by Jeremy Kahn, October 31, 2016 8:58 AM
- Provider of accounting software targets small companies*Tech IPOs in London rare as investors cite difficult market
- U.K. software company FreeAgent Holdings Ltd. plans an initial public offering on the London Stock Exchange’s AIM market for small, growth-oriented companies.
Edinburgh, Scotland-based FreeAgent provides cloud-based accounting software for “micro-businesses,” a term it defines as companies with fewer than 10 employees. Its decision to float bucks strong headwinds in the U.K. tech IPO market. Last week, financial software developer Misys Ltd. pulled a planned 750 million pound ($912 million) IPO citing adverse market conditions. According to data compiled by Bloomberg, there have been seven tech IPOs in the U.K. in the last 12 months.
“Investors are always needing solid, well-run businesses,” FreeAgent Chief Executive Officer Ed Molyneux said in an interview. “Whatever the market conditions, we think there is a market out there to sell our shares.”
FreeAgent, founded in 2007, sells its services through a subscription model and said it currently has about 52,000 customers. It said monthly subscriber revenue, as of the end of September, put it on track for sales of 7.7 million pounds annually, up from 6.8 million pounds at the end of its financial year in March. But despite what it said was a gross profit margin of 80 percent, the company lost 1.3 million pounds in 2016, according to documents filed with British business registry Companies House.
FreeAgent’s float would be the first since LoopUp Group Plc, a conference calling platform, went public in August, raising 8.5 million pounds. The largest IPO of the past 12 months was April’s 75 million-pound listing of Midwich Group Plc, which sells audio visual and document-handling equipment to businesses.
Freeagent is hoping to raise about 8 million pounds, which would value the entire company at between 31 million pounds and 35 million pounds. The company has plans to be profitable before interest, depreciation, amortization and taxes in 2018.
After pricing and an initial lockup period, FreeAgent’s shares should begin trading in mid-to-late November. Nplus1 Singer is acting as adviser and broker for the share offering.
FreeAgent has been financed so far with 9 million pounds of private equity and debt from angel investors, a crowd-funding campaign, London-based venture capital group LocalGlobe and private equity firm Innovation Group Investors.
Molyneux, who studied computer science at the University of Oxford and flew fighter jets for the Royal Air Force, co-founded FreeAgent after struggling to manage the accounts of his own small defense consulting business. He said becoming a public company was important both to show FreeAgent’s customers that the company was transparent and stable and to attract and retain talented employees, who received stock-based compensation.
“We do provide share options but as a private company it is very hard for people to perceive that they are worth anything,” Molyneux said. “A public listing generates a sense of ownership among employees.” FreeAgent employs about 100 people.
Molyneux said the company considered taking on additional venture capital but didn’t think its profile aligned well with the rapid growth often sought by such investors. “There is a tendency to pump things up to deliver the returns that venture capitalists need,” he said.
FreeAgent says its growth will be boosted by new U.K. tax rules that require all but the smallest businesses to manage their tax records digitally and file quarterly tax returns. Currently, such businesses are only required to file annually. FreeAgent sells its software directly to such businesses and also as bulk licenses to the accountants who handle the bookkeeping for such micro companies, which account, the company said, for 95 percent of all U.K. businesses.
“Most people have this idea that the U.K. Plc is all about banks and supermarkets and what we see is that it is actually mostly about hairdressers and coffee shops,” Molyneux said.