How does the “Shark Tank” evaluate the value of the enterprise?

Basic theme Shark tank The TV series is the big shark (investor) or entrepreneur (sell business) persuade the other party to accept their business valuation, and use this as a basis for negotiation. Entrepreneurs often enter at high valuations, while Sharks fight back at lower valuations.

Entrepreneurs and Sharks have different ways of valuing the companies shown in the show, but a good valuation of a company takes into account certain factors, such as income, earnings, and the value of companies in the same industry.

Key points

  • shark Shark tank It usually requires a share of the business—or a percentage of ownership—and a portion of the profit.
  • A revenue estimate is usually determined, which takes into account the previous year’s sales and revenue and any sales in the pipeline.
  • Sharks compares the company’s profits with the company’s revenue valuation to arrive at the earnings multiple.

Learn how to value companies based on the “Shark Tank”

Shark tank It is a popular show where investors (or sharks) listen to speeches from business owners who want to get funds from them. In exchange for their money, the Sharks usually need a place in the business, which is a percentage of ownership and part of profits. In return for giving up shares in the company, entrepreneurs get funding, but more importantly, they have access to Sharks, their connections, suppliers, and their experience.

Determining the amount of investment in the company and the percentage of ownership that everyone is willing to consider comes down to forecasted income, earnings, and valuation of the company.

Income multiple

Under normal circumstances, entrepreneurs will ask for a certain amount in exchange for a certain percentage of ownership. For example, an entrepreneur might ask Sharks for $100,000 in exchange for 10% of the company. From there, the shark begins to determine whether its value is correct.

The Sharks usually confirm the entrepreneur’s valuation of the company at $1 million. The shark would arrive at this total, because if 10% ownership is equal to 100,000 USD, this means that one tenth of the company is equal to 100,000 USD, so one tenth (or 100%) of the company is equal to 1 million USD.

If the company’s sales are $1 million, the shark will ask what its annual sales were in the previous year. If the response is $250,000, it will take the company four years to reach $1 million in sales. If the answer is $75,000 in sales, the Sharks may question the owner’s $1 million valuation. However, if last year’s sales were US$250,000, but the entrepreneur recently signed a sales agreement with Wal-Mart to sell products worth US$600,000, then based on sales forecasts, the valuation would be more attractive to Sharks. In other words, the valuation not only considers the sales and revenue of the previous year, but also considers the company’s sales channels.

Return multiple

Company in Shark tank They are not publicly traded, which means they do not have stocks or announced earnings multiples for investors to consider. However, Big Shark can still use the company’s profit to compare the company’s sales revenue valuation to get a profit multiple.

For example, if the company’s valuation is USD 1 million and the owner’s profit is USD 100,000, the company’s profit multiple will be 10 or (USD 1 million / USD 100,000). However, we don’t know whether a profit multiple of 10 is beneficial to the company.

This is where comparative analysis comes into play. Suppose that in our previous example, the company is a clothing retailer. Sharks can compare multiples with multiples of other companies in the same industry.

For example, suppose an entrepreneur is selling a clothing brand with annual sales of 1 million U.S. dollars and profit of 100,000 U.S. dollars. Entrepreneurs can apply the indicators of the professional retail apparel sector by using the revenue multiple of the sector. Assume that the industry’s average return multiple is 12.

Calculated at 12 times the revenue, this will bring the business value to US$1.2 million or (12 x US$100,000). Based on this valuation, the entrepreneur can justify the transaction by acquiring 10% of the company’s shares with a shark investment of 100,000 USD.

Future market valuation

Future valuations can also be calculated in the same way as income and earnings multiples. The only drawback is that these numbers are predicted values ​​and may be inaccurate. The sharks may ask the entrepreneur his forecast for sales and profits in the next three years. They will then compare these numbers with those of other companies in the retail apparel industry.

Entrepreneurs may predict that gains in the next three years will result in net income of US$400,000 in the third year. If the expected earnings multiple of the retail industry is usually 14.75 times, the future sales value will be 5.9 million USD or (14.75 x 400,000 USD).

Shark ultimately hopes to recoup the investment and make a profit. If the Sharks agree that the company may generate $5.9 million in business in the third year, a 10% stake at a price of $100,000 may be attractive. However, by the third year, the business may not generate a profit of US$400,000. Therefore, the shark may demand a higher percentage of ownership, repay a lower loan amount, or propose some combination of the two.

Valuation of intangible assets

If the Sharks only valued the company based on numbers, then the show would not be dramatic or exciting.But valued intangible assets Shark tank Is one of the reasons why it is so popular. Like other seasoned investors, Big Shark considers the entire package-numbers, stories, and experience in its valuation of the company, although numbers are usually the most important part of the job.

But other intangible assets are also important. For example, stories related to individuals and products can help influence their valuation decisions. If the entrepreneur has a compelling story of hard work and determination, then the shark may agree with his or her valuation. There is not much controversy.

The sharks also asked a series of questions about the company. For example, they may ask about the cost of the manufacturing company’s products and their selling prices. This will help them calculate product profits. They will ask about other costs, such as marketing, as well as the previous year’s sales and future sales channels to determine the demand for the product. The increase in demand and sales is always a good sign. But if sales decline, stagnate, or only slightly increase, then the sharks will ask them why they are doing this. If the reason is not convincing, then the Sharks will opt out.

Special considerations-valuation risk

Sharks might say that based on the valuation metrics of listed companies, they cannot apply the same valuation to entrepreneurial companies. There are several differences between small businesses and public companies.

A large, mature retailer may have thousands of stores around the world, but a small business may have only a few locations. Although the growth rate of small businesses is of course higher, the risk is much greater due to the risk of failure and liquidity in the exit strategy. Liquidity measures the ease of buying and selling an investment. If there are many buyers and sellers competing for investment, there is sufficient liquidity. If there are few buyers and sellers, there will be insufficient liquidity.

The lack of liquidity brings more risks to the sharks, which requires the application of risk-adjusted discounting to make the rewards worth the risk. Therefore, the shark has more room for maneuver and can provide a quote based on the risk-adjusted discounted valuation.

Sharks may bargain for higher company shares, such as 30% ownership to obtain a $100,000 loan. Even if valuation metrics (based on income and gains) indicate that Sharks should hold a lower share, the risk of loss from investing in an unknown company usually increases Shark’s ownership share.

The Sharks can also increase their ownership based on the intangible assets they bring. These intangible assets may include their experience, access to retail stores to sell products or supply chains.


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