Tasty Cheese manufactures healthy snacks from cottage cheese and chocolate, something Anna found to have mass appeal (though Arlene Dickinson didn’t seem to care for the snack). Her past efforts had made her business profitable, but she was looking to expand. She asked for $150,000 for a 20% stake in the business, which, considering the business made no money annually if it paid her a salary, was a fairly aggressive valuation.

Naturally, the dragons were reluctant to give her the valuation she asked for, and one by one they bowed out of the deal.

Except for Jim Treliving, owner of Boston Pizza.

Jim stepped up with an offer, though at a lower valuation than Anna had been looking for. Knowing that she was limited in negotiation room in terms of price, she turned the tables on Jim, asking for an additional feature in the deal. She asked that the product be sold in all Boston Pizza locations, something which would provide immense value to her brand.

While Jim did not promise the result, he did commit himself to looking seriously at that option, and the deal closed.

What this teaches about negotiation is that even when someone appears to be holding all the cards, there are still options. There are factors that can be negotiated that may not affect the price, but will impact the value of the deal to each of the participants. A good salesperson knows how to find those aspects of a deal and play with them to their advantage.

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1. This is about an investment, not trust. As such, be prepared to offer a fair deal based on what your business is worth today, not what you hope it will be worth in a year. If your valuation is off by too much, the rules of the Den will ensure that no deal can happen.
2. Know your numbers – you will be asked about sales, profit, expenses, margins, and projections. Make sure you have that information ready.
3. Explain your business in a single sentence. What need are you filling? What problem are you solving? It’s okay to tell a story, but you may be asked to summarize your business, in which case, one or two sentences should be all you need.
4. Know the industry and the competition – what are other people doing in the industry, and what sets you apart? What barriers to market exist? What has happened to other small companies that tried to enter this market?
5. Why do you need the money – sure, it’s nice to have extra cash, but the investors will want to know that their money is being spent for things the business needs, not things you, the owner, want.

Additionally, understand what expertise each of the investors has, and pitch accordingly. If your business needs help with marketing, Arlene Dickinson may be the investor you need to woo. If you’re looking into franchising your business, target Jim Treliving. Philanthropic based businesses may resonate with Brett Wilson, while the cold cash deals tend to connect with Kevin O’Leary. For technology businesses, be prepared to answer tough questions from Robert Herjavec.

If you come into the Den unprepared (and that includes rehearsing your presentation, having someone drill you on the numbers and play devil’s advocate in regard to your business), then it should come as no surprise that you don’t get a deal. Prepared and ready with the facts? If you don’t get a deal, you will, at least, walk away with some good advice.

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Her asking price was $100,000 for 40% of the business, which was bringing in about $200,000 in sales of protective rain gear. Her specialty product, a cover for golf bags, was being used by professional golfers – and not because she paid them to do so. The business had a solid product, or line of products, and yet there was something missing.

Arlene Dickinson spotted the missing piece – Carolanne had put her heart into the business for many years, and was done. She didn’t have the motivation to bring her business to the next level. Whether it was a matter of being bored, frustrated with a lack of progress, or just ready to move on to something else – the time had come for an exit.

Carolanne pitched her product well, and pitched her business well. She even noted what the flaw in her business was, that she needed to bring someone in to breath new life into the business. The offer she received reflected precisely that, and made a first for Dragons’ Den.

Arlene offered her $200,000 – for 100% of her business, with a royalty of 5% being paid over the next five years. The conditions were basically those which would involve putting into place a new management team – and Carolanne would have her exit. The offer was accepted on the show, making it the first time that someone sold their business by pitching on the Den.

Every business owner needs to know their exit strategy. Whether it will be to sell the business, merge, hire others to run it for you, there needs to be a way out. If opportunity presents itself to realize your exit strategy, then as long as you are aware of what that strategy is, you’ll be prepared to take advantage of that opportunity.

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The 7 Virtues based out of Halifax is a perfume manufacturer, with a twist. Rather than look for easy sources of flower extracts to form the basis of the perfumes, Barb targeted Afghanistan, where the orange nectar needed for the perfume could provide an alternative to the other cash crop in the region – poppies. Paying competitive prices for the nectar (the estimated cost of a liter of nectar is $8,000), she gave farmers a lucrative, legal option for their fields. Additionally, this source of legal funds would result in hundreds of jobs, creating a boost to the regional economy.

To some degree, Barb was overpaying for the supplies – with the caveat that it provided her with a good marketing line for the business, which would make it even easier to sell her product. Additionally, with the high margins perfumes are able to manage, Barb had some room for flexibility in her purchasing prices.

As her presentation proceeded, Barb demonstrated her business acumen – she managed to break even within her first month of operations, and was unable to keep up with demand. While social conscience played a role in her business, Barb was quite clear: The 7 Virtues was not a charity.

Running a business based on social responsibility can have many benefits, and it does not need to be mutually exclusive with being profitable. With the right person in charge, the business can end like Barb’s – with an investment from Arlene Dickinson, Brett Wilson, and Jim Treliving.

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The basics of the business model is that Frogbox drops off and picks up sets of hard plastic boxes which are sturdy and waterproof, at a cost to the consumer on par with using new cardboard boxes. A quick check of their website shows that renting 35 boxes with a dolly for a week would cost about $109 plus a delivery fee (in the case I looked up, the delivery fee was $40).

Robery Herjavec and Kevin O’Leary made the first offer with a valuation of $400,000 to which Arlene Dickinson pointed out that the offer was ridiculously low. Jim Treliving and Brett Wilson then put out an offer with an $800,000 valuation. Arlene, who had been pushing a higher valuation, made an equivalent offer to that from Jim and Brett.

Doug Burgoyne, after some discussion, came back with a request – that Jim and Brett join their offer with Arlene, which would mean that the investors would bring the full set of experiences needed. Jim, of course, with his various franchises, could show them how to scale their business to add new cities to their list. Brett could provide more general business experience. Arlene, the master of marketing, would help in bringing their brand into the public awareness.

On air, the dragons accepted, and the deal moved forward with the three dragons. However, after the show, Arlene stepped out of the deal when it became difficult to determine the exact role she are her business, Venture Communications, would play in the marketing of Frogbox. However, Jim Treliving and Brett Wilson continued with the deal and closed recently.

Part of coming on the den with a pitch is being prepared to explore new options. An entrepreneur who believes they know how to run their business better than anyone else and cannot listen to new suggestions will find themselves on the receiving end of harsh criticism from the dragons. At the same time, there are aspects to every business that are truly best understood by the people in the trenches.

Doug was aware that expansion was the key to making the deal go forward. The two offers dealt with the problem in different manners. Jim and Brett were likely to focus on the ability to franchise the business (starting in a new city had a cost of about $60,000 which is not unreasonable for a franchise model). Arlene was more likely to focus on how to market the business more extensively. During growth, both aspects of growing the business are important, but one needs to dominate the other.

Ultimately, the business would take one of the two paths, and that would be determined by conversations between the owners and the prospective investors. As smart business owners, they made the decision before the deal closed, and will be more likely to see success in their growing business.

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Entrepreneurs often think that if they don’t act quickly, the opportunity will disappear. And there’s never been anything more false than that.

The initial reaction to this is that Arlene may have erred in her statement – after all, opportunities come and go, and rapid action is often needed to take advantage of a given opportunity. Reflection, however, shows that Arlene’s years of experience are coming into play as she highlights one of the critical issues with an entrepreneur’s mentality.

It is true that opportunities come and go, and that action is required if you are to take advantage of such an opportunity. However, even when action is required, it should never be done on the basis of it leaving, but rather, because the opportunity is a good one. That is, the action should be taken because after careful evaluation (which is not necessarily a slow process), it was determined that the benefits of the opportunity are worth pursuing, and you are capable of succeeding with it.

As an example, a person who manufactures custom jewelery may have the opportunity to get featured in an internationally read magazine. This would have the potential to seriously increase her exposure, and then sales. However, reflection would show that since she crafts each order herself, the realistic limit on the number of orders she could fulfill is much smaller than what that exposure would provide. As such, the exposure would have some short-term benefits, but until the infrastructure is in place to handle a major increase in volume (for example, using some junior designers to produce the work once it has been designed, with a hiring structure that is easily scaled), the opportunity would actually be bad for the business.

This has happened to many businesses, where they over-extended themselves, and then found themselves unable to meet demand. The action that precipitated the situation was often one of lost opportunity – or rather, a refusal to acknowledge that some opportunities should not be acted upon. If a business wishes to be successful, they need to learn to reflect and to act on careful evaluation relative to the amount of risk the opportunity can create.

And yes, sometimes you will have to act, and sometimes you will have to make decisions quickly. But the decisions should be based on logical evaluations, not emotion.

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Jason Bellissimo came onto the show pitching his new tray to assist waiting staff at restaurants, which he called the Handi-Tray. (In my search for his site, I discovered that there’s actually another product called the Handi-Tray, which is not, as far as I can tell, in any way connected to Jason’s product.) It was designed to allow for easier use by wait staff, along with a spot for including advertising around the edge of the tray.

The first dragon who I thought would be interested was Jim Treliving, who could easily get it into his chain of restaurants, Boston Pizza. However, while he liked the product, Jim didn’t feel it was right for him, with a limited appeal and a lack of connection to the advertising component of the tray.

Next was Arlene Dickinson, who might have been interested on account of the marketing aspect to the product. The display around the rim could have been a secondary product to the tray with its own marketing appeal, but again, Arlene indicated she could not connect to Jason or his Handi-Tray.

Brett Wilson, though, was interested in the product and in investing, but not at the stated terms. While Jason offered a royalty based investment ($1.50 per unit sold), Brett wanted more say in the business itself, and offered the $100,000 investment in exchange for 50% of the business.

The concern Jason had was that he wanted to retain creative control of his company, though he seemed to understand that his need for cash and connections far out-weighed his need for control of the business. An equal partnership also meant that he was likely to gain significant input from Brett along with the cash, the kind of mentorship that many small business owners dream of having. The deal was struck.

Sometimes, it really is worth giving up control of the company, if the person gaining that control can bring more value to the company that you currently have. Additionally, if your business is facing more than just cash flow issues, then looking to banks and such for loans and lines of credit may only serve to lengthen a problem while hiding another.

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Courtesy of WarriorWriter on Flickr.com

Robert Simoneau of Saint Laurent, Quebec, came on the show representing his company, Posilight. His company has developed a product which, if not completely innovative in nature, has an interesting application. They manufacture light bulbs for refrigerators in stores which use a large number of LED lights to provide directed light with higher energy efficiency. He had, at the time of the show, secured trial runs in two large grocery stores.

He was asking for $75,000 for a 10% stake in his company. Jim Treliving, thinking of his company Boston Pizza, commented that merely using the efficient lighting in his stores could recover the full investment in a single year. Robert Herjavec, though, couldn’t get excited about a light bulb, and bowed out.

Kevin O’Leary, acting typically aggressive, tossed an offer on the table. Trading equity for royalty, Kevin offered to invest for an 11.5% royalty until the investment was paid back, reducing to 5% thereafter. In addition, there would be 1% equity. Jim quickly offered to join him, followed by Brett Wilson.

With three of the Dragons in on the deal, Robert Simoneau tried to get Robert and Arlene Dickinson to join the deal. However, Robert was not interested. Arlene, however, decided that this would pose an interesting marketing challenge, and liked the idea in general, and so she tossed her hat into the ring. That put 4 dragons together on a deal which was rapidly accepted.

What’s interesting about this deal is the nature of the product that caught the interest of 4 dragons. The product doesn’t have to be exciting. It doesn’t have to be a market leader. It just has to strike the right chord with the investors. Having solid numbers behind you when presenting make it easier to seal the deal.

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Patents and Money

What was surprising was the second deal, which was not typical of the show, and the reactions of the various people involved was not surprising.

Richard Abramowicz of Yo Mama Gear came on the show asking for $3,300,000 for 30% of his business – in US dollars. His business model, however, had little to do with clothing or equipment (although that would turn out to be a part of the model).

Richard owned the patents and derivatives on the phrase “Yo Mama”, held here in Canada since 1988 and in the US since 1998. That means that anyone who uses the phrase is violating his patent – for example, Urban Outfitters, Zazzle, Cafe Press, and American Apparel. (His claims have not been verified, but those companies were the ones he mentioned on the show.) His business plan is to sue them for patent infringement.

Naturally, Arlene Dickinson was disgusted by the business model, and would have no part of it. Brett Wilson wanted no part of it, and neither did Jim Treliving.

Kevin O’Leary, however, loved the idea. Robert Herjavec talked about the technology sector, where this is a viable business model, and can be quite successful. (As an example, look at i4i and it’s case against Microsoft.)

The two of them decided to take the deal, but on very different terms. Kevin proposed that he pay $1.00 for 51% of the company, which would give him the ability to file suits against whoever violated the patents. Should those suits be successful, he would pay Richard from the proceeds of the case the balance owing: $2,999,999 US dollars.

This was an unusual deal, as the money is not made from the ability to sell or market a product or service, but from the ability to protect a patent – and in this case, the patent of a phrase that many people have been using for decades, unaware that it had been patented, or even patentable.

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Mark Bajramovic and Dr. Oren Tessler of Ottawa, Ontario, presented the Air Mouse. Originally developed in order to reduce Carpal Tunnel Syndrome, it has applications in a variety of areas. The invention looks like a glove, and works like a mouse on a dedicated pad. They expect to retail the device for about $100, which is a good price point for a quality mouse.

They came on the show asking for $75,000 for a 15% share in the company. To back them up, they pulled out a letter of intent from a manufacturer agreeing to produce the device, pending them getting sufficient funding. The investment was to be used to refine the prototype and to move into production.

Robert Herjavec and Kevin O’Leary got into a brief debate about how to market a product like this. Robert felt that it could be marketed as being a “cool” device, appealing to the gaming industry. Kevin disagreed, saying that for people who suffered from carpal tunnel syndrome, a device like this could become a necessity, thereby pushing up the price.

Jim Treliving was concerned about the asking price – why weren’t Mark and Oren asking for more money? (Their response was that rather than get into an argument with Kevin O’Leary, they just made a fair evaluation.)

Brett Wilson was quiet for this deal – only saying that he liked the idea, but wasn’t going to invest.

Arlene Dickinson then made an offer – $75,000 for 15%, with the caveat that there was not yet another such product on the market (there isn’t). With such an offer, the other Dragons did not have much room to counter – after all, Arlene was offering exactly what Mark and Oren were asking for.

After some pushing, Mark and Oren managed to get Robert to go along with Arlene on the deal. Robert, with his experience in the computing industry, could really help them move their product through the computing world. Arlene’s marketing expertise would balance that, pushing the product out at the gaming industry.

The deal was struck.

This deal shows that if you know what you have, and know what you’re worth, it doesn’t have to be so tough on the Den!

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John Marr and Jonathan Mackenzie of Mackenzie and Marr Guitars came on the show with a handmade guitar that retails for about $1,000. In a daring attempt to prove the quality of the guitar, they had Kevin O’Leary do a blindfold test of their guitar against a $5,000 guitar made by an established brand. When Kevin was informed that he had chosen the $1,000 guitar as the better instrument, he was sold.

The two friends were asking for $35,000 for 35% equity – valuing their business at the price of 100 instruments (of course, costs need to be subtracted, but still, not a large amount). Their plans for the money included moving manufacturing to China, and increase their ability to build more of the instruments.

The catch is that they are selling their guitars solely via their website, which means that potential buyers aren’t going to be able to try out the guitars. Therefore, they will need endorsements in order to encourage potential buyers that it’s worth the risk. Arlene Dickinson, concerned about precisely this issue, declined to invest. Likewise, Robert Herjevec declined for similar reasons.

Jim Treliving, Brett Wilson, and Kevin O’Leary decided to put in a group offer, but not at the terms on the table. Each of the three investors would put in $5,000 for 5% equity in the company. The balance of $20,000 would be given in exchange for a royalty of 5% once the initial investment had been paid off. Until then, the Dragons wanted a 10% royalty.

John and Jonathan felt that 10% was too steep, and wanted to start at 5% from the beginning. The Dragons countered back with 7% from the beginning, with 5% once the investment had been repaid. The offer was accepted, but not before it looked like the two friends would talk themselves out of a deal.

Putting your product to the test on national TV is a big risk, especially when you can’t do a dry-run beforehand. But when it works, the risk can prove to be very rewarding!

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Kelvin.23 - a great multi-tool

Wednesday night was the first episode of Season 5 of Dragons’ Den on CBC, and it was fantastic. Also called the Celebrity Episode, 3 well-known TV celebrities were on hand to endorse great business ideas.

For fashion, there was Jeanne Beker from fashion television. Mike Holmes was there to check out the tools (and inform one Den hopeful that she better make sure her liability insurance is paid up). Debbie Travis, a well known expert in home decorating, was there to check out the Kelvin.23, the subject of this post.

Kevin Royes from Vancouver invented the Swiss Army Knife of home decorating, and everyone on the show loved it. Called the Kelvin.23, it features a variety of tools that will let you do most light to medium jobs around the house:

With 23 essential features integrated into this one compact design, kelvin.23 is ideal for anybody in need of a quick fix. It hammers, screws, measures, levels and even shines a bright light when you need it most. Made from cast aluminum, zinc, carbon steel and ABS plastic…kelvin.23 is built to last.

The deal Kevin was asking for was $200,000 for 10% – and he had $250,000 in sales during the preceding 6 months prior to the filming of the show to back up his $2 million valuation.

The first Dragon to decline was Kevin O’Leary on account of the initial description of what the money was to be spent on – manufacturing. There’s risk in manufacturing that Kevin O’Leary felt was not intrinsic to the business. While further questioning of Kevin Royes revealed that he intended not to set up a factory, but to directly negotiate the manufacturing process, Kevin O’Leary remained out.

Jim Treliving, however, saw a bargain at $200,000 for a solid business, and offered his money. When Arlene Dickinson asked to go in on the deal, Jim balked, and so Arlene made the same offer on her own. Robert Herjevac offered to match Jim’s offer in conjunction with Jim (that is, combined at $400,000) for 25% of the company, and Arlene joined the partnered bid.

With three of the Dragons vying for a piece of his company, Kevin Royes stepped out for a quick consultation with his wife and his marketer for the U.K. On his return, he countered with an offer for $500,000 for 25%, which, after some brief discussion, was accepted by all three.

This was someone who played his cards well. Kevin had a solid business, impressed Debbie Travis, who would then feature the product on her show and record an infomercial as part of the deal. He had sales to back up his valuation, putting him in a strong bargaining position.

But most of all, he impressed the Dragons as soon as he did his demo. At that point, they were interested in investing, and he could stick to his valuation, and they would pay for it.

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There were, as usual, two deals on the Den. The second was a case of Brett Wilson helping to boost creativity and dreams on the part of two girls, 11-year olds Abby Somer and Megan Boudreau who invented a game called Let’s Dance Board Game and came on the show asking for $10,000 for 50% of their company. Rather than invest in the abilities of the two girls to sell their product, who had yet to sell a single unit, Brett gave them $500 to get them started. If they made money within a year, they could pay him back, but if not, he would write it off. This went against the rules of the Den, which state that you have to get all the money you ask for in order to get a deal, but hey! it’s the holiday spirit!

The other deal, which actually happened first, was presented by Allan, Patricia, Melissa, Jordan, and Amanda Kotack for their company, Cosy Soles. Retailing at about $40 a pair, the family developed the product in response to a need for heated slippers, and have created a second product, heated mittens, which retail at about $25 a pair. Their business was growing, with a steady increase in sales over the last couple of years.

They came on the show asking for $150,000 for 35% equity. The problem, however, was not in the valuation, which seemed fairly accurate, but in the fact that none of the 3 children would get involved full-time in the business. This aversion to taking risk drove most of the Dragons away from the deal. It was as though the family wanted someone to come in and take over the business, and pay them a salary for their work.

Brett did give them a deal, but on different terms. He gave them $30,000 in exchange for 10% equity in their company. The balance of the money, $120,000 was given as a line of credit to help them offset their expenses in the short term. He made a clear point, however. The family would not be getting his time.

The lesson here to future entrepreneurs – going on Dragons’ Den is not like going to the bank with a pitch for a business. At the bank, all you want, or can expect to get, is money. On Dragons’ Den, the coveted deal includes expertise.

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The deal which was more interesting was between Ross Lipson & Howard Migal of Grub Canada, and Brett Wilson (yet again). They came in asking for $200,000 for a 20% stake in their company. According to their site:

GrubCanada.com allows you to order food online from all your favourite restaurants for delivery or take out. We make ordering food, fun, fast, easy and much more convenient…

How It Works?

1. Place order online for delivery or take out.
2. Restaurant receives and confirms order via email.
3. Restaurant prepares and delivers or you pick up your meal.
4. You enjoy the hot, fresh food that just came so quickly and easily!

However, once they presented their numbers, it was clear that their valuation was priced too high at $1,000,000. In the month before their appearance on the show, their income was a mere $12,000. Extrapolating based on their growth and sales forecasting, their annual, after-tax income for that year would be about $70,000.

Ross and Howard, however, knew their company, and the numbers. Their membership was growing consistently between months. Sales were on the rise. Their biggest issue was marketing, and pushing their site around. While their valuation was high, consideration was being given for the fact that they were a young company, and still undergoing natural growth.

Kevin O’Leary started the negotiation with an offer of $200,000 for 50% of the company, to which Robert Herjavec joined in, but contingent on the willingness of Jim Treliving or Arlene Dickinson to join the deal. Arlene, however, was not interested, as she found herself attracted to the business smarts of Ross and Howard, but not the idea itself. Jim was also not interested on account of their business model.

The business makes money by taking 9% of the price of any food ordered from the restaurant as a royalty. Jim, as owner of Boston Pizza, found this to be quite steep, and felt that Ross and Howard would have a hard time getting franchises to be interested in working with them. As soon as Jim declined the deal, Robert backed out, and Kevin decided to withdraw his offer.

At this point, Brett made his offer – $200,000 for 50% of the company, and 1% of the 9% royalty being charged to the restaurants. The other dragons encouraged Ross and Howard to accept the deal – at a $400,000 valuation, they were still getting a higher valuation than their numbers justified, and they were not likely to do better from anyone else (not that there was any other deal to discuss).

The end result? Ross and Howard accepted the deal, and Kevin was left asking if this was the deal that got away from him.

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To start, there was the disaster of the first pitch. While I am not an expert in copyright and trademark law, what the first entrepreneur did was foolish. Branding herself with a name similar to a franchise empire owned by one of the Dragons, and then stressing that point, is a way to increase the risk of investing for any of the Dragons. First rule of pitching to potential investors – don’t piss them off. While I think she has a viable business model, she may be forced to re-brand her business to prevent a lawsuit.

The first deal that was made was pitching to the fact that the Dragons would like the product (which they did) and that there would be a solid business plan behind it, reflecting an accurate understanding of the product and the market (which there was). Schmotoboard is essentially an electronic skateboard or snowboard, and there is definitely some appeal there. Entrepreneur Trevor Bielby worked hard to develop his idea and bring it to market, working part-time on the project with a few other people.

This idea appealed to the Dragons on multiple levels. First, Trevor knew where he stood, why he needed the money, and exactly how much he needed. Second, the product demo sold several of the Dragons to make a purchase even before they heard what the deal was. This immediate interest and ability to make quick sales, coupled with the fact that he already has stores willing to carry his product, makes this a viable business. Brett Wilson was sold on this, and gave him a rounded up amount (by $0.65, to be exact) for 50% of the company, which was accepted, and Jim Treliving joined the deal at the last minute. This was a fast deal, and will likely be successful for all parties.

The second deal was something more along the lines of what I spend much of my time doing – working online on a variety of sites. Scribble Live allows people to create a linear feed of information from a variety of sources, and has already been marketed to various large companies. Their business model is not built on ad revenues, but on subscription fees, which is more stable, predictable, and better paying. They also provide services to customize their product for their clients.

After various squabbling between the Dragons, two offers were tabled. One was between Arlene Dickinson, Jim Treliving, and Kevin O’Leary, giving the full amount ($250,000), but for 50%, and Arlene wanted the right to confirm that the site was as marketable as they were claiming. The other offer was exactly the same, from Brett Wilson, but without the verification. The pitchers, Michael DeMonte and Jonathan Keebler, countered with 30% equity (up from the initial offer of 20%). Brett gave the trio of Dragons the first choice of accepting the counter-proposal, or negotiating from there. However, Arlene, Jim, and Kevin had already agreed they would go as low as 30%, and, rather than risk losing the deal to Brett at that price, decided to take the 30% for their investment.

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