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Equity financing has a different significance in Berlin than elsewhere. The start-up transactions that have dominated here for many years have left no room for lengthy consideration of equity versus debt capital. For obvious reasons, banks give companies without a positive cash flow a wide berth. For a long time, financing was therefore synonymous with equity. Only recently has there been a certain trend towards loan financing (“venture debt”), which is then provided either by the well-known venture capital players or new, specialised players in the market.

Financing and start-ups seem to be two terms that are so closely intertwined that it is impossible to imagine financing and SMEs in the same sentence. Yet there would be no more meaningful sentence. Many equity investors would be happy to invest in SMEs, but they often knock on the door in vain. However, there are also several sides to this coin.

On the one hand, it is an exaggeration to say that equity investors would be happy to invest in SMEs. After all, this desire to invest is always preceded by at least a superficial analysis that scrutinises sales and profit development as well as market prospects.

As a result, many companies still remain as potential investment candidates, but to be honest, many also fall through the cracks. The classic private equity investor (i.e. "private capital") has certain requirements and only invests above a certain amount, which presupposes that the company in which this investment is made also generates certain sales and, with exceptions, profits. There are various reasons for this. One of these is that private equity investors often raise capital themselves and promise their own investors that they will only invest in companies with certain parameters.

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Conversely, SMEs are of course also involved in a network of relationships that includes bank financing, for example, and are of course often not as independent as they would like to be for practical reasons. However, SMEs are well aware that the co-determination rights typically demanded by an equity investor significantly restrict their freedom in terms of corporate development and strategy. To put it positively, the SME gains a sparring partner.

Accordingly, there is an area of tension here. However, this tension can also lead to the company in question developing far beyond expectations following an investment and/or a succession situation being resolved for the entrepreneur in question in the long term. For example, if the private equity investor acquires a minority stake in the company's share capital via a capital increase and then later increases this to a majority stake (whereby shares are bought from the core shareholders).

This should mean that SMEs can also raise equity capital very sensibly. There is now so much information available elsewhere on the more precise criteria that are relevant for startup investors that it would hardly be of any added value to reproduce them here in detail, adjusted for nuances.

However, one important difference should be emphasised. If you really want to simplify, the two key criteria for investing in a start-up are:

a. the probability of being able to sell the company at a value that exceeds the valuation at the time of the investor's entry many times over

a team that is trusted to expand the company up to this exit

And according to this simplified view, what is the situation for a medium-sized company, what are the criteria here - apart from the above-mentioned exceeding of a certain turnover and profit threshold?

In one sentence: sustainability of the company's success. This is a basic requirement that is very much opposed to speculating on a big exit for a start-up.

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You are a shareholder of a start-up or medium-sized company and would like to discuss the possible equity financing of your company confidentially

Services of in rebus

Private equity investors who pursue a “buy and hold” strategy are satisfied with this criterion. The sale of the stake does not have to be on the agenda in the short term, and perhaps not the acquisition of a majority stake either. This is a category of investor to which only stable medium-sized companies have access.

However, most private equity investors, similar to their colleagues in the venture capital sector, also pursue an exit strategy, which can also take the form of combining various companies in a “platform” and mapping different value creation stages of a process (example: production and market access/distribution). This makes the “platform” more valuable than the sum of its parts. This is also a strategy that does not exist in the start-up/venture capital sector. The majority of these companies were sold by the existing shareholders.

The services provided by in rebus corporate finance for equity financing can be broken down as follows:

Project start and analysis

As a first step, the consultant will collate all documents that contribute to an understanding of the company. This includes the above-mentioned annual financial statements and BWAs as well as, if applicable.

Reporting from external service providers (e.g. online marketing agencies), additional information from the customer on its value chain from supply chain to sales and additional information on the market and competition researched in-house.

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All of the above information is compiled in several documents. This can include a separate financial plan, but in any case an investor presentation, sometimes also called an “investment memorandum”, which in turn can be designed in different detail for different target groups and purposes.

Investor approach

The investor approach is based on an exchange with the company on the market environment and any suitable candidates. In some cases, companies have already been approached proactively. In addition, the advisor researches transactions in this market environment.

Of course, the network of the advisor, who either already has contacts in this market environment or to relevant financial investors, or both, is also not unimportant. How these buyers are approached in detail differs from consultant to consultant. The purpose of the initial discussions between advisor and buyer is, of course, to arouse interest and perhaps also to explore the parameters of a possible investment. The success of this part of the process is of course based, among other things, on targeted analysis and documentation.

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Presentations and negotiations

How the next steps are carried out depends on the team of the advised company as much as on how the buyer conducts the dialogue. An intensive, direct exchange involving the most important decision-makers makes sense if certain key parameters are already clear or to discuss a more complex issue. As a rule, it makes sense not to discuss all the details from the outset, but to clear any deal-breakers and red flags out of the way first. However, the personal chemistry between the parties acting together after the transaction cannot be considered important enough, so that in this phase of the project a balance must be struck between friendly discussions, which always require a lot of resources, and making progress on factual issues.

The above presentations and initial negotiations should ultimately lead to the conclusion of a (mutual) preliminary agreement (LOI). In the venture capital environment, it is likely that the investor will literally pull this document out of the drawer.

It should be noted that the LOI is not binding. So please look your negotiating partner in the eye and assess how binding you consider an LOI to be. Whether and to what extent the LOI partner adheres to the preliminary agreement is decisive for the success of the entire transaction project, not just with this partner.

This is because exclusivity is regularly expected in the next step in order to carry out a thorough review of the company, which can take various forms. In no case can the dialogue with other potential investors be continued in the same way as before.

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Due Diligence

As part of due diligence (DD), every stone is lifted. Professional buyers always commission their own management consultants who specialise in certain aspects, such as examining the market and the business model as part of commercial due diligence or reviewing the annual financial statements and related documents as part of financial due diligence. At the same time, due diligence is rarely equally comprehensive, which is partly due to the investor’s in-house expertise. If a private equity investor appears as a buyer who already owns portfolio companies in this segment, he will assume that his expertise exceeds that of one or other management consultancy.

It can be assumed that the buyer will bear the corresponding costs. This in turn results in his need for the aforementioned temporary exclusivity. If the seller changes his mind and wants to finalise the deal with another party, the buyer would have literally sunk these start-up costs. Which is to be avoided.

A more detailed description of the DD process is perhaps not necessary here if you realise that, on the one hand, questions are regularly answered in blocks, which takes time in addition to the provision of the requested documents. On the other hand, it is important to realise that this process also leaves room for the buyer and seller to discuss a purchase agreement. What we like to do in parallel in order to complete the entire process within a reasonable period of time.

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Signing and closing

Signing” refers to the signing of the contract with which the parties commit to a legal transaction, while “closing” refers to the fulfilment of the associated obligations. Of particular interest to the buyer is the transfer of the funds to be invested or the first instalment, if instalment payment has been agreed.

Are you looking for an M&A advisor to accompany the transaction process from the beginning to the closing?