Business Valuations and Knowing Your Numbers on Shark Tank

First up on the Shark was Nick Romero of The Ave.  Nick Romero was asking $125,000 for 15% equity ($833,333 Valuation) for The Ave, which is a concept that is operated out of a retail location in Venice California.  The Ave offers customers the ability to customize apparel.  In the segment, customized shoes were highlighted, which required a special platen that Nick Romero had a patent pending for at the time of taping.  Being that the business was being operated out of 450 square foot retail location, and was taking orders online, it already was operating two different business models, #1 being a Brick and Mortar Retail Business, and #2 an E-Commerce Business.   This is a key issue that was alluded to by the comments of the Sharks, as Nick Romero pitched the idea of opening more retail locations, and also franchising the concept.  Franchising the business would add a Third Business Model to what was already in place.  While most of the discussion about which business model to focus on was left on the cutting floor of the editing bay (The Actual time on the set was likely close to an hour), the comments from the Sharks that made the Segment were telling:

Kevin O’Leary: “That’s the problem with this deal, everybody has a different version of a business model”
Robert Herjavec: “I don’t want to change a guy’s business model”

So despite the fact that Nick Romero had a novel and profitable concept in The Ave, it seems like the ultimate issue for the Sharks to not invest was that they did not see eye to eye with Romero on which business model to grow the business with.  Romero seemed to display interest in more retail locations and franchising, which are ongoing time and labor intensive, as opposed to licensing or equipment leasing, which are lower time and labor intensive than operating Retail or Franchising.  While Nick Romero has a good thing, his plans for the business just didn’t fit the Sharks at the time of taping, so there was no deal.

Lesson Learned:  If you want investors to invest, have ONE business model settled on, having two or more Business models does lead to dilution of company resources, which holds each model back.  Just make sure to pick the business model that best suits your skill set and goals.

Second up on the Shark Tank was Blake St.Clair of Bark ‘Ems.  Bark ‘Ems is prepackaged food for pets, specifically dogs at the time of taping.  Blake St.Clair of Bark ‘Ems was asking for $100,000 for 51% equity, which is essentially a $200,000 Valuation ($196,000).  A very useful concept for on the go pet owners.   Of course, the question was asked, why can’t a pet owner just put some dog food in a bag.  Which of course is what a lot of people already do.  The short answer is, convenience sells, so even though most people would just put food in a bag, there still is a market for this product.  Of course, that market was unknown as there were no sales at the time of taping, so the Sharks were either out because they thought there was no market for the product or that the business was too early in its life to invest.

Lesson Learned here, better to pitch investors after the concept or the market is proven with sales history or tangible interest.  

We’ll point out though that the product got some favorable responses on twitter, because as one person put it, People love their pets, and they spend more money on their pets, than non pet owners would expect.  Expect to see and hear more about Blake St.Clair and Bark ‘Ems, as there is an active pet blogging community

Third up in the Shark Tank were the three partners of the Brewer’s Cow Beer infused ice cream.  The ice cream was non-alcoholic, and just beer flavored.  The company was relatively new at the time of taping had only booked $5,000 in sales.  While Mark Cuban and Robert Herjavec both enjoyed the flavor of Brewer’s Cow ice cream they sampled, they did not make an offer.  Aside from the business being relatively unproven, it certainly seemed like the main reason was that the three partners were not well versed in the financial metrics of the business.  As Robert Herjavec pointed out: “You got to know your numbers….there are certain things in every business you got to know every morning when you wake up, and one of them is: what do I need to do to in order to break even”  Clearly as the three partners pointed out, they aren’t number guys.  So again, no deal with the Sharks.

But, Lesson Learned, If you are going to be in business, KNOW Your Financial Metrics!  If you don’t know your numbers bring in a ‘numbers’ partner, or have a strong financial adviser, such as a CPA, or be held back by your own financial ceiling.

Last up in the Shark Tank were Desiree Estrada and Arlene Battishill of GoGo Gear.  GoGo Gear is a Fashionable line of Motorcycle and Scooter apparel.  Riding apparel requires special armor and fabric to offer protection to the wearer.  Most riding jackets are industrial-sporty looking.  GoGo Gear jackets as modeled on the set and shown on the website are quite stylish.  Desiree Estrada and Arlene Battishill had put in $400,000 of their own money up to that point, and had not recouped that investment at the time of the taping.  Clearly they were burning through cash and needed guidance.  Needing guidance on how to run a business is a turn off for investors such as the Sharks, as they are busy with other ventures to hold someone’s hand to help them run and grow a business.

A flashpoint in the segment was the Asking Valuation that Desiree Estrada and Arlene Battishill came in with which was $2,000,000 ($300,000 for 15% Equity).  Given that their sales had not been large enough at the time of taping to register a tangible EBITDA, the Business Valuation was Completely Unreasonable.  Actual valuation metrics and multiples rarely avoid the editors cut and onto the air, so we’ll take the time to discuss the 5x multiple mentioned by Kevin O’Leary.   O’Leary meant Five Times (5X) the EBITDA of the company.  For an in depth explanation of EBITDA click here.  Basically, EBITDA is the profit of a business that includes expensing executive salaries.  Often times people assume multipliers should be used on the Gross Revenues, which is not the case here, since Kevin O’Leary was referring to an EBITDA multiple.  EBITDA multiples vary by industry, but they are between 3X to 6X for quite a few industries.

With Gross Revenues of $172,000, factoring Cost of Goods, G&A expenses and executive Salaries, there would little, if any, EBITDA left over to multiply  with any number.  So essentially, as Mark Cuban pointed out, the business wasn’t actually worth much at the time of the taping based on the on going sales.  Fortunately, the actual products were nice, so Daymond John felt that there was some potential that he could make some money with them.  Daymond John accepted $300,000 for 65% equity, which  yields an approximate Valuation of $462,000.

Let’s see if an actual deal was finalized in writing between Daymond John and Desiree Estrada and Arlene Battishill, because after doing Due Diligence, Daymond John could have felt that the product line would not work for him, or that he could not add any value, or that he could not devote enough time to help Desiree Estrada and Arlene Battishill with growing the business.

Lesson Learned Here, have a Realistic Business Valuation!

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