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What are reverse mergers?

One of the most difficult things for a small business in New Jersey to do is to raise money for expansion. A private company may look at loans, cutting costs or even going public before it is able to come up with a strategy that will provide it with needed capital funding. Such businesses do, however, have another option for seeking out and securing the financial support that they need for their plans. These enterprises may go through reverse mergers.

There are three parts to a reverse merger. First, the private company must merge with an entity that is already traded in the public market. The publicly traded entity must pre-exist the merger and the private company must become part of that entity after the merger is complete.

Second, management of the newly-merged public business stays with that of the original private company. Managing the new public entity allows the formerly private business to have control of spending decisions as well as growth. In many cases, private companies merge with pre-existing shell companies in order to easily take control of management of the new entity.

Finally, investment in the newly-merged entity provides investors with shares of the entity. Since the private company effectively becomes public when it merges with the shell corporation, it too becomes publicly held and eligible for public ownership. Those who invest in the merged entity are provided with plans for ending their investment relationship with the entity as they receive shares of its ownership.

There are advantages and disadvantages to pursing a reverse merger to build financial support for a private business. Attorneys who practice business law can give their clients specific advice on whether such transactions could help them grow. The reverse merger, however, does give a private business options when its management is considering ways to grow its wealth.

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