Some companies prefer to go public by doing a reverse merger. This means that, in the long run if you have a privately held company, that you can merge it with a publicly held company that will be referred to as a shell. In other words, this shell company will have no assets except for cash and the business operations will be run on a nominal level. Once the reverse merger is successful, your private company will be publicly held automatically.
Taking this route also means it will be more expensive than going any other route. The private company's shareholders will get the majority shares from the public company and will also gain control of the board of directors.
Advantages of taking your company public through a Reverse Merger.
Lowered cost: When taking your company public with an IPO, it's usually more than with a reverse merger since costs are predetermined with a reverse merger. Having said that, it will greatly depend on what your underwriting commissions are with an IPO.
Increased valuation: Once your company is public, you will have increased valuation, which is the one advantage over a privately held company.
Quicker process time: The time involved in taking your company public with a reverse merger is significantly less as opposed to going the IPO route. Doing this means everything is completed in fewer steps as opposed to an IPO which can take anywhere up to 12 months to complete.
Incentives & acquisitions: You can attract the right management and retain valuable employees by simply using stock options and stock incentives. Acquiring public stock will be less expensive as well.
Financial planning: Founders and shareholders enjoy the fact that public company stock ensures an exit strategy for them in the long run as opposed to having a private company. It's easier to use when it comes to the estate planning for the principles.
Reduced risk of underwriter's withdrawal: Unfortunately one of the aspects that can be a great risk in taking your company public through an IPO is the fact that an underwriter can withdraw at the last minute depending on the state of the market and that means that the underwriter can request a reduction in the offerings even after most of the upfront cost has been expended.
Earnings History & reduced business requirement: While an IPO requires that the company submits a long history of their records, such isn't the case with a reverse merger as it's simply not needed as much. Also with an IPO, senior management doesn't realize how much time they will have to spend on it.
With a reverse merger, less parties are involved and the transaction is quicker and not as complex as an IPO. There isn't any regulatory review required or approval needed for the transaction which makes it real easy in the end.
No underwriter: There is no need for an underwriter, since an underwriter's role is to solely help a bigger company reach public status and making them look just right for the IPO.
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