Here is the second of five posts about lessons that I’ve learned from watching the ABC reality television show, Shark Tank. Please join the conversation by adding what you’ve learned in the comment section below.
Lesson 4 – It’s All About Control
For the most part, the entrepreneurs who present on Shark Tank overvalue the value of their enterprise by a fair amount. When the entrepreneur makes his first offer, you can see the sharks figuring out the implied value of the business. It’s a simple formula — asking price of the ownership stake divided by % ownership stake offered. So, if an enterpreneur offers 10% of her company for $20,000, the implied value (or worth) of the company is $200,000 ($20,000 / 10%) . While I could devote an entire series of posts about how an entrepreneur can justify the valuation of his business, for now, suffice to say that factors such as profitability, cash flow, growth potential, patent/copyright protection and management expertise, all play a role in the valuation. The point is that IF the valuation that the enterpreneur has implied in his offer to the sharks is fair AND one of the sharks feels like the business has some substance, the sharks frequently ask for a 51% ownership stake (either alone or in conjunction with other sharks) to take control of the company. In rare instances, the shark’s initial offer is for 50% of the company;however, most times, the sharks ask for controlling interest.
When presented with a counter-offer that gives control to the sharks, the entrepreneurs on Shark Tank seem to fall into two distinct groups. The first group includes those owners who cannot and will not take orders from someone else. The company is their baby and they absolutely won’t give up control. Pragmatic owners fall into the second group. This group of owners realize that 49% of something is worth more (in some cases much more) than 51% of much less (or nothing).
The next lesson that I learned from watching Shark Tank will be posted shortly…
All five lessons that I learned from watching Shark Tank:
- Lesson 5: The More, The Merrier
- Lesson 4: It’s All About Control
- Lesson 3: Coming Soon!
- Lesson 2: Coming Soon!
- Lesson 1: Coming Soon!