Tip of the Week: How are Shell Companies Valued?

A shell company is a company with no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents. To identify and value an appropriate shell for a specific company’s purpose, it is necessary to understand six important characteristics of the shell. These give the prospective buyer a way to gauge the shell’s value and utility for the purpose at hand.


1. How was the shell created?

Shells are created in one of two ways. A shell is created from scratch when a founder or group takes public an empty company whose business plan is to acquire a private company. A shell can also be created after the termination of operations of a “real” public company.

2. Does it have assets and liabilities?

Assets of shells can be significant amounts of cash, an old claim the company is asserting against a third party from its operations, or potentially valuable intellectual property.
In some cases shells also carry liabilities. These liabilities have to be included in the value of the shell, so often management tries to eliminate these liabilities or convert them to equity prior to or upon closing a merger.

3. Is the shell trading or non-trading?

Shells formed from scratch (other than SPACs) generally do not and cannot have their stock trading prior to a merger. Public shells resulting from a former public operating business typically do continue trading. The marketplace for shells deems trading to be positive, and generally values a trading shell higher than one that is not trading.

4. Is the shell reporting or non-reporting?

Some public shells “report” under SEC rules; others do not. A reporting company is obligated to file quarterly, annual, and other regular reports with the SEC and is subject to other rules. Companies that trade on the Pink Sheets often do so without being required to report. A company can also be a “voluntarily reporting” company. These companies are not subject to the reporting requirements but continue to file quarterly and annual reports with the SEC and have their financials audited. The marketplace generally assigns a higher value to a shell that is required to report and is current in those reports.

5. What is the size of its shareholder base?

One major asset a shell has to offer is a shareholder base. The only way meaningful trading in a stock can build is through the addition of a good number of shareholders. Simply put, a public company with 2,000 to 3,000 shareholders is more valuable than one with twenty to thirty. However, the identities of the shareholders, the percentage of the company’s float which they will represent, and the manner in which they became holders all may affect their value to the shell.

6. Is it clean or unclean?

Problems in a shell’s past history or management can adversely affect its current value. The cleaner a shell is the more valuable it is.