On the well-known show “Shark Tank,” financiers (or Sharks) listen to proposals from entrepreneurs seeking their financial support. The Sharks often demand a stake in the company, which is a percentage of ownership and a portion of the profits, in exchange for their funding. The entrepreneur receives funding in exchange for giving up an interest in the business, but frequently, more crucially, they gain access to the Sharks, their network of contacts, suppliers, and experience.
Forecasting revenue, profitability, and applying a firm valuation are the key factors in deciding how much to invest in the business and how much ownership each party is ready to consider.
Revenue Multiple
An entrepreneur will typically demand money in exchange for a portion of ownership. For instance, a businessman might approach the Sharks for INR 1,00,000 in exchange for 10% of the company. The Sharks then start evaluating its value to see if it is appropriate.
Typically, the Sharks will attest to the entrepreneur’s valuation of the business at INR 10,00,000/- in annual revenues. (simple Math: 10% for INR 1,00,000/- then 100% will be INR 10,00,000/-)
The Sharks would inquire about the previous year’s sales if the company was valued at INR 10,00,000/- in sales. If the answer is INR 1,00,000 it will take the business ten years to reach a million dollars in revenue. The valuation would, however, be more appealing to the Sharks based on the sales projection if last year’s sales were INR 1,00,000/- but the entrepreneur recently got into a sales agreement with Amazon to sell INR 5,00,000/- worth of stuff. In other words, the valuation takes into account the company’s sales pipeline in addition to the company’s revenue and sales from the prior year.
Future Market Valuation
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 Handloom industry.
The entrepreneur might forecast that earnings in the next three years would lead to INR 4,00,000/- in net income in year three. If the retail industry typically has a 15x forward earnings multiple, the future valuation would be INR 60,00,000/- in sales or (15 x INR 4,00,000/-).
The Sharks ultimately want to get their investment back and earn a profit. If the Sharks agree that the company could possibly generate INR 60,00,000/- in business by year three, a 10% stake for INR 1,00,000/- might be attractive. However, it’s possible that the business might not generate INR 4,00,000/- 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
The show wouldn’t have any drama or excitement if the Sharks only evaluated companies based on their financial performance. But one of the things that makes Shark Tank so well-liked is its valuation of intangibles.
As an illustration, the story both personal and product-related—can influence their choice of valuation. If an entrepreneur has a motivating tale of perseverance and hard work, the Sharks may quickly and bravely accept the valuation.
The Sharks also enquire about the business in detail. For instance, they can inquire about the pricing of the product and the cost of manufacturing it for the company. They can determine product margin with the use of this. To determine whether there is a market for the goods, they will enquire about additional costs like marketing and request information on current sales as well as sales forecasts for the upcoming year. Demand and sales growth are always positive indicators. However, the Sharks will inquire as to why sales decreased, remained unchanged, or very slightly increased. The Sharks will withdraw if the justification is weak.