Negotiation Lesson from Shark Tank – Counter Offer with Conviction

First into the Shark Tank was Scrub Daddy, the creation of Aaron Krause.  The Scrub Daddy isn’t any ordinary sponge, it can morph from a very soft sponge (Activated by Hot Water), to a firm sponge (activated by Cold Water) that can scrape tough food stains.  Aaron Krause is a clever inventor, and with the Scrub Daddy had a big hit on his hands.

Prior to taping on the set, Aaron Krause had sold the Scrub Daddy on QVC on Three separate occasions.  This immediately gave credence to the product that had Lori Greiner interested. Kevin O’Leary submitted the original offer, which was flat out rejected by Aaron Krause.  That allowed Aaron Krause to establish his presence, that he was to be taken seriously by the Sharks.  Daymond John submitted the second offer for Scrub Daddy, which was much more palatable to Krause.  However, Daymond John asked for Lori Greiner to join him, and she stated that she did not need him in on the deal.  So, it came down to a Three way bidding war between Daymond John, Kevin O’Leary & Lori Greiner.  Kevin O’Leary offered a cash deal for No Equity, simply a royalty on all sales in perpetuity.  This seemed to be an appealing offer as Aaron Krause clearly established his credibility to grow the business by getting onto QVC and in local retail stores.  Daymond John & Lori Greiner each wanted equity in exchange for their cash infusion, and in turn proceeded to bid each other up for Scrub Daddy.  After Daymond John, bowed out of the bidding, Aaron Krause was left with Kevin O’Leary’s cash offer for no equity and Lori Greiner’s offer for $200,000 at 25% equity ($800,000 Valuation).  Clearly, having two competing offers put Aaron Krause in the catbird seat, and he wisely use his negotiating leverage to counter offer Lori Greiner for $200,000 for 20% Equity ($1,000,000 Valuation).  He got himself an additional $200,000 in valuation with his simple counter offer, which represents a Whopping 25% increase over Lori Greiner’s last offer for Scrub Daddy.  While she did not ‘win’ this time, here is a play by play breakdown of a Negotiation Clinic Lori Greiner put on that you can learn from for the Readerest.

Lesson Learned is Clear here, Always Counteroffer with Conviction, Especially, when you have the negotiation leverage due to multiple bidders being present.

Also Appearing on the Shark Tank as an update segment were Mark & Hanna Lim of Lollacup.  Lollacup is a handy straw based cup for young children.  Mark & Hanna Lim are Los Angeles based entrepreneurs who were quite diligent in getting themselves on to the show, which you can read about on their blog.

Their product, Lollacup, is a straw based cup for young children to use to help in speech and dental development. Their cups are, of course, cute, and with their innovative weighted straw, actually very easy to use for children. Lollacup was, as Kevin O’Leary mentioned, a better mouse trap. High praise for the Lollacup.

Mark & Hanna Lim are manufacturing their Lollacup in the United States, and that is a big selling point for Lollacup.  Good to see that Mark Cuban and Robert Herjavec are happy with their investment.

Second into the Shark Tank were Meg & Matt Meyer presenting their business The Bear & The Rat.  The Bear & The Rat is a line of Frozen Yogurt products for dogs in a series of Novel Flavors.  Meg & Matt Meyer naturally were pet enthusiasts and worked hard to get local distribution from Whole Foods in the Denver Colorado market.  Sales weren’t super high for The Bear & The Rat, and the Meyers had left a recent trade show without orders.  Given that it was a product that needed to be in Freezers, this meant that it was in an Extremely competitive space, as freezer space in any market is limited.  This was a major factor in the Sharks all bowing out without making an offer.  It’s important to note though, that none of the Sharks have significant exposure in Frozen Foods, so they also weren’t in a position to offer value.

Big Lesson Learned from this segment is that if you are going to pitch investors, seek out investors in the industry you are pitching, so you can find investors that can offer synergistic value beyond just a cash infusion.

The third segment featured a battery powered unicycle by two partners called the SBU.  SBU stands for Self Balancing Unit, which seems to have been renamed the Solowheel.  Similar to a Segway, except with only one wheel and far more compact.  Appealing to the Sharks was that the initial batch of manufactured units had sold out, and at high profit margins.  Also, there was a patent in place, with more pending, as well as copyrights.  Even better music to the Sharks ears was the fact that that the company had already earned royalty payments from a licensing agreement they had struck.  This was enough to convince Kevin O’Leary & Robert Herjavec to make an offer, which the Duo accepted. It is important to note that the duo accepted an offer MUCH lower than what they were asking for.

Lesson Learned Here is that it is okay to overvalue your company in the initial pitch, IF, and a Big IF, the investors know that you will seriously consider realistic offers like the Duo did.  Always a good idea to start high and negotiate lower, as long as it is clear to the other party that you will be realistic.

Last into the Shark Tank was Shelton Wilder who was pitching her product the Shemie.  The Shemie is a line of basic, layerable foundational pieces for women’s wardrobes.  The segment was an emotional segment in which Shelton Wilder revealed that she had a prior partnership that crashed and burned culminating in bankruptcy and overcoming a battle of alcoholism.  The product line is interesting, and you can find it on Kickstarter here.  Back to the pitch, Shelton Wilder’s past issues came up sometime in the middle of the pitch.  The big lesson here is that the Truth will come out at some point in the process, even if it doesn’t come out during the taping of the segment, before a deal is finalized there is plenty of Due Diligence that happens, which would flesh out the truth.  Kevin O’Leary made a great point, which is that entrepreneurs seeking investment should come clean with any bad news upfront.  The logic behind this is that it helps build an impression that there is a straightforwardness to the entrepreneur, which is reassuring to an investor, that they will always get the straight story.  Also, a business person who has tasted bitter defeat and has learned from it, is battle tested, which also is reassuring to investors.

Want to read recaps of previous Shark Tank episodes? Click here to see the entire collection episode recaps, all of them with business lessons you can take away from each pitch.

For More information on how Just Elementary, Inc, Business Brokers can help you with Valuation Matters & Negotiation Techniques for your business contact our Client Care Manager Sonia Chhabra at (888) 926-9193 or email cs@justelementary.com