First up in the Shark Tank were Jason Lucash & Michael Szymczak of OrigAudio. They asked for $150,000 for 15% equity.
Their company sells portable audio speaker solutions. On the show they claimed to have a track record of sales. In their one year of sales they have grossed $750,000, upon which they netted $150,000, though they did not pay themselves. Cutting to the chase, this segment featured multiple negotiating tactics simultaneously and quickly deployed.
Mark Cuban blew open negotiations NOT by presenting a counteroffer to the original pitch. Instead, he came out firing with a rapid fire request for a revised offer from Lucash and Szymczak and he told them that he would either accept their counteroffer and he would immediately bow out. GENIUS Negotiation attempt by Cuban.
Number 1, he forced Lucash and Szymczak to counter their own offer, which placed the pressure on them to how their hand first. This technique is called ‘Making the Other Party Negotiate Against Themselves.’
Number 2, Cuban made an ultimatum offer, which again placed the pressure on the other party.
Number 3, Cuban attempted to remove the bidding competition by telling Lucash and Szymczak that he would bow out if they chose to solicit other offers. Reducing competition, which is along the lines of Reducing Demand in the Supply/Demand equation, is a tool to drive down the price, which is a technique to get a better price.
Of course, there is some risk to Cuban’s strategy, and in this case it did backfire on him. However, these techniques individually are still useful to keep in your negotiating arsenal.
Kudos to Lucash and Szymczak, who ended up getting a deal with Robert Herjavec at their original asking terms. Getting their original asking terms is no small feat. Ultimately, they were aided by two factors, they had multiple offers plus Cuban’s interest. When you are negotiating with multiple buyers, remember, you have the leverage, don’t forget to use it.
Second up was Johnson Bailey proprietor of Man Candles. His product is a line of unconventional fragrant candles. Bailey was asking for $50,000 for a 25% equity stake, which valued the business at $200,000.
Bailey brought some enthusaism, which the Sharks appreciated. Bailey had recent sales of $53,000, and he had put in to that point $40,000 of start up money. Obviously, unconventional fragrances such as ‘Popcorn’ and ‘Golf Course’ are novelty items, so the Sharks perceived this as a business with limited upside.
The segment was fairly short, so we might have missed out on some lessons that Sharks might have shared with Bailey. We can surmise that a novelty business has a lot of risk in turning profit, and it is easy to get discouraged. Herjavec and Barbara Corcoran definitely disliked the concept of the product, but Cuban offered Bailey encouragement. Even though the business was small, and revenues were small, the fact that Bailey had generated sales and placed his product on retail store shelves, means that there is a market for the product. Cuban reminded the other sharks that Bailey had results that demonstrated measurable successes. The question for Bailey to answer is if the results are enough for him to keep going until he gets to sufficient profitability.
Julie Goldman of Original Runner Company had an extremely interesting segment that provoked a lot of commentary. Goldman’s product is a wedding runner that is durable and stylish, which is important for the day of the wedding and for posterity in all of the wedding photos and videos.
Let’s start with the lesson which did not receive a lot of airtime in the edited segment, and that is of Valuation. Goldman asked for $250,000 for 15% equity in her business. This translates to a valuation of $1,666,666.67 The previous full year of Gross Revenues were $550,000, and the current year was tracking to $650,000. Goldman said that at a multiplier in the range of 3 at the minimum to 5 at the high end justified her valuation price. Three (3) times $550,000 equals $1,650,000, and 5 times $550,000 equals $2,750,000. One thing to point out here, is that multiples in the range of 3 to 5 are typically applied to EBITDA, not the Gross Sales. For some reason, this section of the pitch did not make the final cut, but the Sharks must have covered this topic with Goldman. EBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is an accounting measure of profit, which you can read more about in our post about EBITDA. Ultimately, the valuation was addressed in the segment via the offer presented by Kevin O’Leary which essentially valued the company at $500,000. Though the EBITDA profit was not disclosed on the segment, *IF* it was in the range of $150,000 to $200,000, then O’Leary’s offer falls in the bottom range of 3 times EBITDA multiple.
Another lesson on Display with Goldman’s segment was to know your all the numbers of your business, including all operational expenses. Goldman showed her chops when she told the Sharks that she had restructured her business as the economy tanked, by reducing overhead in the form of occupancy cost and payroll. Smart work on her part, she showed that she is resourceful and resilient. This is a key ingredient to be a successful company builder.
On Twitter The sharks, in particular Kevin Harrington, commended her for her gumption and resolve. Barbara Corcoran on the segment told Goldman that she didn’t need the Sharks, because she has ‘gotten this far on her own.’ Though on Twitter Corcoran did state that she didn’t make an offer because she felt that Goldman would be difficult to work with, a sentiment that was echoed by Daymond John on his twitter feed on multiple occasions. Being resolute and determined has a downside, and that is that it will turn some people off, but it is a necessary ingredient to grow a start up to a viable business.
Let’s discuss one final lesson gleaned from Goldman’s segment, which is to know which business you are in. The Sharks honed in on the fact that Goldman has a successful niche in high end runners that retail in the neighborhood of $750, and that she was attempting to enter a lower price market in the runners. The Sharks felt that focusing the business on the high margin product was the way to go for them, and the quickest and least riskiest path to success. Goldman disagreed, and to her credit was quick enough on her feet to give a well thought out reason why pursuing the lower priced market was worth it.
The Sharks have a point, if she stays in the high end niche, it is a space that she can continue to dominate. The lower price niche is prone to commoditization, plus it carries greater need for capital investment, which increases the risk that the capital invested will not be returned in a reasonable amount of time. But, there is no right answer in business, as long Goldman is willing to reinvest more of Her Own profits of the business, she should be able to raise the appropriate expansion capital to finance the growth of the business into other niches.
The final segment of the show featured Jeff Stroope of HyConn LLC. Stroope was in the Shark Tank to pitch a special product that will make fitting hoses to nozzles much simpler and quicker. Stroope demonstrated a HyConn fitted fire hose. The quickness is important when it comes to fighting fires, so the product can be a huge property and life saver.
The Sharks were impressed and liked the product, but were worried about the fact that Fire Departments are funded by government budgets. Government budgets are under severe strain, so the Sharks felt like even though the product is great, it might not have many customers that are able to pay.
The Sharks interest quickly jumped up when Stroope pulled out a prototype of a HyConn adapted for a regular Garden Hose. The regular garden hose market is huge, so naturally the sharks jumped in with offers after discovering this aspect of the HyConn product line. For Stroope, a big checkmark on a very important lesson, which is to protect the intellectual property you have created, as he did with a patent. Clearly, this product is a game changer, similar to the SweepEasy that was featured in an earlier episode of the Shark Tank.
Filed under: Business Tips, Business Valuation, Negotiation · Tags: Barbara Corcoran, Daymond John, HyConn LLC, Jason Lucash, Jeff Stroope, Johnson Bailey, Julie Goldman, Kevin Harrington, Kevin O'Leary, Man candles, Mark Cuban, Michael Szymczak, negotiation, OrigAudio, Original Runner Company, Robert Herjavec, Shark Tank, valuation