Potential Benefits of a Reverse Merger

Taking a company public via a traditional initial public offering can be a great way to raise not only capital but the public profile of your business. But going public can be a complex, expensive, and time-consuming process. A shortcut exists, however, that may offer an appropriate alternative to an IPO for some companies.

With a reverse merger, a private company can acquire a public company that has gone dormant and assume the public company status of the business it acquires. A dormant or “shell” public company is one that is still listed on a stock exchange but has no assets, usually due to a sale or a bankruptcy.

Reverse mergers offer certain benefits: They can be accomplished relatively quickly and inexpensively compared to a traditional IPO, and they involve less regulatory red tape. They don’t raise nearly as much capital as an IPO, however, at least not initially. This usually makes reverse mergers better for private companies that aren’t desperate to raise large amounts of cash quickly but rather have the capability to grow substantially on their own in the future.

Reverse mergers also provide a higher degree of certainty to business owners than IPOs because they aren’t dependent on market conditions. An IPO can be canceled at the last minute if market conditions change drastically, wiping out a year or more of preparation, but reverse mergers aren’t subject to such volatility.

The first step to accomplishing a reverse merger is to locate a viable shell company that you can acquire. The good news is there are more of these companies out there than most business owners realize. You can start by simply doing an Internet search for “reverse merger shell company.”

Your attorney and accountant may also be able to help you locate candidates for acquisition. In addition, business finance consultants who specialize in this area can often provide “clean” public shell companies without any predecessor entities or history of business failure in their backgrounds, which can help expedite the process. Keep in mind, though, that the consultant may want a piece of the pie, such as a minority stake of between 2 percent and 5 percent of the new company.

The next step is to plan your long-term financing strategy. Remember that a reverse merger is an indirect method of raising capital, so you must have a plan in place for how you’ll raise cash after the merger is complete. Fortunately, public companies tend to be more attractive investment options to a wider range of potential investors than private companies and thus often enjoy a more abundant supply of equity capital.

In putting together your merger team, experts recommend that you work with a highly reputable national accounting firm and a prestigious law firm that specializes in these types of transactions. Unfortunately, a negative perception has built up over the years when it comes to reverse mergers. Working with well-recognized and respected accounting and legal professionals will go a long way toward helping create the right first impressions with investors and business brokers.