I’m sure you’ve heard of the show Shark Tank. It is one of the highest rated shows currently on television and I happen to love it. Seeing success stories from small business people with great ideas is rewarding. It’s a big reason why I do what I do. Helping Small Business is helping America.
If you haven’t seen the show, the premise is that ordinary people present an offer of equity (ownership) in their company in exchange for cash. The investors or “Sharks” can then offer a deal, usually negotiating percentage of ownership for cash and business experience to help grow their business.
Having been involved in mergers and acquisitions, I can tell you there is much more scrutinies behind the scenes going on after these contestants appear on the reality show. Still, it is quite entertaining.
The first thing that happens on the show after the business owner appears, is that they state their name and what they are looking for. For example, one might say, “Hello Sharks. My name is Eric Wheeler and I am seeking $500,000 for 10% of my company Park City Bookkeepers.” Then they start their pitch as to why the Sharks should invest.
The Sharks then start writing…but what are they writing?! They are calculating the valuation that the contestant just gave themselves, which is a very basic calculation. It is simply the amount of money they are asking for divided by the percentage of equity. So, in the case above, I am asking for $500,000 for 10%. That calculation would looks like this:
$500,000/10%=$5,000,000
I have provided a template to help you quickly calculate business valuation. It’s a simple formula and you may already know it well, but if you want to follow along with the numbers quickly while you’re watching the show then download the free template so you can drop the numbers in and let Microsoft Excel do the work for you.