Two critical issues are the “cultural fit” of the startup with the buying company and the valuation or determination of the purchase price.

Comprehensive examination of the company to be purchased

Startups typically operate without distinctive hierarchical structures and live a pragmatic, shirt-sleeve “just-do-it” culture. Such a culture can be in contrast to the corporate culture of the buying company, which may have developed and established itself over many years. In my opinion, it is particularly important to also analyze the soft factors as part of the due diligence that accompanies the acquisition of a company, i.e., the careful and comprehensive examination of the company to be purchased. Among other things, the cultural fit can be tested very well through intensive discussions with the management and key employees of the startup.

Compromise: The earn-out agreement

The second important issue is regularly the valuation of the startup. Depending on the lifecycle stage of the startup, one may not be able to use traditional valuation methods, such as the multiples valuation, which is the application of a multiple of revenue and/or operating income. The discounted cash flow method, the discounting of expected future cash flows, is more appropriate, even if the startup’s planning is naturally subject to uncertainties. A compromise is then often the agreement of a so-called “earn-out agreement”, which states that a part of the purchase price will only be paid to the sellers in the future depending on the achievement of agreed operational and/or strategic goals of the startup.