Each Percentage Counts for More than it sounds like – Shark Tank Business Valuation Lessons

Third up on the Shark Tank was Gary DeJohn of Vinamor Wine Aerator.  Gary DeJohn was asking for $75,000 in exchange for 30% equity ($250,000 Valuation).  At the time of taping Gary DeJohn had sold approximately 1,000 unit.  The Vinamor Wine Aerator is a great wine aerating product that can be conveniently used in restaurants to quickly aerate a newly opened bottle of wine, which increases the customers’ enjoyment of the wine.  This is a win-win for a restaurant, as customers are likely to order more wine if they enjoy the first bottle.  Kevin O’Leary is the natural fit to invest in the product as he is a serious Wine Connoisseur.  A an issue for Vinamor Wine Aerator was that all the other Sharks did not feel that they knew the Wine Market well enough to invest, so O’Leary was the only Shark left who could offer value as an investor partner.  However, O’Leary declined to make an offer, citing the fact that He felt that the market for Vinamor Wine Aerator was too small for him.  This meant that he felt that potential returns for him were too small to commit his time and resources.  One thing that contributed to Kevin O’Leary feeling that the returns would be too small were the gross profit margins on the product, was was 100%.  The cost to manufacture the Vinamor Wine Aerator was approximately $20, and the retail cost was $40.  This does not leave a large enough margin for General & Administrative expenses, and sales & marketing expenses, and factoring in reduced profit margins on B2B sales.  The other thing that seemingly held O’Leary back was the fact that he felt that there is a healthy level of competition in the space with other aerators aside from the Vinamor Wine Aerator.

Lesson Learned:  Have high margins for your product to entice investors to invest.

First in the Shark was San Diego based Stephan Aarstol, the founder of Tower Paddle Boards.  Stephan Aarstol was asking for a 1.5 Million dollar valuations ($150,000 for 10% equity).  Tower Paddle Boards is an innovative product for people who want to paddle board standing up.  Kind of like standing rowing.  Stephan Aarstol had not been in business for too long at the time of taping.  He was focused on direct to consumer sales for Tower Paddle Boards.

When the Sharks began to investigate the metrics of the Tower Paddle Boards business, they quickly got into Customer Acquisition costs.  Aarstol said that his cost to acquire customers was low, but he was challenged on it by Kevin O’Leary.  Organic SEO is free, but time costs money too.

Kevin O’Leary made an offer for $150,000 for 50% equity plus 10% royalty on all sales ($300,000 Valuation) for Tower Paddle Boards.  This offer was trumped by Mark Cuban, who offered $150,000 for 30% equity ($500,000 Valuation) and first right of refusal on any other business ventures that Aarstol would offer for investment in the future.  Important to note, Cuban’s offer was not 20% better for Aarstol (50%-30% does not equal 20% difference), it was actually ($500,000-$300,000 divided by $300,000, which equals a 66.67% difference.)

Aarstol took Cuban’s deal for Tower Paddle Boards, let’s see if they finalized a deal in writing after conducting post segment taping due diligence.

Update: They did finalize a deal, as evidenced by the update segment in another episode of Shark Tank.

Lesson Learned:  Be careful when negotiating percentages, as they can sound like a small difference, but they really are a huge difference as exemplified in this segment.

The update segment of the show featured Rick Hopper of ReadeREST.  ReadeREST is strong stainless steel clip that sticks to a shirt because a backing strip featuring neodynium magnets. Hopper asked for $1,000,000 Valuation ($150,000 for 15% equity).  The ReadeREST product demonstrated really well, as Hopper intentionally fell to show that the eyeglasses he had secured with the product did not fall out. The real meat of the original segment was the Genius Negotiating methodology used by Lori Greiner.  Here is the recap of Lori Greiner’s genius negotiation tactics.  Despite ‘losing’ the negotations with Lori Greiner, Rick Hopper has to be very happy since the sales of the ReadeREST have skyrocketed since the his Shark Tank segment aired.

Second up on the Shark Tank were Nick & Penilope LaRosa, the owners of Instant Lift.  Instant Lift is a product that is transparent body tape that helps smooth wrinkles and hide fat.  They had been selling the product for 5 months at the time of taping.   The key issue in the pitch was that the Nick & Penilope LaRosa were only selling one of their two Instant Lift products, the one that is neck down.  They weren’t selling their Instant Lift body tape for the face.  This brought up the issue that the Investors wanted to know that they were investing in the business that was going to be the priority for the Nick & Penilope LaRosa.  They did not get an offer from the Sharks for Instant Lift.

Business Lesson learned: If you are going to attract investor money, they are going to want to know that you are going to focus full time on the business they invested in.

Last up on the Shark Tank was Mr. Aviv Grill’s of Miso Media.  Aviv Grill was there to pitch his music app that helps people learn how to play the guitar.  Miso Music is the app that people can download to their iPad.  The big issue for the Sharks came down  to the Valuation.  Grill was asking for a $6,000,000 Valuation.  Yes, $6 Million.  The offers from the Sharks came down to a $3,000,000 Valuation, in the form of $100,000 for 3.33% equity  from Kevin O’Leary and a $300,000 offer for 10% equity from Robert Herjavec.  A small argument ensued over what seemed like small difference in percentage.  Mark Cuban Offered $300,000 for 8% equity ($3,750,000 Valuation) , and the common refrain on twitter, is why Aviv Grill haggling over a few small percentage points.  Let’s take the difference between Mark Cuban’s offer and Robert Herjavec’s offer.  It sounds like the difference is 2%, but the real difference is 25%.  How is that?  ($3,750,000-$3,000,000) divided by $3,000,000 = ($750,000/$3,000,000) = 25%.

Lesson Learned:  Be careful when negotiating small percentage points difference in Equity Valuations, as small percentage differences end up being a very Large Spread.

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

Want to read recaps of previous Shark Tank episodes? Click here to see the entire collection episode recaps, all of them with business lessons you can take away from each pitch.