What is Flotation
Flotation is the process of converting a private company into a public company by issuing shares available for the public. It allows companies to obtain financing externally instead of using retained earnings to fund new projects or expansion. The term "flotation" is commonly used in the United Kingdom, whereas 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 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. These types of funding allow a company to be less publicly transparent. Companies will still incur legal fees and costs for deal structuring and accounting.
Many private companies choose to receive private funds for the benefit of simplicity and lesser requirements for transparency. Private companies may also wish to remain privately funded because of the high costs associated with flotation or an initial public offering (IPO).
When a company enters the flotation process, it lists the company on a public exchange. There is a rigorous evaluation process that will consider the company's cost of capital and return on equity (ROE). The flotation analysis also factors in flotation costs.
Typically, an investment bank is involved in assisting in the structuring of the new public shares issuance. Extensive underwriting fees add to the cost. Other expenses associated with a flotation include legal fees and registration fees.
Once a company has decided to go public, the underwriting investment bank typically leads the process for a flotation or IPO. 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. The bank will develop an investment prospectus and market the company’s offering in a road show prior to the initial stock issuance. The road show helps the company determine the demand for the newly issued shares. Gauging demand during the road show is an important step when setting the final initial public offering share price, as well as in determining the ultimate number of shares to make available for issue.