How Valuations Are Calculated on Shark Tank

For entrepreneurs and aspiring entrepreneurs, ABC’s Shark Tank has to be one of the most inspiring and entertaining shows we could watch. Not only do we get insight into how business deals are made, but we also get to witness everyday individuals reach their entrepreneurial dreams. All within about an hour’s time.

ABS’s Shark Tank is a show where entrepreneurs pitch their business or product to a group of investors. The show features well-known entrepreneurs like the founder of FUBU Daymond John and the billionaire owner of the NBA’s Dallas Mavericks, Mark Cuban.

On the show, entrepreneurs ask for capital based on what they believe their company is worth. Many fans of the show, who have never been in business negotiations, can sometimes miss what is happening. This is because they may not be familiar with some of the terms heard in the tank. One of these terms is “company valuation.”

Business valuation is the process of determining the economic value of a business. It involves analyzing various aspects of the business, such as its financial statements, assets, market conditions, competition, and other factors, in order to estimate its worth.

However, viewers sometimes wonder how company valuation is calculated on Shark Tank. In this article, we’ll break down how the investors and entrepreneurs calculate the value of the company being pitched on the show.

How is Valuation Calculated on Shark Tank?

On the show, you’ll notice the entrepreneurs valuing their companies and the investors asking how they arrived at that valuation. For example, an entrepreneur may offer an investor 10% of their company for $100,000. This means the entrepreneur values their company at $1 million ($100,000 x 10).

In order for the investors to agree to this valuation, the entrepreneur must demonstrate why they think the company is worth a million. Otherwise, they may look like they’re just making numbers up. Which usually doesn’t go well with the investors at that point.

The Sharks usually start by applying an earnings multiple approach. This is when they look at what the company made the prior year to help come up with the valuation. They often compare the earnings multiple to similar companies in that sector.

If an entrepreneur selling cookies values their company at $1 million but only made $25,000 the previous year, they would have to include other factors to justify their $1 million valuation.

However, if the entrepreneurs can’t provide valid reasons for their valuation, and the investors are still interested, they will typically ask for more equity. Equity refers to the percentage of ownership in the company. This is where the Sharks come up with their own valuations.

A Shark may believe that the company is overvalued. So, they may counter and offer the entrepreneur $100,000 for 20% equity. This means that the investor feels the company is currently valued at $500,000, not $1 million. This could be for many reasons. For example, the typical earnings multiple for baked goods may be lower than the entrepreneur has factored in.

 Check out the video below to see the highest valuation ever in the Shark Tank.

Other Ways to Calculate Company Valuation

There are several other ways to calculate a business’s value. Although these methods are rarely seen on the show, you can bet that the Sharks are evaluating every part of the business they’re investing in during the due diligence process once the cameras stop rolling. Here are a few of those ways:

Asset-Based Valuation

The asset-based valuation approach involves calculating a company’s valuation based on the value of its assets minus its liabilities. It’s unlikely that you’ll see this valuation method on the show because it is usually not suitable for companies with a significant amount of intangible assets, such as intellectual property or brand value. Many of the businesses that visit Shark Tank fall into this category.

To use the asset-based valuation approach, an investor would first identify the company’s assets and liabilities. Liabilities would include property, equipment, inventory, and debt. Next, the investor would subtract the liabilities from the assets to arrive at the company’s net asset value. Finally, the investor would adjust the net asset value to reflect the market value of the assets, which may be different from their book value.

The Discounted Cash Flow (DCF) Approach

The discounted cash flow (DCF) approach involves projecting a company’s future cash flows and then discounting those cash flows to their present value, taking into account the risk associated with investing in the company.

To calculate a company’s valuation using the DCF approach, an investor would first project the company’s future cash flows. Next, the investor would apply a discount rate to each year’s projected cash flow to arrive at its present value. Finally, the investor would add up the present values of each year’s cash flows to arrive at the company’s valuation.

One reason why this approach is rarely used on the show is because it can be challenging to use. Properly using the DCF approach to find valuations requires a lot of financial modeling and assumptions about the future.

Conclusion

Calculating a company’s valuation can be a complex process that requires careful analysis of a range of factors. The great thing about Shark Tank is that it simplifies this process for the general public to understand. The next time you watch the show, try to calculate valuations in your head. Now that you know how valuations on Shark Tank are done, you can begin to come up with your conclusions about which valuations are fair and which ones are not.

Also Read:

10 Successful Companies That Were Rejected on Shark Tank

The 15 Best Shark Tank Deals Ever Made

The 20 Best Shark Tank Episodes Ever