The travel industry’s case for raising external capital

TravelMole guest comment by Imtiaz Longi, head of travel at accountancy, taxation and business advisory group group Vantis

AIM (The Alternative Investment Market) is proving an increasingly popular route for travel companies keen to raise capital to fund growth, attract new skills into the business and, in some cases, provide an exit route for its founders.

5.2% of the more than 1,500 companies currently quoted on AIM are from the travel and leisure sector. Investors, too, are increasingly seeking out AIM quoted companies in their search for high returns on their investments and the various tax reliefs which enhance AIM’s attractiveness to investors.

AIM is attracting overseas companies, too. The newly introduced Designated Market Route allows companies quoted on certain Stock Markets to “Fast track” onto AIM. Increased red tape and costs in territories such as the USA are also making AIM an attractive alternative to markets such as NASDAQ. London is a mature market and is also appealing to Asian and Chinese companies looking to raise finance.

AIM is not suitable in every case, though. Financing expansion or attracting new talent by seeking an external cash injection from flotation may sound straightforward in theory. The personal and emotional effects of bringing outside influence into a business often run very tightly by its founders should not be underestimated, however. 

With the typical cost of an AIM Flotation starting at approximately £300,000, companies need to be sure it’s the right move for them. Embarking on the process only to regret the decision part-way through could prove emotionally and financially extremely costly; and even potentially fatal for smaller travel companies. 

So how can businesses ensure they are fully prepared for flotation and avoid some of the pitfalls that have cost other companies dear?   

A Good AIM

Entrepreneurs often consider flotation before they are ready for life as a publicly quoted company. Founding shareholder/directors need to take a critical look at their business and themselves before setting off down the AIM route. In many cases venture capital, bank lending or asset financing may be better options, especially if the company is at an early stage. Companies looking to raise relatively small amounts, say £1m, should also consider the Ofex market as a potential alternative to AIM.

The management team should prepare itself to embrace some degree of outside influence; the impact of effectively relinquishing some of the control of the company should not be underestimated and this is one reason why external, independent assessment of the company is recommended. Personal characteristics that will ease the path to Flotation include: a willingness to embrace change, the ability to set clear goals and strategy, the ability to effectively communicate the strategy to others and a readiness to accept advice and direction. Business owners should also be realistic about valuation: a business is only worth what someone is prepared to pay for it.

Businesses suitable for AIM should have the following attributes:

• An experienced management team with a good understanding of its sector of the travel market and the opportunities available

• Profitable products or services that are easily understandable

• Access to individuals who have public company experience, either by recruiting them into the organisation or working with external advisers

• The potential to grow market share or exploit new market opportunities

• A sound trading history.

AIM is certainly enjoying buoyant times as a market to raise capital and is an option that successful companies are well advised to explore as part of their strategic planning.

Good grooming

If a business is not ready, advisers such as Vantis can be brought in to ‘groom’ the company prior to flotation. This could mean anything from appointing one or two key people, to completely restructuring the business. This could take many months, potentially even years. A certain degree of hand-holding is recommended because the AIM process can be complex, lengthy and therefore costly.  External advisers are well placed to assess the company’s suitability to float, and can streamline the process, minimising headaches and expense, even by advising against flotation if the circumstances warrant.

One key area where Vantis has successfully advised clients is in consolidating prior to flotation. Bringing together two or three like-minded companies whose offers complement each other (e.g. an airline seat consolidator with a tour operator) can reduce many of the administrative costs associated with flotation. In this case, a good adviser acts as a kind of marriage broker, introducing companies that would benefit from a join venture.

So the decision to float has been taken.  Plans for expansion are in place, prospects look good and the chairman and MD are raring to go, but the flotation   process itself can still take between three and six months to complete.

Business advisors can also help by recommending other members of the flotation team. These may include a nominated adviser (Nomad) and broker, reporting accountant, solicitors, public relations advisers and share registrars. Working with organisations that know the process is vital; they have experienced and have already dealt with many of the issues that will be faced.

From Private to Public

When quoted, the business will have continuing obligations and good corporate governance is essential.  The founders will now need to share the responsibility for board level decision making with non-executive directors and maybe a new finance director. This can be a major cultural change. 

As a quoted PLC, the company’s performance will be far more transparent. When things are going well or badly whilst in the public eye, there can be dramatic consequences for the company’s share price. Shareholders quite rightly expect an acceptable return on their investment; the directors will be under the spotlight, and the company needs to meet expectations. This, alongside retaining the personality of the company (which in many cases made it a success in the first place) means for many, the challenge really begins only once the company has floated!

Conclusion

Funding business growth and development by raising capital on AIM is an attractive option for many, not least because of the tax benefits and the flexible regulatory regime compared with a Full Stock Exchange Listing. Companies need to understand the full implications of flotation and the changes it will bring to company structure, processes and personality.  Taking the right advice at an early stage can ensure the company is well suited to flotation and has all the right procedures and people in place. This can help save unnecessary cost and assist the management team in the transition from private to publicly quoted company.