Before contemplating a reverse merger, one must be aware of its limitations.  If the subject company is experiencing heavy growth or a start up that is in need of capital, a reverse merger may not be the right fit. Most public companies are considered successful once they reach some critical mass of revenue and profits, somewhere in the range of $20 million to $30 million and 10 percent, respectively.

A high growth company may be on the right path to reach this threshold but needs the capital immediately to obtain the goal. With capital being one of the top reasons why a company decides to go public, time becomes the mitigating factor of why the timing may not be right.   Companies that have completed a reverse merger and fallen short, lack the financial results needed to be considered a success by the financial community, creating skepticism in the marketplace. This ultimately results in a lack of interest by investors for its stock and the needed capital to sustain its growth. “If you can build a business up big enough, it's respectable.” -Will Rogers

As we have seen over the past years, the days of hype and instant success have become the exception, not the guaranteed outcome.  A reverse merger takes much less time to become public however, the stock still needs to be sold and the market for its stock still needs to be created.  If the subject company has reached the threshold, it may take less time to make a market for its stock but how much time one never knows for sure.

“If a business does well, the stock eventually follows.” -Warren Buffett

Costs and Fees:  Reverse mergers are considered inexpensive when compared to completing an initial public offering from scratch.  Transactions can be completed from the $75,000 – $150,000 range, compared to three to four times that amount for a full IPO.  Keep in mind, that the private company may have to give up five percent to twenty percent of its equity just for the privilege of becoming public; and when it is time to raise additional funds more equity will probably disappear. 

Starting with a clean public shell can minimize some forfeiture of equity requirements to around five percent, as well as past business failures of a previous public entity.  Clean shells have been set up for the sole purpose of merging with a private company, and have no past business failures or liabilities.  Private companies, when completing a reverse merger with either a clean or a manufactured shell, most likely will still have to surrender a portion of its equity to either financing consultants or the principles of the current shell.

Finding a shell:  Law firms with a securities practices, many times have dormant public shells from past or current clients.  Financial security firms, investment bankers and accountants are also a source for shell companies as they are an integral part of creating, financing and maintaining public companies.

Deciding to proceed:  Many business owners do not start with an end goal in mind.  Doing a reverse merger is no different.  Understanding the pros and cons as well as the long-term results with help in the decision making process.  Becoming public sometimes sounds better than reality as the financial costs and scrutiny may outweigh the benefits.  However, there are as many success stories as failures and it just depends to whom you are talking. 

“If you don't think baseball is a big deal, don't do it. But if you do, do it right.” -Tom Seaver

Things to consider:  Starting with good counsel is a must, hiring the right professionals such as an investment banking firm, a national accounting firm or securities law firm should help uncover the best course of action for a specific end result.

Keeping in mind the shareholders’ exit plan, potential risks as well as rewards are also critical.  Considering all available remedies in obtaining the desired result could lead you down a different path with less risk and a similar outcome. 

“Don't be afraid to give up the good to go for the great.” -John D. Rockefeller

Mark Gould is a VERCOR Partner and Co-Founder, Certified Business Intermediary (CBI), Master Mergers & Acquisitions Intermediary (MMAI), and Certified Business Opportunity Appraiser (CBOA). Mark is also a co-author of “The Business Sale … An Owner's Most Perilous Expedition.”  Mark has owned 10 businesses and has provided valuation, merger and acquisition services to over 500 companies in a wide range of industries.  Mark works out of VERCOR’S West Coast office.