The start of Series 11 of Dragons' Den kicked off last night with yet more ridiculous business valuations and lack of financial knowledge.
This first episode saw one of the best so far ... “Mr Wrap It Up” asked for a £500,000 (yes half a million!) investment for 11% of his business. That makes his business worth over £4.5m - in his mind. I must admit that his knowledge of his finances was rather impressive – the previous and current turnover and profit figures just rolled off his tongue as they should do for ANY and ALL business owners.
However, whilst making good profits, £180k in 2012 and projecting £250K in the current financial year, the finances just didn’t add up and the Dragons agreed. Surely with all that profit the business would be able to secure some bank or other financing for the building of premises without giving away any shareholding.
All that aside, the lack of financial acumen for some “entrepreneurs” going into the Dragons’ Den beggars belief. OK, so not every business owner needs to be an accountant but by golly if you are trying to persuade someone to invest huge amounts of money in your business you ought to know your finances better than you know the names of your other half, your children, your mother and anyone else important in your life!
What you need to know
For all previous years, the current year and projections for the next three years, you should know:
- Gross profit = Turnover – Cost of sales & direct costs
- Gross profit percentage = Gross profit / turnover x 100
- Net profit = Gross Profit – Indirect costs & expenses
- Net profit percentage = Net profit / turnover x 100
It would also be useful to have your cash, bank and any liability figures to hand – in fact an understanding of the balance sheet and the ability to talk through the position to anyone asking about it.
Of course, you need to make sure that the projections are realistic and based upon robust assumptions such as signed orders and new contracts – you may well be challenged if you spout ludicrous figures.
Does your Business Valuation stack up?
Taking a hard look at those figures you need to ask yourself if the valuation that you are putting on your business really stacks up or have you valued “vapour wear”!
Remember that the current business valuation is without the investment and without the expertise of a Dragon investor. Can you really justify the valuation figure or have you plucked it out of thin air?
The pitches to the Dragons often lack information on how the valuation was arrived at and why the entrepreneur thinks the business is worth that much.
Remember that this is a business investment decision – pure and simple.
The fact that the business may be “your baby”, your pride and joy, something that you’ve invested thousands of pounds in or whatever emotional reason you’d like to present is of no interest whatsoever to the Dragons. They just want to see when they will get a return on their investments and how much they are likely to multiple their investment by.
What do you need the money for?
And finally, if you’re asking for a pot of money you need to be able to articulate where the money will be spent and what return that spend will yield.
Not good TV
Clearly you may not know all of the figures or even all of the terminology that I have used here but before you make an appearance on national TV I would suggest that you “learn your lines” otherwise be prepared to be made to look a fool.
But of course if you did present all of the above it wouldn’t make very good TV – would it!