Business Essentials: 'If we go to the City, will it be a case of return to sender?'

REaD is a thriving database business that stops mail being sent to the deceased or people who've moved. As it seeks to expand, Kate Hilpern sees if it would find the right home on the stock market

We all know how annoying it can be to receive post for people who no longer live at our address. Ensuring that this happens as little as possible is the job of Mark Roy. He set up REaD Group in 1991 after spotting a gap in the market - for a database system that would enable high-volume mailers to ensure they were targeting the correct people at the correct address. The business has become so successful that he is now considering floating it. The problem is that he doesn't know where to start.

"Our ethos is simple," says Mr Roy. "If 5 per cent of the one million people you contact by mail don't live where you think they do, they won't respond. Our service identifies them and removes them from your list, so you can now mail 950,000 people and get the same response.

"Since it costs around 60p to mail each item, you'll make a saving of £200,000 through a service that will cost you around £50,000."

Ten years after starting up, Mr Roy decided to expand the already thriving business with a second major service: preventing mail from being sent to the deceased. "My wife died that year and I had a couple of young kids at the time who used to ask, 'Why are people still writing to mummy?'" says Mr Roy. "I discovered that approximately 47 million pieces of direct mail a year are sent to dead people in the UK and, because of my own experience, I realised that it's not merely annoying but upsetting. Then, through research, I also discovered that it does enormous brand damage to organisations."

The result was REaD Group's Bereavement Register - a service free to members of the public which prevents junk mail from being sent to the deceased. Meanwhile, the direct marketing company pays for every record flagged up when its mailing list is screened against the register.

Having already met with success in the UK, the register is being rolled out internationally.

"We've grown far faster than we ever envisaged and are making more money than we ever thought we would," admits Mr Roy. "Our turnover is expected to be more than £10m this year, compared with £8.2m last year, and we will net close to £2m. We now want to exploit this success and accelerate our growth."

Floating at least part of the company is something he's particularly interested in. "But how can I tell if it's the best option for us? What are the pitfalls? How would I prepare the business for it? I'm an entrepreneur and so I'm stepping over the fence and feel in alien territory."

In his favour is that one of REaD Group's non-executive directors has experience of floating other companies. "In addition, as a result of being based in Sevenoaks [in the South-east], I have several local contacts who work in the City," says Mr Roy. "But they all tell me that floating the company is a very costly process because of having to find an adviser, preparing offer documents, and so on.

"While I understand that I'll get the outlays of costs and fees back, it's still my money that I'd be putting up, so I'd want to be sure it was worth it."

Flotation is an exciting proposition, says Mr Roy. "But it seems to be a difficult world to get the inside track on."

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WHAT THE EXPERTS SAY

Chilton Taylor, head of capital markets, Baker Tilly

"REaD has exploited a lucrative gap in the UK market. With impressive growth and international expansion under way, it's a prime candidate for flotation. Going public also means increased visibility for REaD and its niche services.

"The challenge is demonstrating sustainable growth in an expanding market and showing that management can meet the challenges of becoming a larger operation with increased competition.

"Continual investment in the latest technology is vital for REaD. Capital raised on flotation will enable further development but the company must prepare a comprehensive business plan, which calculates required investment and identifies key limiting factors and additional working capital requirements.

"Does the current management team have the strength to take the company to the next stage? Does it accept the need for stronger corporate governance? Is there a strong financial director and are appropriate financial reporting systems in place to meet the scrutiny of the public and the City?

"A good first point of contact is an experienced adviser - an accountant or lawyer, for example . He or she will assess the suitability of flotation for REaD, explaining the advantages, disadvantages and alternatives."

Barry Franklin, business adviser, Business Link for London

"In applying to have its shares listed, REaD must appoint a sponsor (a merchant bank, lawyer, accountant or broker), who will submit its application, lodge supporting documents and act as intermediary between REaD or its advisers and the UK Listing Authority.

"Since REaD will be coming to the market for the first time, its management may want to appoint advisers such as public relations specialists, registrars and a receiving agent. Their function is to process the application, report the results to REaD and take appropriate action with regard to the issue of allotment letters.

"REaD should also consider the appointment of non-executive directors.

"Professionals to help REaD with its flotation won't be cheap: in addition to the sponsor's activity, complex work will need to be undertaken, such as diligence and verification procedures. This requires the assistance of specialist lawyers."

Jonathan Hinton, corporate finance partner, Deloitte & Touche

"A company that completes an IPO [initial public offering] benefits in several ways. In particular, the company's profile is raised and it has the potential to raise money in the future from the market.

"Furthermore, the listed shares can be used to provide incentives for senior management and employees (for example, through the creation of share option schemes), or even as currency in any acquisitions that might be contemplated.

"However, the process can be costly and time-consuming, and where new money is to be raised from the market, there is no guarantee of success.

"If the company is successful in its IPO, it will also be expected to comply with corporate governance and financial reporting requirements.

"Given the relatively small size of REaD, investors will seek capital growth rather than income yield, but they may be nervous about providing cash for expansion into untried international markets.

"It is also often a surprise to shareholders in small IPOs to learn that there will be little liquidity in the trading of the shares - and that they might therefore find themselves locked in for the long term."