06 Oct Cost vs. Quality vs. Speed When Going Public
The mantra that you can’t do it all applies to reverse mergers as much as anything else. The cost, quality, speed conundrum is one such area. Typical analysis of cost, quality and speed tell us we are only allowed to have two out of three. This “pick two” conundrum is frequently manifest in the deals we do. For instance, if you want to have a fast transaction at a low cost, you’ll most definitely be sacrificing quality. You’ll likely run into dirty shell issues. On the flip side, if you require quality and cost savings, it’s going to take more time to finish the process. For the private company seeking public status, there are many roads that lead to Rome. The question is, how much will it cost to take a company public? How arduous will the journey be and how long will it take?
Most often companies looking to enter the public markets by some type of reverse merger will reverse engineer their deal structure to fit:
- Their budget. How much do they want to spend? Do they have the money to purchase an existing clean SPAC that already trades and includes a trading symbol or will they need to manufacture a shell or complete a self-filing?
- Their time frame. How quickly does the business want/need to be up and trading? The answer to this question will change the type of shell the business eventually merges with. Speed is one of the biggest perks of going public with a reverse merger. That’s the main reason Twinlabs is cited as choosing a reverse merger transaction over traditional IPO.
- Their appetite for risk. The quicker and less expensive the deal, the less time is spent in due diligence if their using an existing shell. The less time and money spent on an existing shell that was not somehow manufactured, the more risk they involve in the deal. If the chickens come to roost long after such a deal, they have no one else to blame but themselves.
Each of the aforementioned tweaks to the “go public” process are dependent on the status of the business. Long-established companies with solid EBITDA, consistent business and good margins are the most likely to desire speed and be less cost-sensitive on the price of an existing, trading shell. In doing so, they will demand quality. When you take a startup company public, they typically prefer cost savings and speed. For the small share of startups that are good candidates for a reverse merger, speed to going public is less of an issue than cost, in most cases. Most businesses are somewhere in between “mature” and “startup” and require a tailored and sensitive approach that is dependent on their individual needs. In every instance, we urge shareholders and management to skimp on cost and speed, but never skimp on quality. The risks just aren’t worth it.