As you will have seen from the 'AIM advisers' chapter, one of the Nomad's principal tasks is to assess, on behalf of the London Stock Exchange (the 'Exchange'), whether a company is appropriate for admission to AIM. In this chapter, we will look at the factors that a Nomad will consider when determining suitability.

While a company may be suitable for AIM, there may be other options better suited to the company and its shareholders. In this chapter we will also consider the factors that the prospective AIM company should take into account when deciding whether to seek admission to AIM.

Finally, while a prospective AIM company may be ideally suited to the market, and AIM may be its best option, the company may not yet be ready for admission. In this chapter we will look at the different matters the prospective AIM company should consider in order to prepare itself for life on a public market.

The Nomad's primary responsibility and duty of care is owed to the Exchange and it must ensure that the admission of a company to AIM and its conduct following admission do not impact adversely on the reputation or integrity of the Exchange. For a Nomad, the reputation and integrity of the market are of paramount importance.

A Nomad should only proceed with the admission of a company if it is confident that the company will enhance the market's reputation and has a realistic chance of delivering real value to shareholders. In assessing a company's suitability, a Nomad must ask if it really wants to be associated with that company. Central to this decision will be strong management that will strive for best practice in corporate governance and communicate effectively with the market, a sound strategy and a realistic possibility of creating value for shareholders.

There are over 40 business sectors represented by AIM companies, so there are very few types of business that would not in principle be able to find a home on AIM. It is preferable, however, that the business is operating in a market with good visible growth over the medium term, although a company that is operating in a static or declining market may be attractive, if it has strong management and is growing its market share or consolidating the sector.

For certain types of company – for example, mining and natural resources or biotechnology companies – its assets and the track record of management in exploiting such assets are most important. For investment funds, many of which have chosen to join AIM, the track record of the investment manager is the critical factor in deciding whether to invest in the business. A Nomad considering advising a start-up business – a rarer event in risk-averse market conditions – will largely base its decision on management, strategy and preparatory work undertaken.

However, irrespective of sector, in determining whether a trading business is likely to generate value for shareholders, the Nomad will carefully consider the company's past performance.

As AIM is designed for smaller, growing companies, there are no requirements in the AIM Rules for a prospective company to be of a certain size, or to have an established trading record. However, a Nomad would expect that a strong AIM candidate (other than a pre-revenue business or perhaps a natural resources business) has the following characteristics:

• a record of sustained growth over at least three years
• forecasts that show sales continuing to grow
• a record that compares favourably with its peer group.

Where sales growth appears to have slowed or even reached a plateau, this presents a warning light to advisers and investors. Raising funds at initial public offering ('IPO') to provide the company with the resources to fulfill orders it is unable to complete, or to ensure quality control before continuing to expand, is a much more compelling reason to support the company than purely to expand its sales and marketing.

For a trading business, margins should be steady or increasing and gross profit should be growing in line with or better than sales. If it is not, it could imply supply constraints or difficulty generating marginal sales. Even if gross profit is growing in line with sales, care needs to be taken to ensure that direct costs are correctly attributed at the cost of sales level and not included in indirect costs. For that reason, gross profit cannot be read in isolation and must be looked at alongside EBITDA (earnings before interest, taxation, depreciation and amortisation) and net profit (or loss) before taxation.

EBITDA can be helpful in that it shows the operating performance of the business, although the true operating performance must take account of the cost of using fixed assets. Taken alone, it can be misleading as costs can be eliminated at this level by capitalising them. Accordingly, EBITDA must be reviewed in line with sales, gross profit and net profit (or loss) before taxation.

The Nomad will also review the balance sheet to ensure that it supports the reported historic trading results. Particular emphasis will be placed on debtors – increasing debtor days could indicate quality issues or lack of financial control, or even call into question the validity of the sales numbers.

When analysing the financial track record of a business, the Nomad will also look at:

• whether the company has a history of meeting its forecasts
• whether the company has a record of clean audit reports by an appropriate firm of auditors
• whether the accounting policies adopted are in line with best practice for the industry
• the extent to which the company has managed to raise finance from external investors and whether each round has been at a higher valuation than the previous round.

The Nomad's review of the historic financial information about a company forms a vital part of its assessment of a business and its prospects. It will, however, be reviewed in greater depth by reporting accountants as part of their financial due diligence.

Whilst the financial record provides the most objective and testable record of a business, the Nomad will look at other aspects of a company's history in assessing its ability to manage future growth. These include factors such as:

• does the company have a record of successfully acquiring and integrating other businesses (this is particularly relevant for a company that is seeking to use quoted paper to grow through acquisition)
• level of staff turnover
• compliance with health and safety and other statutory regulations
• compliance with quality management and other non-statutory standards
• publicity about the business (both good and bad)
• litigation.

A company will be judged by investors, above all, on the quality of its management. To a large extent, the financial performance of the company will give a clear indication of the way a business has been run and, by extension, the quality of the management team. Although a company's commercial success would suggest that its managers are capable, the reality could be that they are running an underperforming company in a successful sector. It is therefore important to benchmark the company against its peer group. Management may also be reacting to events rather than driving the business forward. The Nomad will therefore need to analyse and assess the structure and composition of the management team.

A strong management team typically has the following characteristics:

• a clearly defined structure, with a clearly identifiable leader
• a full set of skills encompassing finance, operations, marketing and sales. Operations include procurement, human resources, production and distribution. In most cases, an experienced and capable finance director is essential to the success of a quoted company
• there is strength in depth. A company must have a sufficiently strong management team such that the loss of one particular individual will not cause irreparable damage to the business (although this can be mitigated to some extent by keyman insurance). More subjectively, a business whose leaders are too 'hands-on' will not be able to think strategically. From a more practical point of view, the IPO process can be extremely time-consuming for management and the company must be able to continue its business without suffering from the absence of key directors
• its team members can demonstrate relevant experience in business generally and specifically in the sector in which the company operates
• its members work well together. A strong managing director should have colleagues who are able to stand up to and not be dominated by him or her
• it is able to provide accurate, reliable and comprehensive management information in a timely manner – otherwise, this impacts the company's ability to have the appropriate systems necessary to run the business. Indeed, the Nomad has an ongoing obligation to the Exchange to be satisfied that the company has sufficient procedures and controls
• the accounting policies selected by the management team should reflect industry best practice and should be consistently applied
• it should have strong non-executive directors who are experienced in City practices and are able to impose proper public company practices on their colleagues.

As part of its procedures for determining whether a company has suitable management, the Nomad will conduct due diligence on the directors and sometimes on key managers. Directors will be asked to complete a questionnaire that gives information such as past and present directorships and details of any personal bankruptcies or business insolvencies. This information must be disclosed in the AIM admission document.

The Nomad will review each director's curriculum vitae, from which information will also be taken and included in the AIM admission document. References will be taken and detailed background searches will be made using either publicly available information or specialist agencies where appropriate.

In the UK, the board of directors has responsibility for running the company. It is made up of executive directors, managers of the business and nonexecutive directors serving as representatives of all shareholders. At board meetings, the financial and operating performance of the company are considered and major decisions about the business are taken. It is also the forum where the non-executives can question and challenge their executive colleagues.

In order to fulfil that role, the non-executives need to be experienced, financially literate and independent of the company. The ideal candidate has a successful track record in business, a reputation to protect and sufficient resources such that he or she is not dependent on the income received from the company and is uninterested in short-term share price movements. The ideal candidate will also offer industry-relevant expertise and contacts.

Finally, a Nomad will want to ensure that the directors of a company are fully aware of (and are prepared to accept) the costs and obligations of being an AIM company, that they have considered and have rejected the alternatives and that they are seeking admission to AIM for the right reasons.

The fundamental question that a Nomad should ask is whether the prospective AIM company has a sustainable competitive advantage that can be further exploited to create shareholder value. Competitive advantage can take many forms including patent, copyright or other form of intellectual property protection. It could reside in the company's brand, its people or the time and resources taken to build its systems, processes and facilities or a combination of all of these.

To a large extent, a company's ability to exploit profitably its competitive advantage will depend on its ability to control its destiny. In this regard, a Nomad will look at:

• whether it is a significant player in a large market or whether it operates in a niche that it can control
• whether the company is subject to market forces that are beyond its control and will affect its future growth; these include both limits on demand and supply-side resource constraints
• whether it is dependent on a limited number of staff, customers or suppliers
• the extent to which the market is characterised by barriers to entry.

Fundraising and management of the after-market in the shares is the responsibility of the company's broker and is discussed in greater detail in the 'Raising finance' chapter. However, in determining whether to act for a company seeking admission to AIM, the Nomad will need to consider, in consultation with the broker, whether there is likely to be sufficient investor appetite for the company's shares to ensure a successful IPO, support for secondary fundraisings and an effective market in the stock.

Part of preparing to join AIM involves considering the alternatives and deciding that for all of the costs and additional work that being public entails, AIM is the right option for the company. Anyone thinking of floating their company should have considered and have ruled out the alternatives such as private equity, trade sale, debt finance or even an alternative equity market. Although the Nomad's formal role is regulatory, in practice it would be expected to give corporate finance advice and would be remiss if it did not challenge the owner manager and ensure that he or she was taking their company to market for the right reasons.

Traditionally, joining a public market was seen as the last stage of a company's evolution and a means of the owner-manager securing an exit. AIM is different, in that it is a source of development capital, designed originally as a solution to the equity gap faced by smaller companies. In this regard it has been remarkably successful, raising sums of less than £5m for many businesses. It should not, however, be seen purely as an exit.

Raising funds to provide an exit to existing investors is a reason to float on AIM that most investors will find unappealing. Indeed, large shareholders may be asked to agree to lock-ins as a condition of the broker raising funds.

The primary reason for most businesses considering a flotation is to raise capital for expansion. For shareholders seeking to realise their investment, a trade sale or sale to an institutional buyer or a management buy-out team may well be a better solution.

Whilst AIM is an effective source of capital for smaller companies, finance may also be available from private equity providers, possibly on better terms than wouldbe available through an IPO on AIM. A private equity funded company will have outside shareholders usually with board representation and possibly additional reporting requirements; going public also brings public accountability and scrutiny and the risk of a loss of control to parties not yet known to management. In addition to weighing up the different sources of equity capital, a company should also consider whether debt finance may be either a partial alternative or even a complete alternative to equity finance. What is important is that the prospective AIM company has examined and rejected the alternatives.

While for most companies, their admission to AIM forms part of a fundraising exercise, there are other good reasons for a company to join AIM. The ideal AIM company is looking to come to AIM for one or ideally several of the following reasons:

• to raise funds to expand the business
• to raise funds at future dates to continue growing the business
• to enhance the value of employee and management share option schemes
• to allow the company to acquire other businesses using quoted shares as partial or even total consideration
• to enhance credibility with key customers and suppliers.

The ideal AIM company also has management that is willing to embrace the opportunities that being a quoted company offers, is comfortable dealing with outside investors and the market and welcomes the disciplines that being quoted brings. The ideal company will also have the additional resources to cover the costs of being public and has concluded that the benefits of being on AIM outweigh those costs. Whatever the reasons to float, the reasons for joining AIM and the use of funds must be clearly articulated.

Becoming a quoted company entails substantial changes in the way that a company is run. It involves taking in outside shareholders who enjoy the protections, inter alia, of the Companies Act and the Takeover Code, thereby imposing obligations on management and larger shareholders. Depending on the company's shareholding structure, it also makes possible an uninvited takeover offer for the whole of the company.

The company must be prepared to accept these risks and responsibilities as well as the increased transparency and reporting obligations, together with with the associated time and cost. In particular, the company must be prepared to accept the higher level of information that it must provide about its business than is required of an unquoted company, and to run its business and enter into transactions in compliance with the AIM Rules.

The AIM company's obligation to update the market of its financial condition, performance or prospects does not always sit comfortably with a desire to maintain commercial confidentiality. In practice, most companies find a way to reconcile the needs of the business with their regulatory responsibilities but this is an aspect of being a public company that must be considered.

Beyond complying with its regulatory responsibilities, the company must also be willing to devote time and resources necessary to communicate effectively with the market. The work that this entails is discussed in more detail in the chapter 'Communicating with investors – it matters'.

Overseas companies may wish to have their shares quoted on AIM to benefit from London's capital markets and the raised profile that a quotation in London brings. For an overseas company to be quoted on AIM, the Nomad will normally require that the company's business be international and not limited to its local market. Certain types of business such as natural resources and technology are by their nature international. For other types of companies, they should at least have international markets or seek to expand internationally.

A company that is considering AIM as one of its expansion options should approach one or two Nomads for an initial discussion. Ideally, these should be firms positioned to give a broad range of corporate finance advice. When approaching such advisers, the company should have a business plan or at the very least an executive summary along with summarised historic financial information and forecasts. Through these discussions, the company should learn at an early stage both whether a flotation is a viable option and whether it is in the best interests of the company and its stakeholders.

A company can choose to appoint a firm that has both Nomad and broker functions or an independent Nomad which uses its knowledge of the broking community when advising on the right broker to approach.

For many business owners considering flotation, the decision they take may well be determined by succession issues and a Nomad that has experience of advising on these matters may be particularly helpful.

Once the decision in principle to float has been taken and a Nomad and a broker have been appointed, the broker together with the company should undertake some test marketing to confirm their belief that a fundraising is achievable.

The final decision to be taken is how to raise the funds. The company may be in the position of having to decide whether to float the company directly, or whether to reverse into a cash shell, if one is available. Reversing into a shell involves slightly more documentation than a straight IPO, and takes around four weeks longer as the transaction requires both a full AIM admission document and approval of the shareholders of the cash shell and, usually, additional wording to satisfy the requirements of the Panel on Takeovers and Mergers, who must approve the document prior to publication.

However, reversing into a cash shell provides an expanded shareholder base and obviates the need for a fundraising roadshow, production of a presentation to investors and possibly brokers' notes. It also removes the risk of a fundraising failure. In this situation, the company should fully evaluate the alternatives in conjunction with its Nomad.

As far in advance of admission as possible, a company considering AIM should ensure that a number of key issues are dealt with prior to commencing the admission process. Good planning will save time, money and possibly aggravation.

The admission process itself typically takes three to six months from the time an initial all-parties meeting takes place until publication of a pathfinder AIM admission document. This will be delayed if there are major structural issues that have to be dealt with. It is important, therefore, that any potential issues are raised at an early stage to avoid any negative impact on timing.

The company should ensure that there are sufficient funds to pay the costs of flotation, irrespective of the result of the IPO fundraising. A significant portion of the professional fees will be payable regardless of whether the company secures admission to AIM. Whereas the fees of the Nomad and broker are mainly or wholly contingent on success, lawyers will usually require staged payments and reporting accountants cannot work on a contingent basis so as to ensure their independence. If necessary, a pre-IPO fundraising at a discount to the proposed IPO valuation should be arranged.

The board that will run the company following admission to AIM should be in place by the time the flotation process begins, if only because they will be taking responsibility for the AIM admission document and should therefore have time to get to know the business. Key operational management should have been in place for considerably longer, but nonexecutives may be appointed closer to the IPO.

A strong finance director is extremely valuable and will usually be involved in presenting to potential investors. The finance director will often be the main point of contact between the company and the advisers, ensuring that information and documents are made available on a timely basis. It may be necessary to bring in temporary staff to provide support.

The same applies to the rest of the board and the company's senior management; the flotation process is intensive and time consuming and management of the business must continue during the IPO.

Most private companies do not have non-executive directors, other than to provide industry contacts, although venture capital or private equity providers will usually require board representation. However, it is very good practice for all prospective AIM companies to appoint non-executive directors well in advance of admission to AIM. During the pre-IPO period, nonexecutive directors should:

• impose good practice in corporate governance
• ensure industry standard accounting policies are adopted
• get to know the company sufficiently well so as to accept responsibility for the AIM admission document
• by their presence, give comfort to potential investors.

Main Market companies, being admitted to the Official List, are required to adhere to the Principles of Good Governance set out in the The UK Corporate Governance Code (formerly the Combined Code), a set of guidelines designed to ensure that each listed company is headed by an effective board acting in the interests of all stakeholders in the company.

The UK Corporate Governance Code separates the role of chairman, whose job is to run the board from that of the chief executive, whose job is to manage the business, to ensure that there is a balance of power within the company. For the same reason, the The UK Corporate Governance Code requires that there is a balance between executive and non executive directors including independent nonexecutive directors, so that no one group dominates decision making.

An AIM company should aspire to this level of corporate governance. It is advisable that at the very least, an AIM company should adhere to the QCA (Quoted Companies Alliance) Guidelines, which are similar to, but not as prescriptive, as the The UK Corporate Governance Code. The QCA Guidelines require at least two independent non-executive directors whom the prospective AIM company should appoint prior to admission.

As far in advance of the IPO as possible, companies should establish the necessary board committees – audit, remuneration and nominations. It is also advisable to start holding formal, minuted board meetings as far in advance as possible of the IPO. For further detail, see the 'Legal work and due diligence' chapter.

The simpler the better. Complex corporate structures that are difficult to understand or which have different classes of shares giving preferential rights are an excuse not to invest. Ideally, there will be one class of shares and a simple share option scheme or schemes.

Where there are minority shareholders in subsidiary companies, consideration should be given to buying out their interests or exchanging shares in the subsidiary for shares in the AIM (holding) company. Where a private company has undertaken transactions with related parties, these may need to be formalised or terminated.

The company's shares need to be capable of being traded under the laws of the country where the AIM company is incorporated. For a UK incorporated company, this may mean re-registering as a public limited company. The company should adopt articles of association appropriate to an AIM company.

It may be advisable to re-organise the structure of the group to optimise the company's taxation position.

Accordingly, it may be necessary to get tax clearances and confirmation as well as to the position of the company with regard to EIS and VCT investment. Together with clarifying the corporate structure, this should be done as far in advance of the IPO as possible.

VAT and PAYE should be up to date.

Accounts should be brought up to date. Where a change in accounting policy is required, accounts should be re-stated as early as possible to give the reporting accountant historic financial information on which to report.

Where a company is dependent on assets, for example intellectual property or mining exploration rights, the company should ensure that ownership of the assets and its ability to use them is unfettered. Ownership or leases of land and buildings should be secured. The insurance policies should be reviewed to ensure there is adequate coverage. Where a company is being valued on earnings, it may be of benefit to the owners to transfer certain assets out of the business before admission.

Employment contracts should, where possible, be standardised and changed to ensure they are appropriate for an AIM company. Key members of the management team should have notice periods of sufficient length and should have the benefit and incentive of shares and/or suitably structured share options. Where necessary, the company should take out keyman insurance.

Other matters that a company would benefit from dealing with at an early stage include:

• establishing a website that is compliant with AIM Rule 26
• ensuring all litigation is resolved or, at least quantified
• terms and conditions of sales should be reviewed
• where major contracts have change of control clauses, these are reviewed and the position regarding the IPO agreed with the counterparty
• certification of compliance with quality management and other standards are obtained.

An AIM company needs to have management information and financial reporting systems that enable it to produce monthly management accounts on a timely basis – within no more than three weeks of the month end – and to comply with its reporting obligations under the AIM Rules, particularly where there is a need to notify the market on a timely basis of a change in the performance of the business compared with market expectation.

The reporting accountants will review and report on the adequacy of financial reporting so the company will reduce their work (and cost) by ironing out any problems before due diligence begins, taking on additional staff if necessary.

Once a Nomad has agreed that a company is suitable for admission to AIM and a broker has agreed to raise the necessary funds, the Nomad's task is to bring together a full team of advisers, set a timetable, allocate responsibilities and ensure that all parties adhere to the programme that has been agreed. The two key tasks in any AIM admission are preparing an AIM admission document (which can sometimes be referred to as a prospectus if there is to be an offer of shares to the public) and arranging the fundraising itself.

Once the company and its advisers have agreed to proceed with a flotation and after the key professionals have been appointed and their terms of engagement agreed, the Nomad will call all parties to attend a meeting to agree a timetable. Apart from preparing a detailed timetable, with responsibilities clearly identified, the Nomad will also circulate a detailed list of parties with contact details and a list of documents to be produced. The Nomad will take as its starting point the end of the flotation process. The key date is known as

It is on this day that the AIM admission document is finalised and posted to shareholders and potential investors. Admission to AIM and receipt of funds usually takes place shortly afterwards. The company will often need or want to secure funds by a particular date, in which case that date will determine the Impact Day. The broker will advise on a good time to introduce the company to the market, having regard to holiday periods, market sentiment and the broker's own workload. From this point, the Nomad will work backwards setting dates for the completion of the final AIM admission document, the placing proof and the pathfinder (if applicable) and the detailed due diligence that is discussed in the 'Legal work and due diligence' and 'Financial considerations' chapters.

The Nomad will set the scope of work for both the solicitors and reporting accountants. Where it considers it appropriate to have additional due diligence – for example, specialist reports on mineral resources, technology or intellectual property – it will also set the scope of work for the professionals undertaking such due diligence, in consultation with the company.

The order in which work starts will depend on what information is available. Typically, the first task will fall on the reporting accountants to begin work on the long form (financial due diligence) report. While their work is underway, the lawyers will commence drafting the statutory and general information section of the AIM admission document. The Nomad and the company will begin work on the front part of the AIM admission document and the directors will draft the historical financial information. Information about the structure and contents of an AIM admission document are discussed in the 'Legal work and due diligence' chapter.

If any commercial due diligence has to be undertaken or any experts' reports prepared, this work will commence at a very early stage. Meanwhile, the company will be required to prepare working capital forecasts in support of the statement on the adequacy of working capital (which the directors have to make in the AIM admission document).

On completion of the draft long form report, a full first draft of the AIM admission document will be compiled under the Nomad's supervision. The reporting accountants will then typically begin work on reviewing the working capital forecasts. During this part of the process, the AIM admission document will go through a number of drafts. As the document takes shape, the lawyers will begin the verification process and the broker will start to sound out the market informally as to who might be interested in taking the shares to be issued. In any event, the broker would normally have undertaken some market testing before it agreed to act as the company's AIM broker. The public relations advisers will work on the press coverage to be sought for the issue.

If a pathfinder is to be produced, it is likely to be required some ten to 14 days before Impact Day. This is an essentially complete document (save for agreement as to the price at which the shares are to be placed) which can be taken to potential institutional investors to gauge the level of interest and to determine the placing price. During this period the company is often required to make presentations to potential investors.

Sometimes, the company issues a 'placing proof', sometimes described as a 'p-proof'. This is in all material respects a finished document, except it is marked as a proof. Having generated interest using presentations or a pathfinder, the broker gives the placing proof to potential investors to secure their commitment to invest prior to completing and registering the AIM admission document itself. A placing proof will be used if there is some doubt as to the success of the fundraising, or where the Nomad and broker want to know the amount that may be raised prior to finalising the AIM admission document.

Once the brokers are confident that the funds will be raised and know the price at which the shares will be placed, the company is ready to complete its AIM admission document and a completion meeting will be arranged for the day before Impact Day. At this meeting all documents will be signed and the directors will formally approve and take responsibility for the AIM admission document. Many other documents, including the verification notes which record the underlying evidence for statements contained in the AIM admission document, will be completed and signed and the order will be given for the bulk printing of the AIM admission document. This is then printed overnight and on Impact Day it is filed with the relevant authorities and distributed to shareholders, potential investors or anyone interested in receiving a copy. The AIM admission document must be made available on a website that the company is obliged to maintain under the AIM Rules.

With an institutional placing, admission usually takes place within a fortnight of Impact Day. The admission process may continue for up to about a month after Impact Day, either if there is an offer for subscription to the general public or if the company's shareholders need to approve any aspect of the transaction in a general meeting.

Apart from project managing the admission process and coordinating the work of the various parties, the Nomad will need to liaise with the AIM Regulation team at the Exchange. An AIM company will need to issue to the market a statement of its intention to seek admission to AIM ten business days before the proposed admission date (other than a company transferring from the Main Market or one of several other 'AIM Designated Markets', for which 20 business days' notice is required). The Nomad will draft and issue that statement. It will also arrange the formal application for admission to AIM, which must arrive at least three business days before admission.