There are usually two types of transactions that I run into on a daily basis when it comes to Reverse Shell Mergers. The first one is considered a cash and carry deal: the principals of the Shell want to sell their shares to the highest bidder and are not concerned about what company is backed into the Shell. The second scenario is where the Sellers want to use their shares, in lieu of selling them for cash, as equity participation in the new company that is backing into the Shell. I will cover both of these scenarios.

Cash & Carry

Selling a Shell for cash and carry is the preferred option for dealmakers who are selling the Shell to the Buyers. The deals are quicker, cleaner and only require the dealmaker to find a qualified Buyer with enough cash to close the deal. In this case the Sellers will require due diligence on the new company being vended into the Shell but since they do not have any monetary upside after the sale, what goes into the Shell is of little consideration to them.

Seller Participation

When a Seller has decided to use his shares as equity participation the transaction to sell the Shell can get very convoluted. The Seller, who is usually the principal and CEO of the failed Shell, now wants to grab onto the coattails of a new company that will be (in his mind) the next Google. This is the type of Seller who is going to look at a huge number of potential candidates before he decides which one is worthy enough to be backed into his Shell. Most dealmakers will tell you it is a royal pain in the ass to get these types of deals done because you have to find a company that not only is generating huge revenue and cash flow but also wants to give up a substantial piece of the new company instead of paying cash for the Shell. Then there are the endless negotiations about the value of the new company going into the Shell versus the percentage of ownership in the new entity by the Seller. Last, but not least, there is the discussion about the Sellers “lockup Agreement” so he doesn’t sell all of the new shares he has received in the new company ten seconds after the reverse merger is completed. Needless to say, Seller participation is not the easiest type of deal in the world to close.

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