Launched 13 years ago, London's junior stockmarket remains
a favourite with smaller businesses. And, despite growing competition from mainland Europe and increasing economic uncertainty, it's showing few signs of a teenage crisis

For small and medium-sized enterprises (SMEs) ambitious to generate cash and raise their public profile, flotation on the Alternative Investment Market (AIM) continues to be a popular option. Since its inception in 1995, some 2,300 British and 400 foreign companies have come to London's "junior" stockmarket, raising £49bn. And a 2007 London School of Economics report, From Local to Global-the rise of AIM as a stock market for growing companies, found that although a large proportion of them are early-stage businesses, often operating in high-risk sectors, the failure rate is low, running at less than four per cent in the last four years.

The benefits for companies whose shares trade on the market are numerous. The London Stock Exchange has tightened the regulatory regime in recent years, but there is still less red tape involved in floating on AIM than on the main market. Admission can also mean generous tax breaks. Shareholders in an AIM-listed company, for instance, only need to pay Capital Gains Tax on gains of 10 per cent, rather than the usual 40 per cent. Andrew Baker, chairman of stockbroker Hoodless Brennan, says that "an AIM quote remains an excellent method of helping growing companies achieve their long-term objectives".

Even in today's unsettled economic climate? "Do not expect fancy ratings, but, yes, it is a good time for small companies to float on AIM. All companies will need cash, and having resources will be particularly beneficial in markets that are turbulent, where 'cash is king'."

Such resources will allow companies to take advantage of the acquisition opportunities that the current market offers. Baker adds: "Quoted shares will be good currency to acquire businesses in their sector, to help them grow." For companies looking to raise £10m upwards, the From Local to Global report reckons AIM "provides a platform which at present is not matched anywhere else in the world". Baker says the only time that it is wrong or misguided to float is "when the object is simply an exit for the current shareholders and/or management. This is always a turn-off for potential investors". His advice for directors seeking to float is to "prepare early and conduct an audit of all arrangements, so you are prepared for the due diligence process." Also, because of increasing tax rates, he suggests executives "consider a degree of tax planning well ahead of the flotation."

So what's the first port of call? Speak to a nominated adviser (Nomad) who specialises in helping companies float on AIM and who monitors their compliance with the rules. Baker reckons the process takes three to six months. Directors should expect to spend between eight and 12 per cent of the money they hope to raise on Nomad, broker, accountant and lawyer fees.

There are alternatives to AIM, as Baker explains: "You can consider the PLUS Markets Group [London's newest stock exchange] or the Channel Islands Stock Exchange, particularly where there are overseas businesses or shareholders. Also, depending on the company, some emerging European stock exchanges might appeal—for example, the New Connect market in Warsaw." For firms that are too small for a public quotation but are still seeking to grow, Baker says private equity or joint venture arrangements can be a good option.

According to the From Local to Global report, the main competition to AIM over the next few years is likely to come from the two recently established "junior" markets in Europe—Alternext in Paris (part of the NYSE Euronext group) and the Entry Standard segment of the Deutsche Börse in Frankfurt. Clara Furse, CEO of the London Stock Exchange reckons: "AIM has the credentials and momentum to continue in its role as the world's growth market."

As for the London School of Economics, it concluded that "the core mission of AIM is likely to remain what it has been from the start, to provide a market for small and medium-sized companies which are ambitious to grow and need capital for expansion."

Case studies

A rising star

Who Charles Black, chief executive of application service provider Nasstar
Why Raise profile, access to capital
When December 2005
Result Within 12 months of listing acquired Virtual Email

"We had a big idea and felt that an AIM quotation would enable us to raise our profile and give us access to the capital to grow the idea more quickly than if we remained a small private company.

"We had the opportunity to be a market leader and an AIM quotation was really putting a marker down. You're putting yourself in the spotlight, everything becomes publicly visible. You're submitting yourself to regulation, which is a good way of getting your house in order. AIM is fairly light touch, but still a much higher level of regulation than a private company would submit to.

"As a small company we can open our doors to much larger organisations, whether it's customers or partnerships. We've been through a process that gives people confidence in our business. If you don't have a story or a big idea it's hard to get investors' attention, especially if you're in the sub £20m cap market. I've seen this happen with a number of companies which go to market without really doing anything dramatic: their share price starts falling and it's easy to get distracted and concerned by a falling share price.

"AIM is very relevant if you've got a really good story, especially if you're a tech company—you can get access to capital very quickly. We haven't worried about the share price: that's important. Focus on getting the business right, achieving profits, growing the model and perfecting the product."

In Good Health

Who Stephen King, co-founder of PHSC, health and safety consultancy
Why To move off Ofex, to grow by acquisition
When July 2005
Result Higher profile, able to raise £1m from institutional investors

"When we joined Ofex it was right for us: we couldn't afford AIM; it was something to aspire to. Ofex was going through a sticky period. I think by that time [2005] it had virtually run out of money, and we didn't want to be left without any trading platform, so we moved on to AIM about a year earlier than we would have done. It was a natural progression from Ofex.

"As the company grew, primarily by acquisition, the listing put a value on the business, and it increased awareness of our company and its status. In March 2007, we raised £1m from institutional investors, which we wouldn't have had without AIM, because people of that ilk are not interested in investing in a more junior market.

"It helps in a marketing sense because prospective clients perceive an AIM-listed company as having more substance and stability than a private business. We've drastically strengthened our infrastructure. We have to be a lot more formalised and transparent.

"Once you go on to AIM you work for the shareholders as much as you work for yourself. When you've started the business from scratch, that's a constraint. We're cash-rich and cash generative, so we don't need to raise money. But we merit a re-rating. The mid price when we listed was 64.5 pence; it's two thirds of that today, but profits are 50 per cent higher. We'll feel a squeeze, but not because we haven't got any money."