Why flotation cost matters to a first-time founder
Issuing shares or debt rarely delivers the full headline amount to the company. Adviser, underwriting, legal, audit, regulatory and listing charges reduce the net proceeds. Ignoring them can leave an acquisition or expansion underfunded, while small issues may carry a particularly high cost as a percentage of money raised.
Examples of flotation cost
A company sells ₦10 billion of new shares. Underwriting costs ₦350 million, legal and accounting work costs ₦180 million, and listing and registration charges add ₦70 million. Total flotation costs are ₦600 million, or 6% of the issue. The company receives about ₦9.4 billion before any other use of funds.
Common misunderstanding
Flotation cost is not the same as dilution or the return investors expect. It covers the direct and sometimes indirect cost of arranging an issue. Accounting treatment can differ by instrument and jurisdiction, so the full cash cost, reported expense and adjustment to equity will not always be identical figures.
When to use it
Estimate flotation costs when comparing a public issue with private funding, bank debt or retained earnings. Ask advisers for itemised fixed and percentage fees, then base the funding plan on net proceeds. Early-stage founders can usually ignore the term unless they are issuing securities through a process with meaningful placement or legal costs.