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Factors to consider before engaging in a reverse merger

On Behalf of | May 18, 2016 | Mergers & Acquisitions

Business owners or entrepreneurs looking to start up their next venture must always be on the lookout for funding options. In addition to venture capitalists, angel investors and other ways of securing capital for a new business, some people may choose to seek out a reverse merger. The U. S. Securities and Exchange Commission explains that reverse mergers are also referred to as reverse takeovers. This is because in these transactions, a private company does essentially take over a publicly traded company.

Whether or not a reverse merger is the best way to fund a new business may depend on the individual circumstances. While historically this approach offered a lower-cost and quicker road to a desired goal, Forbes indicates that the cost of a reverse merger today may not be so low. Aside from the costs involved in the actual merger, running a public company can be far more expensive than running a private one. This is something that entrepreneurs should carefully evaluate before making the decision to go this route.

In addition to costs, playing in the big leagues of public markets can add a level of oversight and management responsibilities that some new businesses are not quite ready to handle. On the other side of things, the move to being a public company may allow the ability to woo talent with things like stock options.

Another factor to evaluate in the reverse merger decision is what stock exchange the new company will be traded on. As many of the shell companies have low visibility and active business dealings, the new companies often end up on minor exchanges.