When you’ve started your own business and are considering taking it public on the stock exchange, there are a variety of methods of doing so that you can select from. One option available to you is to go public via a reverse merger. Although this type of merger comes with its own set of risks, the benefits may be worth it.
What Are Reverse Mergers?
A reverse merger is a type of merger that occurs when a private company like yours acquires a company that is already public. Similarly to a standard merger, both companies become a single entity. When acquiring a public business through a reverse merger, your company will also become public. By using this method, you will be able to avoid the many complications that can occur when taking your company public with an IPO.
Although they may not directly concern smaller businesses and startups, there are a couple of other actions that constitute a reverse merger. Any instance of a smaller company acquiring a larger one is referred to as a reverse merger. The same is true when a company that is losing money acquires a company that is making profits. For a startup business, the only type of reverse merger that matters is the first one. Understanding how you can benefit from this merger may help you go public earlier than you had originally thought possible.
How Reverse Mergers Are Useful
When you’re attempting to build your private startup into a larger publicly traded company, there are a variety of ways in which reverse mergers can be useful. For one, you will become a private company without needing to go through the extensive IPO process, getting a hard money loan, which also means that you won’t need to pay as much money in order to be listed on the stock exchange. With standard mergers and acquisitions, there are times when the merger will lead to a substantial reduction on the amount of competition within the market. If the effect is believed to be too negative, it’s likely that the merger will be put on hold. A reverse merger does not cause a negative effect with the market, which means that it won’t be declined for this reason. This merger will also help to reduce your overall taxes.
Before you decide to engage in a reverse merger, keep in mind that running a public company is completely different than running a private one. Although a reverse merger comes with a wide range of benefits, this approach can lead to failure if you or the managers within your company aren’t prepared to run a public business. If you believe that you’re prepared to do so, there are hardly any downsides with this approach as long as you can afford to purchase a public company.
What Is An IPO?
To best understand how beneficial it is to go public via a merger as opposed to an IPO, you should be aware of what an IPO is and what the process entails. IPO stands for initial public offering and refers to the initial sale of stock that you allow for the public. While your startup is private, the shareholders will be comprised entirely of a small set of early investors that might include your friends and family or venture capitalists. When you go public with your startup via an IPO, institutional investors and individual investors will be able to purchase stock whenever they please.
While you’ll have many more responsibilities once you take your business public, doing so allows you to raise more money and possibly expand beyond what you were able to do with the early investments that you received. Even though there are a variety of benefits associated with undergoing the IPO process, there are also many issues with the method when compared to a reverse merger. The expenses are higher and the process is lengthier since you’ll likely need to retain an investment bank for their underwriting services. One of the riskier aspects of the IPO process is that it’s possible that the public won’t accept the price that you’ve set for your IPO, which can be very damaging to your company and its stock price once you’ve been listed on the stock exchange.
How Startups Can Use Reverse Mergers to Go Public
Before you decide whether or not you want to take your company public, you should know that it’s generally advisable that you only do so once you have at least $100 million in total revenue. As touched upon previously, private startups can go public through a reverse merger by purchasing a public company. This company will usually be a shell corporation due to their lack of assets, which makes it easy for you to merge with the dormant company. A reverse merger can take anywhere from 1-4 months to complete. On the other hand, the IPO process can take upwards of a year before it’s finalized.
When you take hold of a business that is already listed on the stock exchange, you will immediately be listed on the stock exchange as well, which allows you to deftly avoid the lengthy IPO process. By utilizing this process for your startup, you won’t need to depend on current market conditions when going public. During the 8-12 months of the IPO process, it’s possible that the market conditions will suddenly and without warning become unfavorable to you, which can put a stop to the process and undo months of work. With a reverse merger, this entire process is avoided. While a reverse merger can take several months to complete, the value it can provide to your company and its shareholders is immense.