The hit show Shark Tank has made small business owners into millionaires through the opportunity to pitch their idea to the sharks in the tank — five titans of industry who made their own dreams a reality and turned their ideas into lucrative empires. For over ten seasons there have also been not-so-successful pitches by entrepreneurs who did not know their numbers or were tripped up by business lingo. Learn Shark Tank speak with these examples:
Example: A product is sold for $60.00 and the entrepreneur’s costs to make it are $15.69 including packaging. That means the margin on the product is 73.85% ($60.00-$15.69=$44.31 in revenue. $60.00/$15.69=0.02615*100=26.15%. 100%-26.15%=73.85% margin).
Example: Kevin tears an entrepreneur apart for asking him to pay twenty times multiple for the business. The entrepreneur’s desired valuation is $2,000,000 and the business only generated $100,000 of sales last year (2,000,000/100,000=20x multiple).
Example: An entrepreneur walks into the tank and asks the sharks for $75,000 for a 20% stake in the company. That means they value the company at $1,500,000 (75,000×20).
Wholesale and Retail Cost
Example: Damon asks the entrepreneur what their wholesale and retail costs are. The entrepreneur says the wholesale cost is $9.99 and the retail cost is $24.99, meaning the entrepreneur will sell the product to the retail store for $9.99 each (this is typically done in larger orders). For the retailer to make money after they account for other expenses like salaries, taxes, advertising, etc. they mark up the price to the consumer to make a profit. The consumer would pay the retail price of $24.99 per item.
Example: An entrepreneur seeks $100,000 in exchange for 10% of their company means the shark who chooses to invest their $100,000 will have a 10% stake in the company, or be owed 10% of all profits. The entrepreneur believes the company is worth $1,000,000 dollars ($100,000×10=1,000,000).
Example: Robert asks what the company’s run rate for a new business where there is less than a year’s worth of data. If sales are $50,000 during the first month, the run rate is $600,000. With this calculation the business can tell whether they are on target to meet annual sales goals ($50,000×12=$600,000).
Example: Kevin is worried a company is losing money quickly and wants to determine if he should offer up more capital (money) for a larger percentage of the business. He asks the entrepreneur what the burn rate is. The entrepreneur says $100,000 a month. Kevin is out because the company is spending $100,000 a month more than it is earning to maintain operations, which he finds too risky.
Example: Lori offering a convertible note of $500,000 means it is a loan for the business with the intention to converting the money to equity because it is too premature to put a valuation on the company.
Example: Mark asks an entrepreneur what their year-over-year sales are. This is to get an understanding if their sales have increased each year they have been in business and if not, find out why.
Line of Credit
Example: Barbara thinks a business will need a line of credit to succeed. She offers a $500,000 line of credit at an 8% rate. That means the entrepreneur will have access to up to $500,000 and if borrowed, will have to pay 8% additional interest on top of the principle for borrowing the money. The entrepreneur does not have to borrow the entire amount and only pays interest on what they borrow. This also provides flexibility because they can determine whether to pay the minimum or monthly payments based on business objectives.
Example: Mark asks an entrepreneur what the seed round was for their business. They say $1,400,000 which means to start the business, $1,400,000 was generated from venture capitalists, friends, family, and even the entrepreneur’s own money. Seed money is often used for market research, product development, prototype production, or other early-stage operations.
Thinking of starting or expanding a business? Use language of the sharks to land your next investor… or to avoid getting bit.
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