For entrepreneurs and aspiring entrepreneurs, ABC’s Shark Tank has to be one of the most inspiring and entertaining shows we could ever watch. Not only do we get a glimpse of how business deals are made, but we also get to witness everyday people achieve their entrepreneurial dreams. All in about an hour.
The ABS Shark Tank is a show where entrepreneurs pitch their business or product to a group of investors. The show features well-known entrepreneurs such as FUBU founder Daymond John and the billionaire owner of the NBA Dallas Mavericks, Mark Cuban.
On the show, entrepreneurs ask for capital based on what they think their company is worth. Many followers of the show, who have never been in trade negotiations, can sometimes miss what is going on. This is because they may not be familiar with some of the terms they hear in the tank. One such term is “company valuation.”
Company valuation is the process of determining the economic value of a company. It involves analyzing various aspects of the company, such as its financial statements, assets, market conditions, competition and other factors, in order to estimate its value.
However, viewers sometimes wonder how the company’s valuation is calculated on Shark Tank. In this article, we will explain how investors and entrepreneurs calculate the value of the company presented on the show.
How is valuation calculated on Shark Tank?
On the show, you’ll notice entrepreneurs valuing their companies and investors asking how they arrived at that valuation. For example, an entrepreneur may offer an investor 10% of their company for $100,000. This means that the entrepreneur values his company at $1 million ($100,000 x 10).
For investors to agree with this valuation, the entrepreneur must demonstrate why they believe the company is worth a million. Otherwise, they may seem like they’re just making up numbers. Which usually doesn’t sit well with investors at this point.
Sharks usually start by applying a multiple-win approach. This is when they look at what the company did in the previous year to help come up with the valuation. They often compare revenue multiples to similar companies in that industry.
If an entrepreneur who sells cookies values his company at $1 million, but only made $25,000 the previous year, he should include other factors to justify his $1 million valuation.
However, if entrepreneurs cannot provide valid reasons for their valuation and investors are still interested, they will usually ask for more capital. Equity refers to the percentage of ownership in the company. This is where the sharks come up with their own ratings.
A shark may believe that the company is overvalued. So they can counter and offer the entrepreneur $100,000 for 20% equity. This means the investor sees the company as currently valued at $500,000, not $1 million. This could be for many reasons. For example, the typical earnings multiple for baked goods may be lower than what the entrepreneur had in mind.
Watch the video below to see the highest rating ever on the Shark Tank.
Other ways to calculate the valuation of the company
There are several other ways to calculate the value of a company. While these methods are rarely seen on the show, you can bet the sharks are evaluating every part of the business they’re investing in during the due diligence process once the cameras stop rolling. Here are some of those ways:
The asset-based valuation approach involves calculating a company’s valuation based on the value of its assets minus its liabilities. You’re unlikely to see this valuation method on the show because it’s typically not appropriate for companies with a significant amount of intangible assets, such as intellectual property or brand equity. Many of the companies that visit Shark Tank fall into this category.
To use the asset-based valuation approach, an investor would first identify the company’s assets and liabilities. Liabilities would include property, equipment, inventory and debts. The investor would then subtract the liabilities from the assets to arrive at the net worth of the company. Finally, the investor would adjust the net asset value to reflect the market value of the assets, which may differ from their book value.
The discounted cash flow (DCF) approach.
The discounted cash flow (DCF) approach involves projecting a company’s future cash flows and then discounting those cash flows to their present value, taking into account the risk associated with investing in the company .
To calculate a company’s valuation using the DCF approach, an investor would first project the company’s future cash flows. The investor would then apply a discount rate to each year’s expected cash flow to arrive at its present value. Finally, the investor would add the present values of each year’s cash flows to arrive at the company’s valuation.
One of the reasons this approach is rarely used in the program is because it can be difficult to use. Correctly using the DCF approach to finding valuations requires a lot of financial modeling and assumptions about the future.
Calculating a company’s valuation can be a complex process that requires careful analysis of a number of factors. The great thing about Shark Tank is that it simplifies this process for the general public to understand. Next time you watch the show, try calculating the ratings in your head. Now that you know how Shark Tank ratings are done, you can start drawing your own conclusions about which ratings are fair and which aren’t.
Shark Tank is a popular U.S. television series that follows entrepreneurs as they pitch their business ideas to a panel of investors, known as “sharks”. The show has become one of the most successful business shows in the world, with viewers tuning in worldwide to witness entrepreneurs wheeling and dealing in hopes of securing investment capital. Valuations are a key part of the show, as they play a key role in deciding who the sharks invest in.
Understanding how valuations are calculated on Shark Tank is essential for entrepreneurs looking to secure an investment and make a success of their business. The valuation process begins with entrepreneurs pitching the value of their company and its associated products or services. While the sponsors may not always agree with the proposed valuation, they do give entrepreneurs the opportunity to demonstrate why their company’s valuation is accurate and reasonable.
The sharks then conduct their own in-depth financial analysis, examining a business’s income statements, cash flow statements and balance sheets. This helps the sharks to gain a much more accurate understanding of the business’s true income potential and its overall financial state, allowing them to make a more informed valuation decision. The valuations take into account the risk associated with the business, the potential for growth and the track record of the entrepreneurs proposing it.
At Ikaroa, we understand that valuations are crucial for the success of any venture. Our team of industry-leading experts can help entrepreneurs with the valuation process, providing valuable advice and guidance throughout the entire process. We can provide detailed financial analysis and advice, assisting in the accurate and reasonable appraisal of a business’s worth. We understand the importance of effective valuations, and strive to help companies maximise the results of their Shark Tank experience.