Business Essentials: Does Freshwater need a big fish to float in the City?

A marketing firm with its sights set on an AIM listing wants to know how to get the best specialist advice, says Kate Hilpern
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The Independent Online

Freshwater, a marketing, design and event management firm, is looking to get a listing in 2007 on the AIM exchange for small and growing companies.

Freshwater, a marketing, design and event management firm, is looking to get a listing in 2007 on the AIM exchange for small and growing companies.

Much of the groundwork has already been done, according to Freshwater's chief executive, Steve Howell. "We've attended seminars and conferences, as well as some meetings with individual personal contacts in the City. In fact, we've got as much information and advice as possible from as many sources as possible about what we need to do to get in shape."

The next step, he believes, is to strengthen the board by recruiting a non-executive director, preferably with City experience. "What I want to know is whether that's a sensible idea and, if so, how we should go about it," says Mr Howell.

Freshwater, he explains, was founded in 1997, and incorporated in 2000. "We are still a relatively small company, with a turnover of £3m and around 80 clients, but we are growing fast," he says. The firm has its principal offices in London, Bristol, Cardiff and Glasgow, as well as a network of associates across the UK.

The existing board consists of six people, three of whom are already non-executive directors. "They have considerable business experience," says Mr Howell. "One has worked for an American firm based in Brussels as their European MD. But we don't have anyone who specifically has experience of the City of London, and I feel we could really gain from that."

He is willing to look at other options, however. "Perhaps the panel will say we've already got three good non-executive directors and that we should get the City experience through other means, such as professional advisers. Perhaps they'll say it would be a mistake to spend a lot of money on putting a big name on our board, when what we'll really be judged on is our trading performance and the quality of our business."

On the other hand, he says, the non-executive directors he has hired in the past have proved hugely beneficial to the company, which may indicate that Freshwater should continue down this line.

"The danger is that when you are running a business, you sometimes can't see the wood for the trees," Mr Howell admits. "When someone comes along once a month or every two months and asks a few commonsense questions from their own experience, it forces you to think about things more and stand back a little.

"It also teaches you what you have to do to attract external investors - notably focus much more on the bottom line. I therefore see non-executive directors as fantastic sounding boards, as valuable friendly critics."

If the panel of experts does advise Freshwater to recruit another non-executive director, Mr Howell is keen to know the best way to trawl for talent and avoid any potential pitfalls inherent in the process. "I'm sure that people may volunteer themselves for the job, but by what criteria should we be judging them?" he asks. "And because there is a cost attached to it, what is it reasonable to pay?

"Our current non-executive directors are all shareholders," he continues, "and because they have a strong stake in the company, they are willing to work for relatively modest fees. But if we get someone with City experience, we're talking about someone doing the job because that's how they make a living - our first professional non-executive director, if you like."

www.freshwater-uk.com

WHAT THE EXPERTS SAY

Dr Elizabeth Haywood, managing director of recruitment consultancy kmc international

"Mr Howell sees non-executive directors as 'fantastic sounding boards' but advisers could also be sounding boards, and not have the same fiduciary duties. A desire to hire a big name for the sake of it would probably not be good value for money, either. Freshwater needs to be clear about the individual's role and his or her ability to add to what the other board members contribute.

"Clarity of purpose will help attract strong candidates. 'Big' names do not necessarily expect a large fee from small firms, mainly because corporate governance regulations are less onerous [than with larger companies] and the time commitment is lower - typically between six and 12 days a year. To attract a City person, you will need to offer £1,500 to £2,500 per day and possibly an equity opportunity.

"The right person should have AIM experience and be prepared to roll up their sleeves. A strong, relevant network of contacts is also important. To find someone, use your own contacts or a specialist headhunter."

Jon Farley, team leader (media), Barclays Business Banking

"For a company of this size, I would expect a board of two to three executive directors and two to three non-executive directors. Freshwater has a good balance of non-executives, which institutional investors like, but it could benefit from one with plc experience.

"Also, for a company of this size, attracting a big name is not vital. Most importantly, they should have experience in the initial public offerings process, face-to-face dealings with shareholders and managing expectations of profitability. Their expertise in the industry and corporate governance will also be important.

"Appointing some professional advisers pre-flotation will help to groom the company - they could also help identify potential candidates with relevant City experience. Regarding cost, a general non-executive director will command around £12,000 to £20,000, and a chairman £30,000 to £40,000.

"Finally, Freshwater should consider that if current non-executives have sizeable stakes in the business, they would not be regarded as independent for corporate governance purposes."

Stewart Masterton, business adviser, Business Link for London

"Freshwater has non-executive shareholders, but could benefit from an independent view provided by a non-executive with City experience. Using a specialist non-executive recruitment company will help extend the choice beyond existing networks.

"The recruitment of someone with good City and sector contacts, and a sound grasp of finance and reporting requirements, will bring a fresh impetus to the company and help develop new areas. An experienced non-executive need not be costly - depth of knowledge and contacts matter more than a big name.

"Freshwater needs to ask why it wants to be a listed company, and assess the true benefits of being listed. If the purpose is to find investment for growth, it could consider other investment options - franchising, partnering with associate organisations or licensing regional offices to a local management team.

"For Freshwater to break into Europe, it would benefit from close working relationships with European suppliers and should consider how, at an acceptable cost, to establish a local management team. While expansion into Europe may be an attractive profit generator, don't underestimate the cost of remote management."

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