With millions of viewers tuning in each year, the Emmy-award winning television series Shark Tank has become a household name. The series allows for entrepreneurs to pitch their product to recognized celebrities who happen to be business people and investors, commonly known as “sharks.” These entrepreneurs are seeking funding for their company in exchange for an equity stake. The show’s massive popularity has carried it through ten seasons and through it’s tenure has introduced concepts relating to business valuation to the masses.
While there are a myriad of types of “value” that can be calculated based on contingencies and purposes of said value, business valuation as a generic term is the value of a business. Publicly traded businesses have their financial data readily available for valuators to determine whether or not their intrinsic value of a company is equal to the market value. Privately held businesses – which many, if not all of the businesses on the Shark Tank are – don’t typically have this same data available for any person to analyze. There are a plethora of different reasons a business owner may want to value their business. Business owners may want a business valued for succession planning. In someone’s passing, their ownership interest in a privately-held business will need to be valued for tax purposes. In the case of Shark Tank, business valuation serves to seek additional funding.
Business owners typically have an idea of how much their business is worth in their head, some more accurate than others. Viewers might not notice it until it’s later mentioned by on the “sharks”, but these entrepreneurs pitch their value within moments of introducing themselves. Their request for money provided by the “sharks” in exchange for an equity interest in their company is their business valuation. As an example, if a business is believed to be worth $100 thousand dollars, then a 20 percent interest in that company should be worth $20 thousand dollars.
With each entrepreneur the sharks engage in dialogue with the entrepreneurs in an effort to learn more about their business and qualify the suggested investment. There are many concepts relating to business valuation (some more complex than others) that have been introduced to the masses that watch the Shark Tank. These concepts and the aforementioned dialogue are no different than what typically are discussed through a management interview in a business valuation. A management interview serves to enable a valuator to learn more about the past, present, and future operations of the business (typically not visible in financial statements or other relevant documents).
Profitability margins are often a topic of discussion for both the “sharks” and valuators alike. The “sharks” often mention margins without definition, and in the most simple way margins relate to the amount of revenue retained after covering costs required to generate those revenues, and expenses related to operating the business. It is important for an investor or valuator to be aware of efforts being made by the owners to reduce costs or increase revenues (i.e. passing costs through to consumers), or to consider opportunities to improve margins in the future.
A SWOT analysis may be conducted by a valuator, as seen on Shark Tank when the “sharks” inquire about what next steps the business may be headed for, or some threats that lie along the way. A SWOT analysis analyzes the strengths, weaknesses, opportunities, and threats of a business. Some of these may be identified through analysis of financial statements or other supporting documents, but opportunities (future investments) might not be disclosed unless the business owner shares their expectations for their company going forward. Additionally, weaknesses and threats may not be clearly identified, nor might a business owner feel inclined to admit there are faults to their business. It is important that valuators carry business experience and have a sound understanding of the industry in which the company operates in.
The above concepts most definitely do not cover the entirety of analyzing a business’ historical and future operations through a management interview, but they are enough for the “sharks” to apply their years of experience to adjust the initial offer to what they believe the company is worth (their intrinsic value). This intrinsic value derived by the valuator or investor be the same as the initial value posed by the business owner on the show. In this case, “sharks” are pretty quick to invest.
In other instances, the values may differ, based on economic factors, industry analysis, or a multitude of other considerations. When this is the case “sharks” make a counter-offer; however, in the world of business valuation, this derived value may reflect the company’s fair market value. Fair market value is the value at which a willing, informed, and able seller would trade an asset to a willing, informed and able buyer. With all things considered, the derivation of fair market value is typically sought out by business owners for succession planning and tax purposes.
Valuators of privately-held businesses often don’t have the luxury of conducting business on public television. While it is entertaining, Shark Tank is quite similar to the practice of business valuation. For production purposes, we may not see the entire conversation between the “sharks” and entrepreneurs. The concepts covered in the show are no different than those discussed in a management interview by business valuators.