Think About Boxes from Inside the Box
It’s a rare occurance on Dragons’ Den when an entrepreneur arrives with a valuation that is reasonable and a business worth investing in. This week, that happened, and perhaps there’s a reason why these entrepreneurs succeeded where many others have failed.
Bryan McCrea, Channing McCorriston and Evan Willoughby came pitching their business, 3twenty Solutions, which converts shipping containers into modular buildings. They were asking for $115,000 for 25% of their business, which had, in its first month of operations, $70,000 in sales. Their estimates for the first year of operations was about $500,000 in sales, which would triple each of the following two years.
Running at about 15% net profit, that meant the business was tracking to have $75,000 in profit in the first year. Their requested investment, with a valuation of $460,000 was quite reasonable, to the point that Robert Herjavec made the unusual move of making an offer on the condition that there were no other offers, at the price they were asking for.
Kevin O’Leary tried to muscle his way into a deal, made all the more difficult because of Robert’s pending offer, and was politely, and then not so politely, told to screw off with his offer of $115,000 for 50% of the business. It was pretty clear, though, that the three entrepreneurs were hoping for a deal from Jim Treliving or Brett Wilson, who had to deal with the fact that Robert left them little room for negotiation.
Brett, with his knowledge of the oil industry (which provided a significant number of potential clients for the modular units), made an offer of $120,000 for 25% of the business, raising the valuation slightly to $480,000. He was aware that part of what Bryan, Channing and Evan were looking for was a strategic investor, who would provide more than just dollars to their business. While investors will often take a seat on the board of directors, it is not usual (though not unheard of either) for them to take an active role in the running of the business.
The deal was accepted, and completed after due diligence.
What Bryan, Channing and Evan understood that so many pitchers on the Den do not is that an investment is not about free money, but about selling something of value. The investor is buying a piece of a business, and they expect to pay a fair price for it. To do that, one must be brutally honest about the value of their business, taking into consideration the work that has gone into the business to date, the assets owned by the business, and the sales history of the business. While some businesses can look to the future in calculating their value, that is the unusual case.
As CBC prepares for next year’s pitches for the Den (auditions are being held shortly – if interested, click here for more information), entrepreneurs hoping for a moment of fame would be wise to watch past episodes, and focus on the pitches that resulted in offers. Make sure you know your numbers, make sure you understand and can present the revenue model clearly.