Flotation

What is 'Flotation'

Flotation is the process of changing a private company into a public company by issuing shares and soliciting the public to purchase them. It allows companies to obtain financing from outside the company instead of using retained earnings to fund a new project or expansion. The term "flotation" is commonly used in the United Kingdom; the term "going public" is more widely used in the United States.

BREAKING DOWN 'Flotation'

Flotation requires careful considerations regarding timing, company structure, the company's ability to withstand public scrutiny, increased regulatory compliance costs, and the time involved in effecting the flotation and attracting investors. While flotation provides access to new sources of capital, flotation costs, the expenses associated with issuing new stock, must be accounted for when considering the switch from a private to public company.

Companies in the more mature phases of growth may need additional funding for various reasons including expansion, inventory, research and development, and new equipment. While considering flotation for raising capital, these companies may also look to other private funding sources such as small business loans, equity crowdfunding, angel investors or venture capitalists.

Private Funding

While these types of funding can allow a company to be less publicly transparent, they also still require legal fees and costs for deal structuring and accounting. Many private companies choose to receive private funds for the benefit of simplicity and less-required transparency. Private companies may also choose to remain privately funded because of the high costs associated with flotation or an initial public offering (IPO).

Companies that choose to enter the flotation process and list their company on a public exchange go through a rigorous evaluation process that consists of considerations for cost of capital and return on equity. Flotation costs are also factored into the flotation analysis. The process of a flotation typically requires an investment bank to structure the new public shares issuance, which can include extensive underwriting fees. Other fees associated with a flotation include legal fees and registration fees.

Investment Bank

Once a company decides to go public, the process for a flotation or IPO is typically led by the underwriting investment bank. The investment bank helps the company determine the amount of money it seeks to raise from the public market issuance.

The investment bank also assists in the public filing documentation requirements, develops the investment prospectus and markets the company’s offering in a road show prior to the initial stock issuance. The road show helps the company to determine the demand for the newly issued shares, its final initial public offering share price and the final number of shares to be issued.