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How do small public companies use stock to make acquisitions?
Small public companies pay for acquisitions with some combination of their own shares, cash, seller notes, preferred stock and earn-outs. Stock can be all of the price, part of it, or an earn-out paid in shares if the business hits its targets. In our experience, deals paid mostly in stock rarely work for small companies. Sellers discount thinly traded shares, so we usually recommend raising cash from long-term investors and using stock as one part of the price.
Joel Arberman, Meraki Partners · Updated October 25, 2026. Based on 17 companies taken public since 1999: 11 by direct listing, 4 by reverse merger and 2 by IPO.
What are the ways to use stock in a deal?
| Structure | How it works | When it fits |
|---|---|---|
| All stock | The seller receives the buyer's shares for the business | The seller believes in the combined company and doesn't need cash now |
| Stock plus cash | Part paid in cash at closing, the rest in shares | The most common mix; the cash gives the seller certainty |
| Earn-out in shares | Extra shares are issued if the business hits agreed targets | The buyer and seller disagree on value |
| Preferred stock | Preferred shares with a dividend or conversion right | The seller wants income and some protection |
| Seller note | The buyer pays part of the price over time | Bridges a gap between price and cash available |
Why do sellers discount a small company's stock?
Shares of a small public company may trade lightly, and the seller may not be able to sell many without moving the price. The shares a seller receives are also usually restricted. A seller who has to wait to sell, with no certainty of the price, will want a higher price or more cash. That is why we usually advise raising cash first. See how public companies make acquisitions.
Can the seller sell the shares right away?
Usually not. Shares issued to a seller in a private transaction are restricted. Once the buyer has been an SEC reporting company for at least 90 days, the seller can generally resell under Rule 144 after six months, subject to volume limits if the seller becomes an affiliate. Larger deals sometimes register the shares on Form S-4 instead, which takes longer and costs more. Former shell companies face longer restrictions.
How does buying with stock create value?
Private businesses often sell for a modest multiple of earnings, while public companies with a growth story are often valued higher. If a company valued at 15 times earnings buys a business at 5 times earnings, the earnings it adds are worth more inside the public company than the price paid. The math only works with discipline: integration costs, a falling multiple or overpaying can erase the gap. See building to buy for a worked example.
What does the buyer have to file?
A Form 8-K within four business days of closing. If the business acquired is significant relative to the buyer, the buyer must also file audited financial statements of that business, usually within about 71 days after the initial 8-K. Exchange-listed companies generally need shareholder approval to issue 20% or more of their shares in a deal; OTC companies need enough authorized shares. See audited financials.
How should a small public company plan its first acquisitions?
- Raise cash from long-term investors before or alongside the deal
- Use stock as one part of the price, not all of it
- Have the target's books ready for an audit before signing
- Agree on earn-out targets that can be measured cleanly
- Keep the share count in view so each deal adds value per share
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