Dragons’ Den Season 13 shows a key problem in startup businesses

January 5th, 2016

Businesses are failing to adequately assessing their worth prior to pitching

While the show continues to grow in its viewers, those that are actually invested in the show have shown a decline in their business value. This is not to say that the businesses/inventors are not offering quality products, but that those seeking to have the investors of Dragons’ Den are not properly assessing their product’s value. A business must be able to understand their company’s worth and present their business in a truthful and ethical manner. Peter Jones offers guidance on his website, www.peterjones.com/business-guide/pitch-your-idea-for-finance/ , and advises: “Don’t … Come unstuck. Know exactly what you’ll be spending the invested money on and provide realistic valuations and projections.”

What is your business really worth? How can you value your small business?

One of the things which is dominating season 13 of Dragons’ Den is that businesses are presenting products with presumptions that they are offering something unique or something that is in demand. When it comes to selling your product or configuring your speech to investors, it is common that a business will want to drive up the cost and the appeal of the product being offered. However, to properly figure out how much your business is worth you should consider the earnings multiples, the entry cost , the cash flow, and the industry demand.

Earning Multiples

The earning multiple is the way in which you can determine the ratio of the investment to the price that you have put into the business. Keep in mind that when you are starting up a business that you must be realistic with your investment multiple. The multiple can be calculated using a P/E ratio (Price-Earnings ratio) to determine the cost. If your ratio is over 10 times the annual post-tax ratio then the expectancy for investment is bleak. Realistically, a ratio of 4 to 6 is ideal for small businesses pitching to investors. Only businesses which have shown tremendous capital and can back such an investment with facts and not idealistic projections may do well in the ratios closer to the 10 mark.

Entry Cost

When you are addressing your business or product’s worth then you need to calculate all the costs which are associated in the manufacturing, production, and selling of the product. It is not just taking the cost to make the product (which is usually a downfall of those seeking investors) but the final cost to start up a similar business with the product. For example: If you are offering a product that requires £10,000 to manufacture, another £3,000 for marketing, and an additional £5000 for additional costs then the start-up would be £18,000 not £10,000.

The Cash Flow

The value of your company may require a low entry cost, but if the cash flow of the business does not have a high ROI (return of investment) then the investor will be less apt to provide capital to your business or product.  To calculate the projected ROI a business should use the following equation:

ROI = [(payback-investment)/investment)]*100

What you need to do once you have the data

Collected valuation of your company should be taken as being a projection and not a concrete figure. Keep in mind that your investor is providing the financial capital needed to have a successful product. As such, present your product as being an investment. Where the value of your product does primarily weigh upon the financial return to the investor, there are other considerations which must be taken into account when determining the value of your product or business. Yes, you do want to ensure that your product will have a high ROI but even in such situations where there is a high ROI a business person will need to relate the following:

  • Consumer Demand – You must have a product that is in demand. Supply and demand is the basis of any business. If your product is widely available then your value of your business or product will be lower. However, if your product or business is unique or has a unique twist on a demanded product, the value of your business will be higher.
  • Actual Data – Market data and surveys based on large numbers are ideal in determining your company’s value. Even if a company has a demanded product with a high projected ROI, an investor will want to know that you have tested your product and that it has had a positive result.

Putting it all together

The value of your business is an accumulation of the cost, demand, and the projected return on investment. Businesses should evaluate their company, determine the weaknesses, and then seek help in the areas which are weak. Do not be idealistic in your assessment of your business, present your product/business in a transparent manner which will appeal to the investor. Dragons Den may or may not be your next stop for getting your product to the public, but with a realistic value assessment you are more apt to gain the capital from investors you seek.

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