Put It In Reverse

Are there too many twists in the road to IPOs? Consider a smoother route: reverse mergers.

Tough initial public offerings are perhaps the most sought-after form of financing, the fact is, surprisingly few companies can hope to negotiate their way through the tortuous process.

This truth leads to a nasty Catch-22. Many promising small companies cannot obtain funding because they are private. However, without funding, they can't hope to grow to the size that would allow them to go public.

Why is being a private company anathema to the capital-formation process? Because many investors believe that even if the company does well, without an exit strategy to get their money out, they'll never realize a substantial return on their investment. There might be some merit to this thinking; however, the other side of the coin is that a patiently funded company that realizes its true potential has numerous options for rewarding its shareholders.

If you're convinced going public is the best way to find the funding you need, there's an alternative to the typical IPO that's less burdensome and may be equally lucrative: a reverse merger. In a reverse merger, a private company acquires an already public, though typically dormant, company and becomes public as a result. Though completing a reverse merger is only the first step in receiving funding as a public company, it can lay the groundwork for substantial capital growth.


Art Beroff co-writes Entrepreneur's "Raising Money" column. Dwayne Moyers is the founder of Cummer Moyer Securities investment brokerage and management company. He has advised numerous emerging companies on financing strategies and options.

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This article was originally published in the June 1999 print edition of Entrepreneur with the headline: Put It In Reverse.

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