Munich Network Event on "Exit Strategies for Businesses and Investors"
When Investors Want to Sell Their Shares
M&A Consultant Cartagena Capital and WTS Tax Advisors informedMunich, 26 October 2010 – He is the embodiment of "young, dynamic and successful". 26-year-old Mark Zuckerberg – founder of Facebook – ranks 35th in the current rich list of the American Forbes magazine with an estimated 6.9 billion US dollars of assets. But his company is not yet stock-listed and therefore this huge amount of money is just a theoretical value. A successful start-up does not necessarily mean that the founder will strike it rich. This was underlined by the tax advisors of WTS World Tax Service and the M&A consultants of Cartagena Capital at an event organised by Munich Network.
The WTS Conference Centre at Munich's Isartor was fully booked with more than 100 registered and paying participants, when Curt Winnen, Managing Director of Munich Network, welcomed the guests. Among the attendants were many founders, shareholders and investors. As “Munich's network for innovation”, Munich Network joins ambitious start-ups with internationally active high-tech companies, investors, consultants and research institutions. With events like this, Munich Network provides “platforms for experience, innovation, knowledge, ideas, talents and capital.”
Falk Müller-Veerse, Managing Partner of Cartagena Capital GmbH, summed his message up nicely in one concise sentence: "The best companies are not sold but bought! “ He added that it was a fact that external equity for funding growth or expansion was a temporary equity investment. "Anyone aiming at maximum shareholder value and exchanging it into cash should start planning the exit strategy at a very early stage," advised Mr Müller-Veerse. Whatever lies ahead of the Facebook founder - be it an IPO, a company sale or a merger - is also subject to many external factors such as the economic situation or competition.
The right point in time also depends on internal factors, for instance the state of the company, the marketability of its products and the current growth story. Only those preparing for an exit in the long run will achieve a maximum result as only in this way a bidding contest can be created. Considering an exit too late means not being able to obtain an optimum sales price. It is also important, though, to clarify whether fellow partners could block the exit strategy.
Mr Müller-Veerse outlined various alternative exit strategies ranging from management buy-out and private equity, strategic acquisitions and mergers to an IPO. While IPOs had come to an almost complete standstill in 2009, a light recovery could be felt at present, he added. The current level, however, is only about a sixth of the total European IPO volume in 2006 and 2007 amounting to as much as 30 billion Euro per quarter then. The number of M&A transactions in some industries has also increased. According to Mr Müller-Veerse it is to be expected that 2011 will become a very good year for transactions in the European technology sector.
The founder of Cartagena Capital explained the critical success factors of an exit process step by step. He recommended to the audience establishing initial contacts with potential buyers up to two years before the exit and making the start-up much more widely known using public relations activities. Furthermore, he advised involving a consultant in the sales negotiations, in particular, if the seller has very little or no experience at all in this field. The actual sale of a company may well take six to twelve months, he informed.
Lothar Härteis, Executive President of WTS World Tax Service, outlined the tax conditions. Unless the critical differences between tax options for an exit from an investment are clearly identified, the tax implications might give a nasty surprise. If a clear course is set early on, those options can be chosen which are most favourable for the seller and the business. "Tax planning is a joint task for both buyer and seller", underlined Mr Härteis. In any case, the tax situation of the business founder and the company's tax position will have to be thoroughly analysed in a tax due diligence. Tax loss and interest carried forward, which the buyer might use, will increase the company's value and the expected purchase price. In a sale of investments the tax loss and interest carried forward first of all depend on which investments are to be sold and to what extend.
With respect to the taxation of the proceeds of the sale by the shareholders, the level of the financial interest and the fact whether the shares are part of private or business assets are decisive. In order to avoid immediate taxation, the establishment of an investment company might be worth considering, which would permit a tax-free reinvestment of the majority of the sale's proceeds. In the presentation and the subsequent discussion the so-called earn-out clauses (performance-related share of the purchasing price) as well as the roll-over clauses (multi-staged acquisition models) and the relating tax benefits were dealt with.
Anyone considering moving abroad in connection with the exit from a start-up, should plan this step early on, advised Lothar Härteis. In context with the exit taxation the German fiscal authorities provide that investments are still taxable even if the German fiscal territory is left.
