Tips for a successful startup exit
Building a successful startup is a huge feat - and at some point, many founders will ponder the right time to withdraw from or exit a company fully. The latter requires carefully planning and should be thought through. Founders want to recoup their investment through the sale and ideally earn as much profit as possible. However, various options are available such as selling shares and possible participations, retaining management among others.
What exit options are there? How do you identify the right time for a sale or withdrawal? What pitfalls are involved? We explain the procedure step by step and offer valuable tips.
Trade sale of a startup
A trade sale is when another company or investor buys part or all your business. These are often larger industry players, who are keen on acquiring a market share, technology or talented professionals. A quick and secure transaction can be advantageous as the buyer usually has sufficient financial resources. Strategic buyers have a strong interest in acquiring your startup in the expectation of positive synergies. As a result, the purchase price can be relatively high. But of course, there are sacrifices to be made when selling your startup. You are giving up your “baby” and thus control of the company. After the sale, you will no longer have sole decision-making power, which could lead to redundancies or the discontinuation of strategically important products or services.
Example: The Hamburg-based FinTech Figo developed a banking service provider and was acquired by Finleap, a Berlin-based FinTech ecosystem in 2019. For Figo, this meant integration into a larger network - an advantage for scaling the technologies.
Sale of startup to private equity companies
Private equity companies or investment companies put money into a fund that buys shares in different companies. In this case, your business is not taken over fully by another company, but you must hand over decision-making and determination rights to the investors. Before agreeing to the sale, you should therefore check the fund company's objectives and strategy to ensure that their ideas are in line with yours. Ideally, these investors will help your startup to develop positively. Conversely, your startup needs to prove that it is worth the investment by presenting an innovative concept and unique selling points as well as supporting facts, figures and data to stand out from the competition.
Private equity firms often provide additional capital for growth and their expertise can strengthen your company. However, the focus is on quick profits and not on long-term growth. That can lead to even more pressure to succeed.
Liquidation: sale of a startup
An adequate reason for an exit can, of course, also be that your startup is not developing as you had imagined, or external factors are forcing you to wind up your company. In liquidation, all your startup's assets are sold - and usually at favourable prices. This type of exit is therefore not suitable for making a profit. However, the process is swift and less complicated than a buy-out and sale.
Initial public offering of a startup
When going public - also known as an Initial Public Offering (IPO) - your startup is listed on the stock exchange depending on how long it has been in business, how much capital it has, etc. The public buys shares in your company, which can boost your image and credibility and bring in fresh capital. However, it is a long way to the exit because once your company is listed, all the shares in the company must be sold. On the other hand, this also means that only a partial exit is possible Then, you as the founder retain shares and only sell them later, if required. Yet, an IPO involves high costs for banks and the stock exchange and intense communication with shareholders and employees.
Merger: Startup and merger
A merger is when two companies come together to form a new entity. Startups in the same markets often merge to take advantage of shared strengths and synergies. A strategically wise merger can increase the market power of the enlarged company. It should be well prepared, as mergers are highly complex, both legally and in organizational terms. In addition, different corporate cultures can cause problems, such as inflexible workforces, internal communication problems and different management styles.
Management buyout (MBO) of a startup
A management buyout occurs when the existing management buys the company. The staff and business model are often retained. This can be done quickly because the management already knows the business. Of course, this step can only be taken if all members of management can raise the purchase price. However, there may be a lack of capital to expand and grow the business.
When is your startup ready for an exit?
Not every startup is ready for the big leap. Indicators of a successful exit are:
Strong growth: Your company shows steady, increasing turnover.
Scalable business model: Your startup’s turnover can be increased without major, additional effort.
Attractive market: Your industry holds great potential for growth.
Clear market position: Your startup is an established player in its segment.
Attractive technology: You offer a unique, innovative product or a solution that is difficult to imitate.
Interest from investors: You receive enquiries from several strategic buyers or venture capital companies.
Strategic preparation: Define clear objectives for the sale. Maximisation of the sale price, long-term security for employees or your personal profitable exit?
Professional valuation: A realistic company valuation by independent experts is essential for any negotiation.
Find suitable buyers: Networks and advisors can help you identify the ideal buyer.
Legal protection: Contracts and finances must be transparent and understandable for potential buyers and able to withstand extensive due diligence processes. This builds trust and reduces potential business risks.
An unexpected purchase offer from a company or private equity firm is flattering but can of course also take you completely by surprise. The right strategy:
Stay calm: Do not accept or reject immediately. The potential buyer may be in a hurry, but you are not. Therefore, take enough time to first professionally determine the market value of your startup. Then review the offer. Entrepreneurial factors such as unique selling offer, positioning and growth potential play a key role.
Involve consultants: You do not have to decide anything on your own! Contact business consultants and lawyers for help with negotiations and financing. If your startup has a pool of investors, they can help with expertise, advice and a network. Seek alternative purchase offers by approaching VC companies and family offices. You can also get tips and support from Hamburg Invest’s Startup Unit.
Think long-term: Does the sale match your personal and entrepreneurial goals? Be clear about your long-term priorities. Do you want money for security and possibly new projects or continuing your entrepreneurial journey with your startup?
What to do if one founder leaves
If only one person leaves the team of founders, clarify the following:
Shares: Will the departing person's share be sold or will it remain in the company? Can the remaining founders take over the share and do they have sufficient financial resources to pay the departing person adequately?
Allocation of roles: Who will take over the management tasks of the departing person?
Contractual regulations: Founders’ contracts should address possible business scenarios, such as the exit of a partner.
Typical exit mistakes and how to avoid them
Emotional decisions: An exit is a rational entrepreneurial process. Your personal sensitivities should not play any role. Thus, the support of neutral advisors is crucial.
Lack of preparation: A lack of clear structures, realistic valuations and legal protection can cause an exit to fail. Make sure to seek advice from experts.
Unclear communication: Employees and business partners should be informed about upcoming changes in good time.
Conclusion: An exit is a complex, but exciting phase in the life of a startup. When planned carefully and with professional advice and clear objectives, it can conclude successfully and become a milestone for the personal and entrepreneurial future.
