This week was actually fairly average as far as the dollars invested, but it felt like a train wreck for most of the show.  Daymond was the only Shark really interested in any of the pitches and he convinced Kevin H to join him on one venture.  Together, they invested $290,000 in two companies for an average stake of just over 50%.

The night looked like it was starting off strong with Send A Ball.  These two ladies will ship an inflated ball with a message printed on it through the mail by slapping enough postage on the outside.  Cool idea and it seems to be popular enough to make them a living.  I do give them kudos for being among the few entrepreneurs pitching the Sharks who could actually explain why they needed $86,000.

Unfortunately, their killer phrase was: “We are slammed with orders!”  Seriously?!  Then why are you selling your equity?  Didn’t your CPA tell you there are factoring companies who will gladly finance those orders for you at a fraction of the cost of equity?  Heck, even a bank might do it!  Barbara said it best that Send A Ball just didn’t need the Sharks and Kevin H pointed out that there really weren’t any barriers to competition so the risk was too high.  Do they have a ball that reads “Research cheaper capital”?

Next up was Qubits who initially put the Sharks on their guard by voluntarily offering 51% of his company for $90,000.  Mark is from my old stomping grounds in Bend, OR, so I won’t be too hard on him.  Although he’s been marketing his construction toy product for over 2 years he’s only made $8,000 in sales, which in itself is a bad sign.  Kevin O asks if he’s approached the four major toy companies for licensing.  When the answer was no, the Sharks began dropping out one by one.  When Daymond was the only one left, he offered Mark the deal he was asking for but contingent on striking a licensing agreement with one of the big four.  Now why didn’t anyone else think of that?

Pillars of Slippers was dynamically presented by Nicole Jones with a pink Hummer and choreographed to hip hop music.  Definitely one of the most confident entrepreneurs, Nicole is hoping to franchise her home shoe party business and asked $150,000 for 15% of her equity.  That’s an initial valuation of $1,000,000.  So is this the next Mary Kay or Tupperware?  Unfortunately, while $64,000 in party-based shoe sales is nothing to laugh at, the $100,000 she was planning on charging her franchisees just doesn’t add up.  Why would someone shell out that kind of money just for the chance to work more than 150 parties a year for a normal salary?  And could a less outgoing person really expect to book almost half of every week with parties?  What makes any of that worth a million dollars?

Last but not least, what stops someone from doing shoe parties on their own for much less start up cost?  All Pillars of Slippers offered a potential franchisee was the car, the name, and their initial inventory.  Unfortunately, none of that is proprietary and all of the Sharks dropped out.

The trend of high valuations continued with Llama Brew whose request for $125,000 for just 10% equity puts their company at $1.25 million.  Seriously now, call a valuation expert or even your accountant and just ask for a simple estimate of your company’s worth before you make any kind of pitch to investors.  This couple may have a potentially good idea, but $4,000 total sales is almost worthless no matter how you slice it.  Needless to say, all Sharks were out.

At BiggsKofford we can do full business valuations but generally that’s more than our clients need.  We often do simple income value calculations based on a multiple of weighted average historical net cash flow or EBITDA.  Comparing that to net asset value is usually enough to give our clients an idea of what an investor might be willing to pay for their business.

The final presentation came from Alan Kaufman of Nubrella, whose completely redesigned umbrella allows for hands-free use in high winds, even when riding a bicycle.  At first, the style looked awkward and I wasn’t optimistic but the design works, it’s patented, and hey, most new ideas look strange to someone entrenched in the old ideas.  That doesn’t make them bad ideas.  Alan started by asking for $200,000 for 25% of Nubrella and ultimately struck a deal with both Daymond & Kevin H for 51%.

One of the things that sent off the warning sirens in my head is that he has invested $900,000 in this company to date.  What in the blazes have you spent that much money on?!  And why do you only need $200,000 now?  I would have been much more rigorous with my due diligence of his operations to date and would have required a clear schedule of how he expected just $200,000 to do what $900,000 could not.  My guess is that he’s not good at managing his financials and will likely be a money sink for Daymond & Kevin.  Experience tells me that design work and patents don’t cost that much and if his product makes a gross profit, manufacturing doesn’t lose him money.  I’m glad the Sharks negotiated a controlling interest because they can replace him with a more competent manager.  Of course, that’s all speculation and Alan did land the deal.

Another lesson comes courtesy of Legal Grind, the curious merger of low cost legal services and coffee house.  Yet another attempt at franchising, these poor folks have been working for 14 years and still had to come crawling before the Sharks to drum up capital.  If that isn’t a bad sign in itself, Barbara asked what the money would be used for and there was initially no answer.  Finally Jeff Hughes says he would hire legal counsel, even though he is a licensed attorney!

The real lesson comes from Daymond, though.  He mentions that he’s skeptical the franchise will attract interest and Jeff responds that they already have over 200 franchise requests.  An incredulous Daymond responds with an easy solution: take $20,000 down payments from 10 of the requestors and they would have the $200,000 they’re trying to get from the Sharks.  Indeed, if you already have orders, there are far cheaper sources of capital than selling equity.  See my post on Innovative Funding Strategies for a few ideas, including asking customers to prepay or borrowing against purchase orders.

One final suggestion for Annie and Jeff Hughes: it’s the Shark’s money, treat them with respect.  Whether Annie was nervous or angry at the way things were turning out, neither is an excuse for arguing with your potential investors.  These people are buying something from you, taking a risk on you, and tying their financial future with yours.  They have their reasons for joining you or leaving you and you will have to accept them or change their minds.  Trying to beat them into submission is not a good negotiating tactic.

On the positive side, Caffeindicator was one of the most polished business plans I’ve ever seen.  He narrowly targeted an extremely structured industry and planned to pit the four most common sweetener brands against one another in a war to either increase their own market share or suppress their competitors from increasing theirs.  He didn’t even care if people used the actual sweeteners!  By using the caffeine indicator on the packet, the customers would waste a packet that would increase the amount purchased by the restaurant and in turn increase sales for the sweetener manufacturer.

His presentation clearly indicated how he planned to leverage his patent in this space and it left the Sharks free to calculate their risk of success and return on investment, which is precisely where you want them to be.  Kevin H. pulled an amazing negotiation trick by rushing an answer from Michael Schiavone before Kevin O. had a chance to make an offer and while Robert’s offer was still on the table.  Pushed for an answer, Michael accepted Kevin H.’s offer which was the best on the table.

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The next episode of Shark Tank airs Friday, February 5 at 9/8c on ABC

The Sharks seem to bear with her line of inspirational products, that is, until they ask her how much she makes.  Last year she pulled in $18,000 in sales and it’s her sixth year in business! Sometimes your numbers are trying to tell you something, like maybe this isn’t a viable business.

These days, since it’s harder to close on business sales and many investors are still waiting to buy, I’ve been focusing a lot on helping entrepreneurs grow their businesses.  One of the first steps is to get a close look at where you are and where you are going by building a Financial Model.  Sometimes the Model tells us that things are going well and helps us focus on areas to improve.  Other times it’s clear that if things don’t change drastically, the business will be out of money before next year.  At that point it’s important for the owners to take a good hard look at the things that would need to change and decide whether it’s worth the risk of bankruptcy to keep driving forward or whether they should liquidate or sell today, while there’s still the potential to get out in one piece.

Entrepreneurs are generally optimistic people; how else could we take such crazy bets on the future?  It is important to learn to view your business from a realistic and grounded perspective to make sure your optimism isn’t trying to take you places you just can’t go.  If necessary, find yourself a mentor or an advisor who will tell you the hard facts on a regular basis.

There were quite a few good lessons, but the one that sticks out first comes to us from Coffee Brand Gifts.  Dan Claffey is asked the obvious question by the skeptical Sharks: do you have any orders? Dan’s response is no, that he had been waiting to sell the product until after he had inventory and capital to produce more.  The Sharks’ incredulous reply speaks for itself.

Maintaining inventory is a cost of doing business and savvy entrepreneurs have been inventing ways to get by with little or no inventory for years.  “Just-in-time” has been replaced with drop shipping and other inventory-less ways of getting goods to consumers directly from manufacturers.  In this age of instant communication, making a sale and shipping goods can happen almost simultaneously from anywhere in the world.

What the Sharks stressed to Dan is that sales trump just about everything else.  If customers are willing to buy your product then you have the potential for a business.  Until then it’s all a dream.  Even if you’re not profitable costs can be reduced, processes can be made more efficient, and prices can be raised.  Having sales means that the major risk of developing a viable product has been overcome and a serial investor just needs to bring his expertise at building a viable business to bear in order to create something truly valuable.

So get out and sell your products!  Even if you don’t have much more than a prototype to show them, if you can convince them to sign a purchase order you can often take it to the bank to get enough startup capital to fill the order.  The margin from that first order and the relationship started with a manufacturer should be enough to get the next order rolling and then you’re off and running.

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Shark Tank airs on ABC, Tuesdays at 8/7c

This week’s big lesson is: be willing to part with equity in exchange for money and expertise.  Jeff & Josh Cohen, owners of The Voyage Air Guitar asked for a staggering $500,000 for just 5% of their company.  Their request values the company at $10 million, even though last year’s sales were only $400,000.  That’s 25 times gross sales!  These entrepreneurs have forgotten that the investors are buying something from them.  If they price their company out of a reasonable range, the investor doesn’t stand to make any money at the end of the day.  Why would any investor buy a company that won’t make them wealthier?

Obviously, this business needs the money and I’m sure the expertise would be nice as well, especially when Kevin H. offers to bring in his experience with infomercials.  Be reasonable when you value your company and know how much you’ll need to give up in order to get what you need to take you to the next level.  If you’re not willing to part with a fair portion of your equity, then you’re wasting investors’ time.  Go to a bank, get a loan, factor your receivables, float a bond, find a line of credit, negotiate with suppliers and customers, and do whatever else you can to get the necessary capital without giving up your equity, if that’s what’s important to you.

EDIT: Just as a fun comparison, the average equity stake the Sharks have negotiated through Episode 8 is 52% and the highest valuation for a single company is still $1 million, set back in Episode 2.

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Shark Tank airs on ABC, Tuesdays at 8/7c

All of the Sharks were involved this week for a total of $750,000 invested in two companies which sets records for dollars invested in a single episode, dollars invested in a single company, and valuation of a company.  A Perfect Pear was the big winner, receiving $500,000 for just 50% ownership which equates to an estimated valuation of $1 million.  For their money, the Sharks snagged an average stake of 75%.

The lesson this week comes from an offer that was (gasp) rejected by the entrepreneur.  Robert Alison is the inventor of LifeBelt, a system that prevents cars from being started if the driver’s seat belt is not buckled.  Ultimately, he was offered $1 million by Robert H. just for the patent.  Robert declined, not because the dollars were too low but because he was determined to build a business from it.

So here’s the lesson, Robert: you can come up with new ideas faster than you can build a business.  Maybe the patent is worth more than $1 million, in which case he made the right move; according to what he was asking from the Sharks, he valued his business at $5 million.  However, having built businesses myself and advised entrepreneurs starting and growing many other businesses, I know that it is dangerous to become emotionally attached to the idea of being a “business owner”.  The most successful entrepreneurs treat businesses almost like commodities, buying them, growing them until the price is right, and then selling them.  Knowing your exit strategy up front is critical to structuring your business appropriately to maximize the value of that exit.

Many entrepreneurs seem to have the attitude that every business they start is going to be a home run.  They fantasize about going public or selling their 100% ownership for incredible multiples.  They see themselves sitting next to the Sharks with a similar “rags-to-riches” story, flying their own private jet, and owning an island.  Unfortunately, businesses like these are the exception, not the norm.  Most wealthy entrepreneurs have started, owned, and sold many businesses, some that completely tanked and others that barely broke even.  Maintaining your focus on how much of a selling price would provide a sufficient return on your investment of time and money while remaining creative and flexible enough to recognize an exit that meets that requirement and pulling the trigger requires discipline and planning.  Know how much that patent is worth and take an offer that fairly compensates you and frees you up to go after the next great idea.

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Shark Tank airs on ABC, Tuesdays at 8/7c