There are 5 “sharks”, each is a business mogul who at one point sold their company or currently owns a very large company.   The sharks are an interesting bunch rejecting investments, undercutting each other, or working together to get a piece of the action.  They are a fairly well rounded group with backgrounds varying from real estate to clothing to computer software.  They are fun and entertaining to watch and certainly are on top of their game.

Many times entrepreneurs come on the show having no idea what their business is worth.  One may come on the show with $10,000 in sales and want to sell 10% of their company for $50,000.  The pre-money valuation (what the company is worth before investment) is $450,000!  I can understand going in low to get the valuation you really want but that is 45X sales!  (Normally you will get around 4-6x sales, though that can change up or down depending on many variables).

If the entrepreneur can start a feeding frenzy they normally trade a much smaller portion of their company.  However, if only one shark is interested in their company and the entrepreneur is not prepared they may walk out having just sold 100% of their company.

Watching the show one can’t help but wonder a few things.  Do the entrepreneurs do any research into what their company might be worth?  Are the sharks taking advantage of them?  Considering many of these sharks are so wealthy, will they even spend significant time on a $50,000 investment that could potentially return them $500,000 (a home run 10X your investment)?

Here is a few tips for anyone going on that show, trying to raise money or negotiating deals with their company.

1. Understand what a Pre-Money valuation is and have a reasonable estimate of your companies worth.
2. Do not low ball, provide good reasoning for your companies valuation.  It will make you look more professional and give an added dimension of respectability to your investors.
3. If you don’t like the deal, counter by stating your rationale in #2 followed by a new proposal.  DO NOT ASK IF THEY WILL TAKE A DIFFERENT OFFER!  You need to be vested in the company as well so that your goals and any investor goals are alligned.
4. Do not be afraid to sell the company and walk away.  If you are going to get an outstanding return on your investment (3x-10x depending on your investment amount).  You may want to cash out and enjoy life or do something new.  This is one area where a royalty for life is wonderful!
5. Say NO.  If you don’t like the deal just say NO.  You brought the company this far are you prepared to take it even further?  A bad investor is a bad deal and keeping all your equity and moving forward while tough can be a good choice for you.
6. Have an exit strategy, know what your long term goals are and what you want from life.

Spending your time to know some basics about what your getting yourself into and how to leverage it will give you the potential to make the most of your capital and give you the best shot at success.

Capital Cents can provide your business the same services for a fraction of the cost outlined in the article.

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A SWOT analysis stands for Strengths, Weaknesses, Opportunities, and Threats and it can be used to look at your competitive landscape.  A word of warning, you must be able to look honestly at your business, take an outsiders vantage point or hire an outside consultant to help.

Start your SWOT analysis by taking a blank  piece of paper or Word/PowerPoint document.  Now label it with your business name at the top, next draw a line down the middle from the Top to Bottom and another line from Left to Right.  Now you have four boxes with the name written of your business written on top.  Similar to this…

Strengths and Weaknesses are internal to your company or if you are analyzing this from a competitor stand point (pretend you are sitting in your competitors shoes).  In the Strengths section list several things your company does well or has a competitive advantage in, things that your competitors would like to mimic or do better than you.  Weaknesses are things your company needs to work on such as a weak brand or poor management.  Take an honest look at your weaknesses, it can be very tough for a business owner or manager to make an accurate list of weaknesses .

Now you are ready to move on to the extrenal factors, Opportunities and Threats.  Opportunities are anything that you can’t necessarily control but can potentially exploit.  A few examples would be is the government about to provide a stimulus in the way of cash or tax breaks for a certain product or service, what about a new distributor that you know is about to offer a new product, a final example to think about is new technological advances that could save you money or time.  Think about a Threat as something that could potentially cause some serious problems to you and your company.  Do you believe a competitor has a pricing advantage (lower price point and more room in their margins), new unfavorable taxes for your product or service, or your customers are shifting away slowly to a better product or service.

With this information you can start to see different areas you can exploit to your advantage or plug a glaring hole in your company.  Another word of caution two people in your company could potentially come up very different SWOT analysis, so keep that in mind.  However, at least you have taken the first step to begin to understand your companies position as well as that of your competitors.

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