Benefits of Going Public and Reverse Merger

By Ben Hedenberg
last updated Sunday, January 12, 2011

When a corporation "goes public," both the company and its founders may enjoy numerous benefits and advantages. Some major benefits include the following:

Access to capital and future financing opportunities
Going public provides your company with equity financing opportunities to grow your business - from expansion of operations to acquisitions.

The issuance of public shares will expand your investor base, and will help set the stage for secondary equity financings, including private placements. As well, issuers often receive more favorable lending terms when borrowing from financial institutions.
The greater number of financing options that become available to companies once they are public include:

1. The issuance of additional shares in a secondary offering

2. Exercise of warrants. Warrants are options that give the holder the right to purchase additional shares in a company at pre-dertermined prices. When many shareholders with warrants – which a public company can easily issue – exercise their option to purchase additional shares, the company receives an infusion of capital, as shown in the chart below.

3. Private Offerings. Many, many more investors will step up to the plate for a private offering of shares once they know there is some sort of mechanism in place for them to resell their shares if the company succeeds. Most investors realize that even a successful company may not be able to go public if market conditions are off. If a company succeeds, there is a greater likelihood of developing a market for its common stock that accurately represents the company and lets investors sell their shares.

Public Companies Trade at a Premium

Valuation Ratio Private
Price/Net Sales 0.6 3.2 433%
Price/Gross Cash Flow 7.3 17.3 137%
Price/Net Income 7.0 23.9 241%
Source: Pratt’s StatsTM and Public StatsTM at Valuation data based on 7,503 private company transactions and 1,233 public company transactions between 1/90 and 11/05. Universe restricted to transactions under $100 million.

Increased visibility and prestige
Going public enhances your company's visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of your stock by sector investment analysts can provide your company with greater profile and credibility. Ultimately, this will result in a more diversified group of investors following your company, which may increase demand for your company's shares and thus increase your company's value.

Liquidity for shareholders
Becoming a public company establishes a market for your company's shares, providing your investors with an efficient and regulated vehicle in which to trade their own shares. Greater liquidity in the public market can lead to better valuation for shares than would be seen through private transactions.

Create employee incentive mechanisms
Your employees can participate in the ownership of your company and benefit from being a shareholder. Stock options and employee share purchase programs are a good mechanism for compensating your employees without depleting cash reserves.
This can serve to ensure stronger employee commitment to your company's performance and success. Share options in a public company have an immediate and tangible value to employees, especially as a recruitment incentive.

Facilitate growth
As a public company, your shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax efficient and cost effective vehicle to finance such a transaction. This can also improve your ability to complete mergers and acquisitions in a more timely and cost-effective manner.

Benefits of reverse merger
Imperviousness to market conditions: Conventional IPOs are risky for companies to undertake because the deal depends on market conditions over which senior management has absolutely no control.

Compressed Timetable: Regular initial public offerings can drag on for a year or more, from when the idea pops into the chief executive's head until he or she actually gets a check. Unfortunately, when a company transitions from an entrepreneurial venture to a real public company fit for outside ownership, senior management's time is at its most valuable.

Reduced Expenses: For a real IPO, it can cost as much as $200,000 just to get a preliminary prospectus on the street. To actually bring the deal to the closing table, the costs increase. A reverse merger, however, can be done for $95,000.

Corporate Income Tax Shelter: Many shell companies have what is known as a tax-loss carry forward. This means that a loss incurred in previous years can be applied to income in future years. When this occurs, the future income is sheltered from income taxes.


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