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# How To Calculate Company Valuation Shark Tank

How To Calculate Company Valuation Shark Tank – If you’ve ever watched Shark Tank, you’ve seen many versions of arguments and answers. You’ll recognize the general shape, which looks like this:

“Hello, sharks. My name is Jonathan Doe, and today I’m looking for two hundred thousand dollars in exchange for a 20% stake in my company, Hot Shotz.

## How To Calculate Company Valuation Shark Tank

After a description of his business, the sharks take over, asking questions and making comments. Inevitably, one of the sharks (usually Kevin, but it could be one of them) asks a question like this:

## Why Does Shark Tank Lie About Valuation?

Let’s unpack that for a second. Whatever the real value of the business, how did the shark come up with that \$1,000,000 figure? It’s actually quite simple, and it’s even possible that the number is correct. Here is the formula:

And that valuation is correct, if Mr. Doe does indeed claim that his business is worth \$1,000,000 and offers to sell 20% of it for \$200,000 – and if he pockets the \$200,000. The transaction before and after the description of the sharks looks like this:

Jonathan Doe starts with 100% ownership and the Shark starts with \$200,000 in cash. Is then left with money and 20% less shares of the company; the shark buys those shares from Doe.

The problem is, this deal is almost never what entrepreneurs are looking for on Shark Tank, or anywhere else for that matter. They want that money back and

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. Instead of selling the shark some of its shares and pocketing the money, the company issues new shares and the company keeps the money. Let’s see what this transaction looks like:

Doen does not sell any of his shares and does not personally receive any money. Instead, the company creates new shares. Doe still has all of his stocks.

As you can see, the company started with five shares, each worth \$200,000 and 20% of the company. Now there are six coins, each worth \$200,000 – but 6 x 20% = 120%…and a company can’t own 120%, can it? (In case you’re wondering, there’s a name for it: fraud.) Here’s what’s really going on:

. Although each of the six pieces is still worth \$200,000, each piece is no longer worth 20% of the whole. The company as a whole is now worth \$1,200,000, so each part (including the sharks) is now worth one-sixth, or about 16.67% of the total. But wait – didn’t our contractor offer 20%? What is going on?

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What’s going on here is, despite what the sharks said, Jon Doe never claimed Hot Shotz was worth \$1,000,000.

When discussing valuation, clarity requires entrepreneurs and investors to distinguish between valuation for the money and valuation after the money. Value before money is what the business is worth for investment. Post-cash value is the value of the business after adding in the investor’s money.

If no money is added to the business, as in the case where the entrepreneur sells his own shares and pockets the money, the value of the business does not change –

In this case, “valuation” and “valuation after money” are the same, according to the original formula. But this kind of transaction almost never happens unless the company is taken over.

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We know from the discussion above that the valuation (shipping cost) is equal to the money invested divided by the percentage purchased:

Therefore, to get the pre-money valuation based on money and percentage in a Shark Tank pitch, we can simply substitute:

None of this comes as a surprise to any of the sharks. All are smart and experienced investors. They know the difference between pre- and post-money valuation. Plus, while some of the contractors on the show might not get it, at least

So why does Shark Tank persist in its mistreatment? Why is there never any discussion of this topic on the show? Why Do Entrepreneurs Handle Shark Rating Mistakes? I can think of several possibilities:

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Am I missing explanations? The last two options are possible, and I think both are likely to happen; but both are also really disappointing. Plus, the fact that the Sharks (and the show’s producers) need to figure out how to properly calculate the rating seems to indicate that the mistreatment they’re using is likely intentional.

I really want to believe that sharks aren’t malicious, or intentionally taking advantage of contractors, through bad reviews. I think number 2 is more likely: the show’s producers and the sharks think a real ranking treatment would be too confusing for the audience.

I think they are wrong, and their oversimplification is wrong. Shark Tank does budding entrepreneurs and investors a disservice by muddying the waters. As I have tried to illustrate, the correct treatment of evaluation is conceptually quite simple. However, I have spoken to many people who are confused by the pre- and post-monetary assessment. Sharks aren’t entirely to blame, but they make the problem worse with every episode they air.

Well, the impact of this valuation error largely depends on the amount of equity. At low equity percentages, the error is relatively small, as above. It is the difference between 16.67% and 20%, or between 20% and 25%. However, as the share percentage increases, the impact increases dramatically. Here is a typical shark offering:

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“OK, I really don’t think Hot Shotz is worth a million dollars, it’s worth less than half that. But I’m going to make you an offer: two hundred thousand dollars for fifty percent equity.

So, according to the shark method, they say the business is worth \$400,000. Supposedly the value = \$200,000 / 50%, right? Let’s see what the real value for money is:

So while the shark seems to be saying that he’s lowering your valuation from \$1,000,000 to \$400,000, in reality, the shark’s offer just lowered the value of your business from \$800,000 to \$200,000. The evaluation error is now 50%: from \$400,000 (in the country where Doe pockets this money) to \$200,000 (in reality).

The higher the final percentage of the investor’s shares, the greater the impact of this misconception, and the hallucinatory trend continues. If a shark offers \$200,000 in exchange for 90% equity, the valuation error becomes huge:

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Entrepreneurs should always calculate their value before money and have a bottom line: what is the business really worth to me? If I were to sell 100% cash, what offer would I accept? Even a desperate entrepreneur who could accept \$222,000 could scoff at \$22,000.

I’ve been waiting years for an entrepreneur to come on the show with a lightly worded pitch:

“Hello, sharks. My name is Jonathan Doe, and today my company Hot Shotz is worth eight hundred thousand dollars. With the addition of your two hundred thousand dollars in exchange for a 20% share, Eighteen months from now, our business plan will exceed double that million dollar post-money valuation.

Sharks: In the popular imagination, you are the prototypical investors. When you talk about appreciation, people believe you. Please honor their trust. Take rating seriously and teach your audience how to calculate it correctly. I hope I have shown that it is not too complicated. Your audience, as well as many future entrepreneurs and investors, will thank you. You should have your calculator handy when watching ABC’s Shark Tank, the TV show where wealthy angel investors invest in small businesses on the spot.

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Recently, a middle-aged business owner was offered 3 offers in quick succession. For me, it was a simple mathematical problem: which offer gave the owner the best evaluation?

Offers Each offer implies what the investor thinks of your company: the valuation of your company. Valuation is not just the total amount of money an investor is offering, but the total value of the business implied by that offering. (I’ll do the math for you in a second.)

So what would you choose? The offers were as follows (you would get what is in bold, the investor gets the rest):

The math To start, let’s keep the math simple. If \$500,000 is the bid for 20%, then the total valuation is \$2,500,000. for each offer, and you will find that the base scores for these three offers are very different:

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The entrepreneur could not decide. It was clear that he had a strong emotional attachment to his business. He is tempted by the \$4 million purchase offer, but is reluctant to part with the business he has built from scratch.

In the end, the offers all changed a bit (as they tend to on Shark Tank), but the contractor came away with something closer to offer number 1. He actually accepted the offer. offer with the lowest valuation.

Why settle for less money from an investor who thinks your business is less valuable? It’s a bit like selling your house for the price of a foreclosure.

I

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