$46,275,000 invested by the Sharks to date

Shark Tank Business School: How Do You Determine Business Value?

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Three key ingredients add up to a simple way to help business owners quickly establish an objective valuation for their company.

When Julie Goldman, owner of the Original Runner Company, asked for an investment from the Sharks, several including Kevin O’Leary disagreed with her $1.8 million valuation of her company. Incidentally, Kevin liked her company, but offered to take a 51 percent stake because he thought she has no idea what she’s doing.

Julie, who came across very capable and business savvy (contrary to Kevin’s assessment) shot back with some pretty serious formulations to defend her $1.8 million valuation, which really impressed Barbara Corcoran.

Julie also put a value on the fact that hers were the only fabric runners available and that many churches and synagogues only allowed her specific style of runners for weddings and other celebrations.

Certainly that should have added to her business value, right?

So what’s really the best way to value your business?

Just three simple factors: net income, plus hard assets, plus predictable future cash flow, according to Neal Frankle of Wealth Pilgrim.

  1. Net income:
    Really. That’s after all expenses, including a reasonable salary for yourself. And be honest if you’re factoring in personal expenses paid for out of your business.
  2. Hard assets:
    Whether it’s a building, machinery, patent or territory, its business value should be included. This could also include market share, intellectual property, or anything with measurable value to someone who bought the company tomorrow.
  3. Potential cash:
    Run the numbers and see if the free cash flow trend is up or down. If it’s rising, add the gains into the business value of the company. But be prepared to provide data.

What do you think? Does Julie understand business value? Feel free watch (or re-watch) the full episode on Hulu.

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About Author

Andrew, a Chicago-based web professional and entrepreneur, has owned and operated InTheSharkTank since 2011. Some of his favorite past Shark Tank business pitches include UniKey, Lollacup, Daisy Cakes, and Pork Barrel BBQ. When he's not busy running the website or live-tweeting, Andrew actively pursues disappointment by following the Chicago Cubs, Bears, and Bulls. Google+

6 Comments

  1. I’d love to see a chart that shows what the offer was, what the Sharks counter was, and what, if any, the final deal was.

    We’ve seen the Sharks use all sorts of valuations, and only rarely do they seem to care about discounted future earnings.

    The only time they seem to give credit for the future is when some other investor has already placed a valuation on the company.

    And, as you mentioned, they will bump up their offer if they like/trust you, independent of the business.

  2. Hi Steven,

    We’re developing a very cool feature that will show much of the information that you mentioned, and hope to roll it out soon.

    It’s funny that some entrepreneurs seem to take a big hit for not proving market via sales while some products still in the idea stage are fought over by the Sharks. What I glean from that is passion/drive/ethic that some of the entrepreneurs bring can actually be part of the valuation, too.

    Andrew

  3. Andrew,

    Great article and I have read lots of the other ones that you have posted on your site. I am going to the May 24th Casting call in LA.

    We just recently went public with my invention, and deciding how to evaluate our company. We are a start up and I have licensed my product to my business partner and have started our own shoe company, which is what we are going to pitch on Shark Tank.

    We think that lots of the entrepreneurs over valuate their company. What do you think is a good way to valuate a start-up?

    Any advice would be appreciated,

    Anthony

  4. Hi Anthony,

    Best of luck at the open call in LA later this month. As with tonight’s episode, some things to keep in mind for startups are any patents (provisional or not), any processes or things that could be patented, and intellectual property. The numbers for these things are usually hard to know, but the more prepared you are with a reason for the valuation, the more credible you are. That was something I took away from tonight’s episode and the UniKey presentation.

    Andrew

  5. Andrew,

    Thank you very much for responding and for the advice. I think that UniKey did a great job in the tank and valuating their business. I learned quite a bit from his presentation and valuation.

    I feel that hopefuls over-valuate their company and that is why they do not get funding. Since we are so new, being provisional patent pending is one the of the main and most important parts of my company. We are still in the process of finding a manufacturer, though I do have some distribution in place when I am able to produce larger quantities.

    We are going in asking for the amount to produce the MOQ required at this time, what we are asking for is not much but mainly their guidance and contacts would be more of an asset to us. With that said, we would also like to license this out so that would be a quick ROI for the sharks and help bankroll our business and lock down market share.

    I would be interested to get your opinion on what we are planning on doing, please feel free to contact me on my provided e-mail and I can get your opinion on a valuation for a start-up as to where we stand.

    Either way, I will be in LA for casting in a couple days, so I am very excited about that. Thank you and look forward to your e-mail

    Anthony

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