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Witold Sawin, a partner at accountant Sawin & Edwards, discusses the pitfalls that can trip unwary managers in the flotation process.

Most company flotations are successful but a small number run into major problems. While advisers should be able to alert the company to any potential deal breakers at an early stage, occasionally things can go seriously wrong and sink a float.

Usually this is down to a key issue which is not resolved (or does not happen) within the planned timeframe. Often assumptions are made at the start of the admission process that certain key factors are “simply legal formalities” - but some matters can prove far from simple.

Intellectual property rights can cause significant problems, particularly in technology and software companies. Young companies in their eagerness to grow can overlook important issues regarding patents, trademarks and licenses. These issues inevitably crop up at the due diligence stage, which is well down the admission path.

Another possible deal breaker, especially for natural resource companies, is permits and exploration licenses. Frequently the granting of such permits is a drawn out process without a definite end date. This can play havoc with the admission process and may stall it indefinitely. Unforeseen problems can be caused by factors including the politics of federal or local governments, socio-economic considerations and in some cases religious opposition.

Companies which occupy land should be careful to address environmental issues, particularly if there is any possibility of contamination. The potential liability for clean up costs or restoring the land to its original state can be prohibitive and may put off potential investors.

There is also the broader issue of contingent liabilities. These are not always highlighted in the accounts, particularly if the company has not been audited. Due diligence can expose aspects of the company’s business practices and accounting which may be open to challenge. There could well be a large potential PAYE or NI liability due to the use of casual workers or perhaps a VAT liability due to the misapplication of certain rules. Alternatively, a legal dispute with a major supplier or customer will also have a negative effect on potential investors.

These are just some examples of things that can and do go wrong. The cost of a failed flotation and fundraising can be crippling, especially for a start-up. While some advisers may be on a success fee basis others will still require payment for their work. Given the costs of failure companies considering a float should seriously consider carrying out some up front due diligence so that potential deal breaking issues are identified and resolved before they embark on the flotation process.