer price. They have thus suffered a double blow – failing to raise the desired cash and being remembered for a flawed flotation. Such a high-profile failure can blight a company’s image for many years.

However, the alternative to flotation need not mean remaining a small private company. Britain now has a very active venture-capital industry willing to finance expansion. Businessmen accepting such funding will not be exposed to the daily buffeting of stock markets or be answerable to a host of small shareholders, and suppliers or customers will not read the profit figures in their newspaper – but the company will still suffer many of the disadvantages of being public. The venture-capital fund will demand total transparency and impose corporate governance and it will monitor the internal accounts monthly, rather than the half-yearly figures that public shareholders would receive. And the entrepreneur is likely to find dealing with one major City shareholder more intimidating than the diverse spread of small investors: its demand for top performance will be greater. The businessman still effectively loses control therefore. He should not forget either that the venture-capital fund will eventually be looking for an exit, either accepting a takeover or floating the business on the stock market – the very move the entrepreneur was seeking to avoid.

But a further alternative is now available, that was not feasible for earlier generations of businessmen seeking to expand: borrowing. Interest rates are now sufficiently low that a company seeking capital can raise money from banks or other sources without giving away any equity. The lender will impose some of the standards expected from a public company – primarily transparent accounts – but will not seek to impose managerial control so long as the loan is serviced. It is ironic that the bank may have lent at a slightly lower rate if the company had been quoted – but had the business floated, it would not have needed the funds!

Cheap borrowing has not been a sensible option for many businesses during the past half century. Now that it is, clever businessmen are choosing to gear up and hold on to their company – even if only so that they can float it at a better price in future.

Anne Lowe was managing director of a London business consultancy specialising in small and medium-size enterprises. She has also run a consultancy based in the United States and now writes for several financial and trade publications including The Business.

(This article was originally published in Director of Finance 2004 edition)