Successful Exit: These 7 Strategies Founders Should Know

Current Status of the Company

Above all else, it is important to realistically assess the current market position of your company. Is the current revenue satisfactory? Do the forecasts provide a sense of calm over an extended period? A consistently growing revenue would also be ideal.

Contrary to common belief that a strong growth phase is a good time for an exit, we must first disagree. Especially then, everyone, including the founders, must step up their efforts. Exiting in this phase could not only be strategically unwise for the company's development but also leave a negative impression on employees and investors. Moreover, many investors prefer to enter after this phase when revenue is secured. The company's image should ideally be spotless and well-established. Additionally, a high level of employee identification with the company is crucial.

So, the key question is: Has the company truly outgrown its infancy stage, and is its existence secured even without the direct involvement of the founders?

Investor Search

It is sensible to pay attention to the backgrounds of investors. If, for example, they come from the same industry or perhaps have already run a company in your business field, that is certainly a positive sign.

Let's switch perspectives: Your stated reason for exiting is often crucial for potential investors. Be honest but remain professional. If the true reason is that you feel incapable of leading the company or need to exit for personal reasons, then formulate it strategically. This way, a must-exit for you in negotiations will not be detrimental. On the other hand, if there are disagreements between the founders, the reason for the exit is usually not doubted. After all, this happens frequently enough. In any case, your exit reason should be credible and understandable for an investor.

Strategies

Now, let's introduce you to the most well-known exit strategies. Some are particularly interesting for startups.

1. IPO/Going Public

IPO stands for Initial Public Offering, also known as "Going Public." This is the initial public offering on the stock exchange. Founders offer shares of their company as securities for sale. Investors become legal shareholders of the company. However, their shareholding is so minimal that their influence on the company becomes insignificant. Most investors focus on dividends anyway. The company gains popularity with a stock market listing. The founders increase equity and can prepare for a later exit.

While IPO is one of the most popular exit options, it is also one of the most challenging in practice. Moreover, an exit often lies far in the future. An IPO is no simple task, and thorough planning is essential. Professional advice from your bank and the involvement of a skilled attorney are highly recommended.

• Spin-off: A spin-off occurs when only a small part of the company is offered as shares, but the founders retain the majority.
• Lock-up Period: Note that lock-up periods of 6 to 12 months exist, during which primary shareholders cannot trade shares of a newly listed company on the stock exchange. It is calculated from the day of the IPO.

2. Trade Sale 

In short, entrepreneurs sell the company or a specific part of it to an investor. The investor is usually another company. Their strategy may vary, but fundamentally, it is about expansion and profit maximization. By purchasing your company, businesses can gain access to previously untapped markets, technologies, or even patents.

A trade sale aims for a satisfactory outcome for both parties. The added value is often a high selling price. If desired, however, founders should ensure they maintain a high level of influence in the company.

3. Leveraged Buy-out 

This option is only suitable for companies that already demonstrate very high financial profitability. Here, founders use both equity and debt together to buy themselves out. Typically, equity is increased independently, while debt comes from taking out a loan.

4. Secondary Purchase

"Secondary Purchase" describes the sale of shares of a venture capital investor to one or more other financial investors. However, investors' returns are often lower, making this option less commonly used.

5. Buy-back

Here, founders repurchase the company shares held by an investor. Consequently, they regain full ownership of their company. However, in practice, this approach is also very rare. Often, founders simply do not have the necessary financial means.

6. Merger/Merger & Acquisition

The term "merger" or "merger & acquisition" refers to the combination of your company with a competitor. The most common scenario: a large company acquires an emerging small company. This may seem like an attractive method for startup founders to achieve an exit with a high profit share. While this can be the case, it is unfortunately mostly not. Finding a suitable company that knows how to truly leverage the synergies of the union and not just swallow the company is relatively challenging.

7. Liquidation/Receivership

All founders fear this path, as practically no one voluntarily chooses it. Liquidation, or receivership, refers to the complete dissolution of the company and the distribution of proceeds. In this sense, it represents a total loss for both the investor and, above all, the founders.

Conclusion

Unfortunately, we cannot reveal the one perfect exit strategy. Instead, it depends on various factors and must always be individually assessed for each company. Long-term planning is essential for your exit to be as successful as possible. Ideally, you should even consider this before the first participation agreement. Here, the first steps toward a successful exit can already be taken.

With expert advice from an experienced attorney, you are on the safe side. GetYourLawyer can help you find a lawyer who fits your company and your situation. Find them conveniently online through our free inquiry form.