Private companies without the means to go public can still get themselves listed on the stock exchange. This is called a back door listing, where private companies merge with public companies. This strategy can be favourable for shareholders and owners, but can often result in a less than favourable outcome.
At Nash Advisory, we talk with many business owners who dream of “listing on the stock exchange”. We don’t know what draws them to this. Perhaps it’s the allure of meeting fund managers, or presenting at an Annual General Meeting. In our opinion, these are all generally reasons to not list on the stock exchange.
Are you looking to make the next power move for your business? Talk to Nash Advisory first. Our extensive businesses services will ensure that you can see the full playing field, and make the right decision when undertaking a liquidity event.
When it comes to listing on the stock exchange, businesses have two options: front door and back door.
As a general guide, a front door listing requires 12 months of preparations and will cost $2 million for a $20 million capital raise. An official listing on the Australian Stock Exchange (ASX) requires:
A back door listing is where an existing ASX listed company (often referred to as a listed shell) acquires the vendor's business, and the vendor's business makes up the majority of the new group. This type of listing is sometimes thought of as easier and less time consuming that a front door listing.
However, it does not have the lustre of a front door listing, and is usually only performed for relatively small capital raises. This type of listing typically takes 6 months and will cost $1.5 million for a $10 million raise.
This relatively higher cost is because:
Back door listings are an easier, more cost-effective way for a business to go public. This process removes the need for extensive regulatory filings and considerable fundraising efforts.
The company and its shareholders may also find value in the merger. If the synergies of both companies align, both businesses will continue to add value and grow.
In our opinion, a back door listing should not be undertaken in 99% of circumstances. A front door listing should only be attempted if your company is worth over $100 million, or if there is a superb growth story.
Back door listings can also result in:
The solution is typically to take on a private funding partner, or to sell to a trade buyer.
Nash Advisory has first hand experience with this type of scenario. Below are hypothetical statistics for situation we have witnessed. The business in question is here referred to as Company Alpha.
Company Alpha was owned by a 40 year old founder. They were seeking access to $3 million of growth funding, and $3 million of cash proceeds.
They were offered two solutions by their advisor:
A private party was committed to investing $5 million for a 60% shareholding in the company. The transaction would have been completed in 90 days and was highly certain of completion. The founder would have:
Instead of taking the above deal, the founder could go through a back door listing process, which would take 11 months to achieve. The backdoor listing would raise $5 million of capital, and the founder would receive:
In the end, the founder took Option 2 — the lower salary and 20% of the shares in the company, instead of 40% shares and a strong remuneration package.
The only benefit they received was a higher upfront cash component. Going forward, the founder will have to report to a listed board, the ASX, shareholders and comply with many listing rules.
In our opinion this was a poor, risky decision. The process timeline was lengthy and the costs incurred were high. The founder has lost control of his company, and now has limited long term upside.
The mismanagement of back door listings happen frequently. There's plenty at stake when it comes to listing on the stock exchange, and the excitement of it can cloud better judgement. To get the possible result for you and your business, you should talk to an experienced financial advisory service.
Have you considered a back door listing? Talk to Nash Advisory before you make your next strategic move. We can help you plan for a liquidity event that will get you the best possible result.