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Should you consider a reverse merger for your company?

On Behalf of | Jun 9, 2021 | Mergers & Acquisitions

Converting your private company to a public one that can be listed on the stock exchange and draw investors is time consuming, expensive and complicated.

A reverse merger may offer an alternative approach that could ease the way.

What’s a reverse merger?

A reverse merger is a process where an active, private company acquires a public company that has essentially gone dormant despite still being listed on the stock exchange. Shares from the private company are exchanged with the public company’s stock, ultimately transitioning the acquiring company into a public one that is registered with the Securities and Exchange Commission (SEC).

What are the advantages of a reverse merger?

Instead of spending up to a year developing the initial public offering (IPO) that will allow you to take a private company public, the reverse merger process can be completed in just a few weeks or months. This is both less time consuming and cheaper.

In addition, there are usually tax benefits that come with a reverse merger. Since the acquiring company must usually absorb the losses of the smaller company, those losses carry forward and help reduce the taxes of the larger company.

Are there any disadvantages of a reverse merger?

There are some possible disadvantages. Companies hoping to acquire a public “shell” company need to perform their due diligence to make sure that they aren’t also about to acquire future legal liabilities. It’s especially important to make sure that the shell company wasn’t used for any kind of illegal purposes in the past, like money laundering or tax evasion.

Stock issues can also be a problem. Reverse stock splits caused by the merger actually reduce the number of shares held by a company’s shareholders, and that can also lead to complications.

Mergers and acquisitions always have complex issues that need to be addressed. Learning more about the legal steps you should take next can help provide some much-needed perspective and clarity before you act.