The American Dream of building and growing a business is alive and well. In fact, you can see it played out every Friday night on “Shark Tank” – a reality TV show with, at least, some redeeming value.
As avid fans, my wife and I are glued to the TV watching as each hopeful small business owner stands in front of a panel of five wealthy entrepreneurs/investors (“Sharks”) and pitches their dream. I’m amazed at how many owners make the same two mistakes:
- Putting too high a value on their business
- Putting too low a value on others impact on their business
One episode that illustrates these two points aired on April 13th (click to watch) featuring a winery owner with a proprietary bottling process (he’s the only manufacturer in the world to bottle wine-by-the-glass). He used his bottling process as a differentiator to sell his product into national chains—growing his vineyard’s sales to $5M. With orders outstripping production capacity and guzzling all available cash flow, he went into the Shark Tank to raise $300K to increase production. And, most unusual, this was his second appearance on the show.
On his first visit one of the investors – Kevin O’Leary–saw the billion dollar opportunity to license the bottling process to the biggest wine-makers in the world and he offered the owner $600K for 51% stake in his Intellectual Property—the bottling process. The owner walked away because he couldn’t grasp the thought of separating the business. Now he’s back with the same pitch for a second try.
You could tell he was proud of his sales achievement—believing he proved the Sharks wrong, but O’Leary wasn’t impressed. While moving towards the same conclusion (that the IP is a billion dollar opportunity), O’Leary said “Wineries are a labor of love and you are in love.” The same story played out as the owner walked away without a deal. But O’Leary’s words struck a chord with me… Are you in love with your business? So much you’re making decisions based on the wrong criteria?
I know this all too well. In 2001 I was so “in love” with my product it clouded my judgment and I wound up making a major decision about the direction of the business with my heart and not my head.
Lesson #1: Do not fall in love with your company—save that affection for worthier endeavors. Do not become a slave to your company, but make it serve you and your family.
Having started and run six companies over almost three decades, bought several companies and sold a few more, I have a very different opinion today on the two issues stated above:
1. Valuing Your Business
On a weekly basis on Shark Tank we watch budding entrepreneurs put crazy values on their businesses. On a weekly basis The Sharks declare “I’m out” for this very reason. Someone should send these budding business builders a memo: You need their capital to survive and their contacts to thrive. Start with a realistic valuation that takes “investor value” into account!
At 24 I started my first company and was instantly fixated by its value. As sales grew my ego grew disproportionately over “what I was worth.” By Year 4 we were closing in on a profitable $5M in sales. Always seeking growth capital, I turned down an investment offer because the valuation, in my opinion, was too low.
Within 12 months the economy crashed and interest rates soared. When my hometown bank was taken over by the Feds, they canceled my company’s line-of-credit and terminated my business loan. I couldn’t find another bank to transfer my account and by October, 1990 the company was dead. How much was it worth now?
Lesson #2: Generally speaking, the value of a privately held small business is lower than you think because there is no public market for shares of your company—so “liquidity events”—opportunities for investors to exit the investment—are scarce.
Lesson #3: A bird in the hand is worth more than two in the bush! In my case I wound up owning 100% of nothing. Had I taken the investment I’d have survived the economic downturn. 60% of something is better than 100% of nothing.
Here are a few suggestions on developing a realistic company valuation:
1. Unless you have valuable IP, companies are valued one of two ways: 1. Multiple of Sales—projected or trailing 12 months, or 2. Multiple of Profits—projected or trailing 12 months. Some sectors are hotter than others and drive higher multiples. Do an internet search on how private companies in your sector are valued.
2. Contact local VCs or Angel Investors and ask them the metrics they use. It’s a great way to build relationships (this is how I closed on my first “Angel”).
3. Find and ask a CPA or Business Broker that doesn’t work for you.
4. Go to “Crowd Funding” web sites, like GrowVC, and check valuations.
5. Ask other SBE owners in your industry (you can search companies listed in Supplier-Connection by using the Small Business Profile tool).
2. Valuing Other People & Perspectives
Back to the Tank: All of the investors on Shark Tank have expertise and personal networks that transcend anything the “contestant” business owners have built—very high value. Why do these CEOs in need of capital discount The Sharks business acumen, while giving so much value to their own? Could it be they, too are thinking with their hearts and not their heads?
In 1992 I worked with Ronald Perlman’s team on the Revlon IPO. During the project I became friendly with Howard Gittis, one of Mr. Perlman’s partners. Mr. Gittis once asked me for an overview of my company. I pitched my business—highlighting our work with investment banks on financial road shows. He asked what would happen if I left the company for 6 months, as I was driving 90% of sales, I told him it wouldn’t survive.
As I finished he said “What you have is a company, not a business.” My confusion turned to understanding as he followed with “Find a product or service that can be replicated, that isn’t seasonal like the IPO market, and that isn’t heavily dependent on one person, and you’ll have a business.” That ten minute discussion sent me on a pursuit I never would have started, leading me to “Mentor®” – a product/service that at its apex served over 55 million users.
Part of what makes America great is the freedom to chase our own dreams, and an economic system that provides us the opportunity. And, based on our ability, effort, and desire we can build a future for our family. Although I don’t endorse some of the personal values The Sharks espouse, it’s clear they possess a great many business skills, and the TV show contains many things from which we could learn.
“There’s wisdom in the council of many” is a great Proverb with deep value, it motivates my closing thoughts: Surround yourself with people of sound judgment and give value to their knowledge, wisdom and advice. Running your own business is a very personal endeavor and it’s difficult not to allow our emotions to cloud our judgment, but be mindful of not thinking of your company and yourself more highly than you ought. I wish you great success.
Small Business is a journey… Be safe!