Business Valuation Calculator for Shark Tank

This calculator can help estimate a company’s valuation based on the investment amount and the equity percentage given to an investor.

How to use the Business Valuation Calculator for Shark Tank?

Every Shark Tank participant requests an investment amount in exchange for a percentage of equity, or ownership, of the business. For example, during Shark Tank Season 15 episode 14, Flora Pod made a deal with Lori Greiner:

"For 300,000 in exchange for 15% equity, and 5% advisory shares"

Flora Pod deal terms

This calculator will calculate the valuation by using the formula:

[math]\Large valuation = \frac{investment}{equity}[/math]

In the example above, if there is a $300,000 investment for a 15% equity, then the formula would look like:

[math]\Large valuation = \frac{300,000}{0.15} = 2,000,000[/math]

Using the calculations above, the Flora Pod business is valued at $2,000,000.

Do You include Advisory Shares When Calculating the Valuation?

Advisory shares are often discussed during negotiations at Shark Tank, and they are important because they represent ownership in the company, and are part of the total outstanding shares. However, there are certain situations where advisory shares might not be included into a valuation.

For example, if advisory shares are subject to a vesting schedule and have not yet vested, they may not be included in the current valuation. This is because these shares do not represent current ownership but rather potential future ownership if certain conditions are met.

In the example above, the deal included 5% advisory shares for Lori. If we included them in the valuation calculation, the numbers would look as follows:

[math]\Large valuation = \frac{300,000}{0.15+0.05} = \frac{300,000}{0.2} = 1,500,000[/math]

Therefore, the valuation in this case would be $1,500,000. As you can see, advisory shares can make a big difference.
In the specific case of Flora Pod, the advisory shares are not vested yet, so we don't need to include them in the calculations. To do that in our calculator, just add zero under advisory shares.

Another case when advisory shares can be excluded is when advisory shares are granted, but the advisors do not provide the expected value to the company. Or even in the case when the relationship with the advisors ends prematurely, the impact of these shares on the valuation might be reassessed.

In some cases, companies may choose not to grant advisory shares at all, especially if the advisors do not contribute significantly to the company's growth or if the equity could be better utilized elsewhere.

Is Valuation Affected by Loans?

An interesting article published in the Harvard Business Review addressed this point. Contrary to what many think, a loan can positively affect a company's valuation as long as it is not excessive. Basically, a loan affects a business valuation through:

1. Leverage: The use of debt can increase a company's financial leverage which can, in some circumstances, increase the company's overall equity value. However, this mainly hinges on the company successfully investing these borrowed funds into operations that yield a higher return than the cost of the debt.
2. Tax Advantages: The interest cost of debt is tax deductible, essentially providing a subsidy from the IRS to the debtor company that can increase the company's value by increasing the funds it can distribute to its suppliers of capital.
3. Risk and Bankruptcy: Although debt can increase a company's value, excessive debt can lead to financial distress and increase the risk of bankruptcy. This elevated risk can affect the company's market value and limit its ability to raise future funds, which can harm its strategic goals, reduce its competitiveness, and lead to eventual decreases in company value.
4. Capital Structure: The exact capital structure of a company, including its blend of debt and equity, significantly influences its valuation.

Given these points, while borrowing can add to a company's value, it is important to balance the potential gains from financial leverage and tax advantages with the potential risks and costs of financial distress.

If you are interested in calculating a personal of business loan repayments, we have a tool that can break down your monthly, quarterly, and yearly loan repayment calculations.

References

• HBR Valuation and Loan: https://hbr.org/1982/07/how-much-debt-is-right-for-your-company