If you’re an aspiring entrepreneur wanting to go into Shark Tank, a meticulous understanding of exactly what the Sharks are interested in will make your experience easier than ever.
One such aspect to master is to be thorough with the ‘valuation’ of your startup. To do the same, a business valuation calculator is what you need to know about.
How to Calculate Business Valuation
Business valuation is the process by which one can determine the value of their company/business at a certain point in its life cycle.
Here’s a quick guide on using the Shark Tank Valuation Calculator:
Step 1: Insert the investment amount in the calculator, i.e., the amount you want the Sharks to pay for your company.
Step 2: Put in the equity percentage or the share that you are willing to give away to the investors/Sharks. If you are a completely new entrepreneur, you can pitch around 10%-25%. Whereas, if you are a little experienced, you can go ahead with 5%-15%.
Step 3: Click on “Calculate” to find out the final valuation.
Note: The valuation will be reflected in the form of pre-money and post-money valuation. We will discuss this in detail in the later sections.
Still, have doubts? Here’s a small example:
The basic formula for calculating the valuation is the total investment money sought by the entrepreneur combined with the equity percentage that they’re offering.
For example, if an entrepreneur is demanding $200,000 with a 10% equity stake, $200,000 is 10% of the valuation of the company – which in this case is $2 million ($200,000 x 10).
At this point of negotiations, the Sharks generally inquire about how much the company made in the previous year. The obtained valuation is then divided by this amount. For instance, if it made $200,000 in the past year, it would be $2 million ÷ $200,000 = 10.
If the company keeps on making $200,000 per year, the investor would take 10 years to break even.
Understanding Business Valuation
By analyzing the value correctly, one can make informed decisions concerning not just sales or purchase of the business but also related to raising capital, planning strategic exits, and assessing growth potential.
This is what makes it extremely critical for both entrepreneurs and investors.
Business Valuation Methods
If you want to determine the valuation of your startup, make use of any of the following approaches that are based on its nature, life cycle stage, and industry:
Market-Based Comparison: Using this method, you can compare your business with similar ones that may have been recently valued or sold. Based on this information, you can fix the investment amount and equity that you want to present to the Sharks.
Income-Based Analysis: Through this method, you can emphasize the startup’s income potential by estimating future cash flows and their discount to the present value.
Metric-Based Methods: When you present your offer to the Sharks, they start their calculations by analyzing whether the asked valuation aligns with their business requirements. For this, they consider metrics such as current revenue, growth trajectory, profit margins, etc.
If they agree to it, they will accept your offer. If not, they can make a counteroffer, and if you want to go ahead, you can modify your valuation accordingly.
Pre-Money vs. Post-Money Valuation: Insights from Shark Tank
In the world of venture capital, pre-money and post-money valuations indicate the valuation of a business’s equity. The only difference lies in the timing of when the equity value is measured.
Here’s a detailed explanation of what the two represent at different points in the funding timeline:
The total valuation of a company prior to raising the Equity Financing Round can be understood as the pre-money valuation. By understanding this value, you can measure the equity that you would want to give away to the Sharks/investors in return for capital.
On the other hand, the total valuation of a company after an Equity Financing Round has occurred is known as post-money valuation. This figure is crucial for the Sharks/investors as they can calculate their ownership percentage with respect to the investment made.
How to calculate pre and post money valuation?
If we take the previous example of $200,000 for 10% equity, here’s how to calculate the pre-money valuation and post-money valuation:
Post-Money Valuation = Investment ($) x Investor’s Equity
Pre-Money Valuation = Post-Money Valuation – Investment ($)
In this case the post-money valuation will be $2 million and the pre-money valuation will be $1800000
Importance of Business Valuation
Business valuation can assist you in the decision making and marketability of your business in different circumstances, such as:
Understanding Your Company’s Economic Status: Before engaging with the investors/Sharks, it’s paramount for you to understand the valuation of your startup. While pre-money valuation can help you to negotiate the equity stake in return for capital, the post-money valuation will assist the Sharks in comprehending their ownership percentage.
Planning on the Strategic Aspects: Valuation can act as a metric to determine the success of your startup. With a solid understanding of the valuation, you can make informed decisions concerning growth strategies, resource allocation, and potential market expansions.
Making Decisions Concerning Mergers & Acquisitions: In mergers & acquisitions, an appropriate business valuation helps investors to get an assurance that the value brought to them is reasonable. Likewise, if you want to sell or merge your business, you will want to have a clear idea about the final price offered or the equity share, respectively.
Leveraging accurate business valuation, the negotiations for mergers & acquisitions can happen fairly by reaching agreeable terms.
Executing Appropriate Exit Strategies: Business valuation can act as a cornerstone when you plan to exit. This is because by analyzing the true value of your company, you can find out the most beneficial exit paths out of: sale, merger, or succession.
