The underlying theme of the "Shark Tank" TV series is for either the Sharks (the investors) or the entrepreneurs (pitching their business)toconvince the other side to accept the valuation of their business and negotiate a deal based on it. The entrepreneurs tend to come in with high valuations, and the Sharks counter with lower valuations.
How entrepreneurs and the Sharks value businesses presented on the show varies, but a good valuation of a company takes into account certain factors such as revenue, earnings, and the value of companies within the same sector.
Key Takeaways
- The Sharks on "Shark Tank" typically require a stake in the business—or a percentage of ownership—as well as a share of the profits.
- A revenue valuation, which considers the prior year's sales and revenue and any sales in the pipeline, is often determined.
- The Sharks use a company's profit compared to the company's valuation from revenue to come up with an earnings multiple.
Understanding How a Business Is Valued on "Shark Tank"
"Shark Tank" is a popular show on which investors (or Sharks) hear pitches from business owners who want funding from them. In exchange for their money, the Sharks typically require a stake in the business, which is a percentage of ownership and a share of the profits. In return for giving up a stake in the company, the entrepreneur gets funding, but often, more importantly, they get access to the Sharks, their network of contacts, their suppliers, and their experience.
Determining the amount to invest in the company and the percentage of ownership that each is willing to consider comes down to forecasting revenue, earnings, and applying a valuation to the company.
Revenue Multiple
Typically, an entrepreneur will ask for an amount in exchange for a percentage of ownership. For example, an entrepreneur might ask for $100,000 from the Sharks in exchange for 10% ownership in the company. From there, the Sharks begin to determine whether it's properly valued.
The Sharks will usually confirm that the entrepreneur is valuing the company at $1 million in sales. The Sharks would arrive at that total because if 10% ownership equals $100,000, it means that one-tenth of the company equals $100,000, and therefore, ten-tenths (or 100%) of the company equals $1 million.
If the company is valued at $1 million in sales, the Sharks would ask what the annual sales were for the prior year. If the response is $250,000, it will take four years for the company to reach $1 million in sales. If the response was $75,000 in sales, the Sharks would likely question the owner's valuation of $1 million. However, if last year's sales were $250,000, but the entrepreneur recently entered into a sales agreement with Walmart to sell $600,000 worth of product, the valuation would be more attractive to the Sharks based on the sales forecast. In other words, the valuation doesn't only consider the prior year's sales and revenue but also what the company has in its sales pipeline.
Earnings Multiple
The companies on "Shark Tank" are not publicly traded, meaning they don't have equity shares or published earnings multiples for investors to consider. However, the Sharks can still use the company's profit as compared to the company's valuation from sales revenue to come up with an earnings multiple.
For example, if the company is valued at $1 million and the owner earns $100,000 in profit, the company would have an earnings multiple of 10 or ($1 million / $100,000). However, we have no idea whether an earnings multiple of 10 is good for the company or not.
This is where comparative analysis comes into play. Let's say in our earlier example that the company is a clothing retailer. The Sharks can compare the multiple to those of other companies within the same industry.
For example, let's say the entrepreneur is pitching a clothing brand with $1 million in annual sales with $100,000 in profits. The entrepreneur could apply the metrics of the specialty retail apparel sector by using the sector's earnings multiples. Let's say the sector has an average earnings multiple of 12.
At 12x earnings, this would value the business at $1.2 million or (12 x $100,000). Based on this valuation, theentrepreneur can justify the deal for a 10% stake in the business for a $100,000 investment from the sharks.
Future Market Valuation
A future valuation could also be calculated in the same way the revenue and earnings multiples are. The only drawback is that the numbers are forecasts and can be inaccurate. The Sharks would likely ask what the entrepreneur is forecasting for sales and profits in the next three years. They would then compare those numbers to those of other companies in the retail clothing industry.
The entrepreneur might forecast that earnings in the next three years would lead to $400,000 in net income in year three. If the retail industry typically has a 14.75x forward earnings multiple, the future valuation would be $5.9 million in sales or (14.75 x $400,000).
The Sharks ultimately want to get their investment back and earn a profit. If the Sharks agree that the company could possibly generate $5.9 million in business by year three, a 10% stake for $100,000 might be attractive. However, it's possible that the business might not generate $400,000 in profit by year three. As a result, the sharks would likely demand a higher ownership percentage, counteroffer with a lower loan amount, or propose some combination of both.
The Intangibles of Valuation
If the Sharks valued a company solely based on figures, then the show would be without drama or excitement. But the intangibles of valuation on Shark Tank is one of the reasons it is so popular. Much like other seasoned investors, the Sharks consider the whole package—numbers, story, and experience—in their valuation of companies, though the numbers are often the most significant part of this exercise.
But other intangibles are also important. For example, the story—both, personal and product related—can help sway their valuation decision. If an entrepreneur has a compelling story of hard work and determination, then the Sharks might agree to his or her valuation, without much debate.
The Sharks also ask a series of questions about the company. For example, they might ask what it costs to manufacture the company's product and its selling price. This will help them calculate product margin. They will inquire about other costs, such as marketing, and also ask for the previous year's sales and future sales pipelines to ascertain demand for the product. Increasing demand and sales is always a good sign. But if sales declined, remained stagnant, or increased by only a slight amount, then the Sharks will ask for the reason they did. If the reason is unconvincing, then the Sharks will opt out.
Special Considerations: Risks to Valuation
The Sharks might say they can't apply the same valuation to the entrepreneur's company based on valuation metrics from publicly traded companies. There are several distinctions between a small business and a public corporation.
A large, established retailer might have thousands of stores worldwide, but a small business may only have a few locations. Though the growth rate is justifiably higher for the small business, the risk is much larger due to the risk of failure and liquidity risk in terms of anexit strategy. Liquidity is a measure of how easily an investment can be bought or sold. If there are many buyers and sellers vying for an investment, there is ample liquidity. If there are few buyers and sellers, there's illiquidity.
The lack of liquidity creates more risk for the Sharks to bear, which entails applying risk-adjusted discounting to make the reward worth the risk. As a result, the Sharks have much more wiggle room to base their offers on a risk-adjusted discounted valuation.
The Sharks could counteroffer with a higher stake in the company, say 30% ownership for a $100,000 contribution. Even if the valuation metrics (based on revenue and earnings) indicate that the Sharks should have a lower stake, the risk of loss from investing in an unknown company usually adds to the Shark's ownership stake.
The Sharks could also increase their ownership stake based on the intangibles they bring to the table. Those intangibles might include their experience, access to retail outlets for selling products, or supply chains.
When Did "Shark Tank" Premier on TV?
The very first episode of "Shark Tank" debuted on Aug. 9, 2009 on ABC in the United States. The show itself, however, is the American version of the international show "Dragons' Den." The very first iteration of the format is though to be Japan's 2001 "Money Tigers".
Who Is the Wealthiest "Shark" on Shark Tank?
Mark Cuban is the richest of the Sharks on Shark Tank with an estimated worth in excess of $4.7 billion as of 2022.
What Are Some Ideas That Sharks Passed on But Were Successes?
The Sharks aren't always right in their assessments. Notable examples of ideas that were rejected on the show but went on to become very successful include Ring, Coffee Meets Bagel, and Chef Big Shake.
FAQs
There are four different methods of valuation used by Shark Tank investors to put a value on a startup and determine the fair offer to invest. These formulas are Earning multiple, Revenue multiple, Future market valuation, and the intangibles of valuation.
How do you calculate the valuation of a business on Shark Tank? ›
This is where the sharks usually ask how much the company made in the prior year. The valuation is then divided by that amount. If the company made $100,000 last year, it would be $1 million ÷ $100,000 = 10. If the company continues to make $100,000 each year, it would take 10 years for the investor to break even.
How do you determine the value of a company? ›
The formula is quite simple: business value equals assets minus liabilities. Your business assets include anything that has value that can be converted to cash, like real estate, equipment or inventory. Liabilities include business debts, like a commercial mortgage or bank loan taken out to purchase capital equipment.
What percentage of Shark Tank deals are profitable? ›
It's not because her friends and strangers on the street have unrealistic business ideas, Corcoran recently told Barstool's “Chicks in the Office” podcast. Rather, it's because only one in every 10 of her “Shark Tank” investments actually earns a profit, she said.
How much is a business worth with $1 million in sales? ›
The exact value of a business with $1 million in sales would depend on the profitability of the business and its assets. Generally, a business is worth anywhere from one to five times its annual sales. So, in this case, the business would be worth between $1 million and $5 million.
How many times profit is my business worth? ›
In most cases, people can determine their online business value by multiplying their average monthly net profit by 36x – 60x. For example, If a business generates a rolling twelve-month average net profit of $35,000, then this business would be valued at $1.26M on the low end and $2.27M on the high end.
What are the 3 main ways to value a company? ›
Three main types of valuation methods are commonly used for establishing the economic value of businesses: market, cost, and income; each method has advantages and drawbacks.
How much is a company worth based on revenue? ›
Valuing a Company Based On Sales and Revenue
Valuing a business based on sales and revenue uses your totals before subtracting operating expenses and multiplying that number by an industry multiple.
What are the five methods of valuation? ›
This course examines in detail the five key property valuation methods: comparison, investment, residual, profits, and cost-based.
Do most Shark Tank deals fall through? ›
90% of the deals fall through because the Founders believed the conditions weren't good for their business even though they took the deal on TV. Then, some deals have taken so long to negotiate that the episode has already aired.
Why Rejecting $30 Million From Mark Cuban Was Her Best Business Move The Growth Show. It was the largest offer in Shark Tank history. Mark Cuban offered Arum Kang $30 million for her dating app Coffee Meets Bagel.
Do most Shark Tank deals fail? ›
The goal of entrepreneurs going on Shark Tank is to make a deal and see it close. But if it falls apart, it's not always a tragedy. About 87% of the businesses we spoke to that didn't get deals are still operating. The remainder have shuttered, were acquired or sold.
Is $100 million in revenue good? ›
The $100 million in Annual Recurring Revenue (ARR) mark is a magnificent milestone for companies that indicates sustainable business growth. While every startup is eager to hit this mark quickly, it's a process that takes time.
How do you value a business quickly? ›
A less sophisticated but still popular way to determine a company's potential value quickly is to multiply the current sales or revenue of a company by a multiple "score." For example, a company with $200K in annual sales and a multiple of 5 would be worth $1 million.
How much profit should a 2 million dollar business make? ›
Based on this, a 2 million dollar investment portfolio could potentially generate an annual income of $80,000 to $120,000. However, it's important to note that investment returns are not guaranteed, and there is always a risk of losing some or all of the principal investment.
How do you determine how much you can sell your business for? ›
Determining Your Business's Market Value
- Tally the value of assets. Add up the value of everything the business owns, including all equipment and inventory. ...
- Base it on revenue. How much does the business generate in annual sales? ...
- Use earnings multiples. ...
- Do a discounted cash-flow analysis. ...
- Go beyond financial formulas.
First, you determine the company's profit or their gross income minus expenses. Once you arrive at an annual profit, you multiply that amount by a multiplier that you determine. The result is the value of the business.
Do you count your business in your net worth? ›
You record your profits and losses on your personal tax return, so you might as well include your business's assets and debts when calculating your personal net worth.
What is most important when valuing a company? ›
Purpose: The Most Important Business Valuation Factor
In the factors that lead to a valuation of the company's worth, the purpose of the valuation is the most important. That's because the purpose of the valuation establishes the premise of value.
What brings the most value to a company? ›
Key Points
- Increase Revenue. Extend your network. Build a positive reputation. Look for opportunities to innovate. ...
- Reduce Costs. Identify cost savings. Streamline your processes. Audit your skills. ...
- Look Beyond the Bottom Line. Align your tasks with organizational objectives. Use your initiative.
The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps is the most widely used approach, as the multiples are easy to calculate and always current.
What are the two basic methods of business valuation? ›
There are five main ways to value your business: asset approach, income approach, market approach, return on investment (ROI) approach, and discounted cash flow approach.
What is an example of a business valuation? ›
Business valuation refers to the process of assessing the economic value of a business. Examples of methods used to evaluate a business include book value, discounted cash flow, market capitalization, and EBITDA. It indicates how the company is performing now and where it will be headed in the future.
What are the four principles of valuation? ›
There are four elements of value, all of which are essential. These are utility, scarcity, demand (together with financial ability to purchase), and transferability.
What was the worst deal on Shark Tank? ›
10 Failed Shark Tank Companies
- 1) ToyGaroo. What was ToyGaroo: “The Netflix for toys”, a subscription service allowing you to rent different toys every month. ...
- 2) ShowNo Towels. ...
- 3) Sweet Ballz. ...
- 4) Body Jac. ...
- 5) CATEapp. ...
- 6) Breathometer.
What Is the Most Successful Product on "Shark Tank"? With more than $225 million in lifetime sales, Bombas has generated the highest sales on "Shark Tank". The company, which sells comfort socks and T-shirts, donates one item per item sold to help the homeless.
What was the largest offer in Shark Tank history? ›
If I offered you $30million (£24.3million) for the company, would you take it?” This represents the largest offer made in Shark Tank history and came as a surprise to his fellow investors. However, the entrepreneurs were not swayed by Mark Cuban's generosity and shared their aspirations for their company.
Which Shark Tank investor died? ›
He was 42. The entrepreneur was behind two pet-based startups, one that was acquired and another that received funding from the sharks. Entrepreneur and “Shark Tank” alum Aaron Hirschhorn died Sunday in a boating accident in Miami. The Philadelphia native and Swarthmore College graduate was 42.
Has anyone ever lied on Shark Tank? ›
Some Contestants Lie
According to Inc., some lie about their finances. These likely do not rank among the best pitches on Shark Tank, according to Reddit. The truth, however, always comes up in the due diligence process that's mandatory after any deal is made in the tank.
What successful companies failed Shark Tank? ›
5 'Shark Tank' Fails That Cost Big Money
- Amazon. Breathometer. The Breathometer sounded too good to be true, and maybe it was. ...
- Sweet Ballz. Sweet Ballz. Everyone loves cake, even investors. ...
- Amazon. Show No Towels. ...
- eclipse_images / Getty Images. Toygaroo.
Yes, Shark Tank is a real television show that features entrepreneurs who pitch their business ideas to a panel of successful business executives, known as "sharks," in the hopes of securing an investment in exchange for a percentage of their company. "Shark Tank" is an adapted television show.
Who is the poorest Shark on Shark Tank? ›
Barbara Corcoran
She sports a reported net worth of roughly $100 million, which makes her the least wealthy of the sharks on the show.
Do Shark Tank contestants get paid? ›
You don't get paid to appear on the show.
The only way to walk out of Shark Tank with some money is through a deal. If an entrepreneur doesn't score an offer, they go home empty-handed.
What is the formula for valuing a business to sell? ›
Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business's balance sheet is at least a starting point for determining the business's worth.
What is the formula for net worth of a business? ›
Assets – Liabilities = Net Worth
If the assets are greater than the liabilities, the net worth is a positive number (which is good). But if net worth is a negative number, the business is not doing well.
What is a business valuation calculator? ›
This tool calculates two 'valuations' based upon your sales, cost of sales and other factors: A simplified Seller's Discretionary Earnings (SDE) valuation.
Does Shark Tank take a percentage? ›
After going through all this grueling process, if your company made it to the season, you had to pay. Regardless of whether or not you raised money, they expected companies to pay a 5% equity - for a few minutes of fame. For comparison, there have been 18 deals in Shark Tank with that much equity! It's no small amount.
What are the 3 ways to value a company? ›
Three main types of valuation methods are commonly used for establishing the economic value of businesses: market, cost, and income; each method has advantages and drawbacks.
What is the formula of net profit to net worth? ›
It measures the profits generated from the investments made by shareholders. It is calculated by dividing the company profits after tax by the net worth, where the net worth is the sum of investments (equity share capital, reserve, and surplus).
How do you value a business based on net profit? ›
How it works
- Work out the business' average net profit for the past three years. ...
- Work out the expected ROI by dividing the business' expected profit by its cost and turning it into a percentage.
- Divide the business' average net profit by the ROI and multiply it by 100.
Valuing a Company Based On Sales and Revenue
Valuing a business based on sales and revenue uses your totals before subtracting operating expenses and multiplying that number by an industry multiple.
How much is a small business worth? ›
One of the simplest ways to value your small business is similar to how you'd calculate your own net worth: assets minus liabilities. For example, if your business has $1 million in assets and $250,000 in liabilities, its value would be $750,000.
Do all the deals on Shark Tank actually go through? ›
The majority of the most successful products pitched on the show have been backed by the sharks, and many participants leave the show with a deal. Others aren't so lucky. Still, there are some contestants who are unwilling to accept the terms and walk away.
Do you give up equity to go on Shark Tank? ›
Just for appearing on the show, owners agree to give up 5% of their company or 2% of future royalties. (This information was originally reported in a September blog post by Ami Kassar.) The idea is that exposure to seven million viewers, along with business advice from top entrepreneurs, is worth that much.
