Did 5 multi-millionaire dragons get this valuation concept wrong?

[japancool]

All he wants to know is, why, if a Dragon is offered £50k for 50% of the company, he says it's being valued at £100k, because the money is going to the company, not the entrepreneur.

Because the Dragon has parted with £50k and ended up with 50% of the company. It doesn't matter who the money goes to.

I fail to see how that is difficult for the OP to comprehend.

 

[Realervz]

It can be confusing at times, but its one of those things that you need to look at from first principles.

the Youtube link you posted isn't a great example- really he's valuing his business at 600k once he's put 600k in, and 1.2m when someone else puts 600k in. If you've each put £600 in a pot together, you'd rightfully expect to own half the pot.

I think your confusion stems from a misunderstanding of what happens on an equity investment.

remember there are three legal entities on an investment-0 the 2 investors and the limited company.

Typically in dragons den, let's say a company has 100 shares owned by one shareholder what is happening is that the company issues 100 extra shares to the new shareholder, in return that company is given money by the shareholder.

At what is called "seed" round (which is what Dragons Den is), the current shareholders will all have their shareholding "diluted" by the new shareholder. Ie you still own 100 shares, but not instead of the company issuing 100 shares in total, instead, it owns 200 shares in total. So the % of the company you own has been diluted from 100% to 50%. You still own the same number of shares though.

In Later fund raising rounds the founders are sometimes allowed to sell some of their shares to the investors- as an example, we have a client with a business which is now worth £120m (but the business is not quite profitable!) - client started it from scratch and owns 80% of the equity- the investor will put £30m- of which £20m will be new issue shares, and the client will sell £10m to the investor (so the client pockets £10m). The clients effective shareholding post-investment becomes 60% (these numbers are illustrative)- he's sold 10% of this 80% shareholder (leaving 72%) which is then diluted by 20% by the initial shares issued to the new shareholder.

Share cap tables and investment agreements can get awfully complicated!

I disagree they are not issuing new shares but transferring a percentage of the existing shares

If you all have really read through the thread, all that you have said is already covered and that's not what I wanted to ask. How equity investment works, how to derive at a valuation, issuing of new shares etc. all are covered in this thread.

The question is really simple, which is what @japancool has mentioned below.

All he wants to know is, why, if a Dragon is offered £50k for 50% of the company, he says it's being valued at £100k, because the money is going to the company, not the entrepreneur.

Because the Dragon has parted with £50k and ended up with 50% of the company. It doesn't matter who the money goes to.

I fail to see how that is difficult for the OP to comprehend.

I guessed you failed to understand the logic I am trying to explain.

If a Dragon is offered £50k for 50% of the company, and he is right to say that the business being valued at £100k, technically it means that the pitcher is offering £100k in value and the dragon is only offering £50k in value but both gets 50% of the business, you seriously think it is right?

However, if the £50k from the dragon goes to the pitcher instead of the business, it means that both of them each contribute 50k to the business or in another words, the dragon is buying 50% of the business from the pitcher, then it make sense to have 50% equity each.

So it absolutely does matter if the money goes to the business or goes to the pitcher.
If it goes to the business, it is called investment, business value increase to £150k (£100k initial value plus £50k new investment from the dragon.)
if it goes to the pitcher, it is called buying of equity, business value still remains at £100k as the £50k from the dragon goes to the pitcher instead of the business.

 

[japancool]

If a Dragon is offered £50k for 50% of the company, and he is right to say that the business being valued at £100k, technically it means that the pitcher is offering £100k in value and the dragon is only offering £50k in value but both gets 50% of the business, you seriously think it is right?

There's no point whatsoever in discussing this with you.

 

[fisicx]

If you all have really read through the thread, all that you have said is already covered and that's not what I wanted to ask. How equity investment works, how to derive at a valuation, issuing of new shares etc. all are covered in this thread.

The question is really simple, which is what @japancool has mentioned below.



I guessed you failed to understand the logic I am trying to explain.

If a Dragon is offered £50k for 50% of the company, and he is right to say that the business being valued at £100k, technically it means that the pitcher is offering £100k in value and the dragon is only offering £50k in value but both gets 50% of the business, you seriously think it is right?

However, if the £50k from the dragon goes to the pitcher instead of the business, it means that both of them each contribute 50k to the business or in another words, the dragon is buying 50% of the business from the pitcher, then it make sense to have 50% equity each.

So it absolutely does matter if the money goes to the business or goes to the pitcher.
If it goes to the business, it is called investment, business value increase to £150k (£100k initial value plus £50k new investment from the dragon.)
if it goes to the pitcher, it is called buying of equity, business value still remains at £100k as the £50k from the dragon goes to the pitcher instead of the business.

You are still trying compare apples to oranges. What is said on the ENTERTAINMENT TV SHOW is for the chumps who watch it. The actual contract negotiated behind the scenes is where the investment, equity and share allocation is all sorted out. Don’t try to read anything into the simplistic valuations on the programme.

 

[John Hemming]

how to derive at a valuation

There is not really any objective value for a business. If you have a listed company, for example, you can multiply the number of shares by the mid price to get a market capitalisation.

However, the different shareholders will value the shares at different levels and may change their minds hence if you wish to buy a controlling interest you are likely to have to pay more than the market capitalisation.

You can value a business in lots and lots of different ways and although there can be formulae different people will come up with different answers and although some methodologies are clearly rubbish there can be a range of methodologies that are entirely reasonable.

 

[WaveJumper]

There's no point whatsoever in discussing this with you.

I realised that about four pages ago and decided he was just trying to get his post count up as seems to be arguing around in meaningless circles.

At the end of the day it's as @fisicx again has pointed out "its a TV show" the real deals are completed after the show. What our OP also fails to realise is there are "in the real world" many different methods of valuing a business, there's at least a basic six to ten all depending on what sphere they are operating in.

People come in with crazy valuations offering in most cases a very small percentage of equity in companies which in most cases are not even making any money. He needs to forget about how they are valuing and focus on when are they (or put himself in their shoes) going to see a return in the investment. In the real world would you invest say 50k for whatever percentage of equity if the business is basically making zilch and as in most cases no more than a side hustle.

As above apples and oranges, he's up to 19 now not long to go

 

[Chris Ashdown]

If you own a Ferrari valued by yourself at £50K and your brother says I will go half's with you for £25K how much is the car worth

 

[AllUpHere]

If you own a Ferrari valued at £50K and your brother says I will go half's with you for £25K how much is the car worth

Based on the information given, there is absolutely no way to tell.

 

[Mark T Jones]

I realised that about four pages ago and decided he was just trying to get his post count up as seems to be arguing around in meaningless circles.

He's trying to prove a semantic point which, within his own defined confines is actually correct

We are all agree that in the context of actually investing in a business its irrelevant, but that isn't the question

 

[NickGrogan]

I guessed you failed to understand the logic I am trying to explain.

Either it's 5 pages of people who don't under the logic. Or the logic is wrong.

Which is most likely?

I asked you to value a company, in one post it was worth £1bn, in the next £10,000. Can you explain using your logic, how you destroyed 99.9999% of the valuation, by adding more cash to the company?

 

[gpietersz]

According to the Wikipedia article:
"The differences between the agreement televised and the deals proposed after filming have caused controversy regarding how entrepreneurs are treated on the show. In 2012, the show faced calls to be cancelled following allegations that many entrepreneurs were being misled to believe their pledge of investment was based on returns from equity when in fact the deals were little different to that of personal loans.[95]"

Thank you! I misssed that which i think is excusable as it is at the bottom of a different Wikipedia page.

So the reason for this is that the show is misleading. Its discussed on air as though they were making equity investments, where is it looks like they are in fact often making personal loans to the founders. The linked news article seems to confirm multiple case: https://www.independent.co.uk/news/...tors-and-calls-show-be-cancelled-8219598.html and with the people @OldWelshGuy nows it looks loans or a mixture of debt and equity are the norm.

It would be OK if they were lending to the businesses, but it looks as though they are lending to the founders as individuals, so shift risk to them.

 

[gpietersz]

The actual contract negotiated behind the scenes is where the investment, equity and share allocation is all sorted out. Don’t try to read anything into the simplistic valuations on the programme.

I think part of the problem is that what is shown is not just simplified for TV. It is that it bears to resemblence to the final deal at all. A personal loan to a founder is a very different animal to taking equity in a company. I found this interesting

Bannatyne and Paphitis put forward £225,000 for 49 per cent of his business. But half the money was a loan. Lees's accountant said he may as well take out a bank loan - and retain full ownership of his company. Lees gave up the complex negotiations with the Dragons five months later. He has gone on to build a hugely successful business with a turnover of £3m.

https://www.independent.co.uk/news/...tors-and-calls-show-be-cancelled-8219598.html

The investment is likely to be terms high advantagoues to the Dragons.

Of course there is an underlying point about using the price of equity as a measure of the value of a business. You can argue it is flawed, but there is no better alternative, or you can argue about the meaning of the word "value", which is pointless. Other than that, its a pretty simpleconcept.

 

[OldWelshGuy]

I don't think it would be legal for the dragons to pay a director directly and that director to gift shares, so again there is some misunderstanding.

The director has a fiduciary duty to act in the best interests of the company and I think they would find it almost impossible to justify having done this if they have taken cash and gifted shares.

A personal loan to a director is nothing to do with the company and drafting a document that allowed the director to loan that money to the company for shares might not be legal.

 

[gpietersz]

@OldWelshGuy I am not suggesting that what happened was that a director took cash and gifted shares. I am suggesting that either 1) the director was loaned money to invest in the busiess (e.g. by buying shares for themselves) or 2) the money was loaned to the business with a personal guarantee from the directors.

otherwise why does the article say the terms were "similar to a personal loan"

Incidentally, I wanted to ask what you meant by this:

in all the cases I know of personally it was loans for equity.

What exactly was the arrangement? Some thing with a similar effect oa convertible?

 

[Ozzy]

He's trying to prove a semantic point which, within his own defined confines is actually correct

Math is a fascinating subject. I love how it is so binary yet it can be used to argue almost any point and twist even the simplest of logic into confusion.

For example, I love this one;
Three friends go for a meal; the bill comes to £25 so they each pay £10 each.
£10x3= £30

The waiter takes the £30 and gives them each £1 change and keeps £2 for himself as a tip.

They originally paid £10 each but got £1 back so in the end they each paid = £9
So that's £9 x 3 meaning that they paid in total £27
The total paid of £27 plus the £2 tip comes to £29
What happened to the last £1, where'd it go?

Find me a real binary example of an investment that works to the OP principle and I'll agree with the argument, until such time I will quote what I said to my investors before they invested into my business; which was something along the lines of;
It doesn't matter what I claim my business is worth, you have all the financials and the business plan. Make me an offer and I'll either like it and accept it or I won't.

Business investment and valuation is not straight forward, which is why lawyers and business brokers exist in the M&A space.

 

[japancool]

Find me a real binary example of an investment that works to the OP principle and I'll agree with the argument, until such time I will quote what I said to my investments before they invested into my business; which was something along the lines of;
It doesn't matter what I claim my business is worth, you have all the financials and the business plan. Make me an offer and I'll either like it and accept it or I won't.

But that's really what the dragons are doing. The entrepreneur says "I think my company is worth this much", the dragons are saying "no, based on what you have told us, we think it's worth this much".

 

[Ozzy]

But that's really what the dragons are doing.

They're not, they are saying that as a negotiation tactic. The actual offers they make, when they make an offer, is not fixed to this formula - it's somewhere inbetween. It's just haggling and nothing more for dumbing down for, as has been said several times over, TV.

 

[OldWelshGuy]

Business investment and valuation is not straight forward, which is why lawyers and business brokers exist in the M&A space.

When we sold out it was simple, we were selling directly comparable product (SCCM Print) for ess than 20% that theirs was. With us out of the way they could raise their prices.

We had a large database and so on.

Buying a business isn't like buying apples

 

[gpietersz]

Business investment and valuation is not straight forward, which is why lawyers and business brokers exist in the M&A space.

A particular deal or offer of a deal implies the business is worth x. Whether it is actually worth x is anotehr matter. I think one problem here is that people are conflating the two.

 

[japancool]

They're not, they are saying that as a negotiation tactic. The actual offers they make, when they make an offer, is not fixed to this formula - it's somewhere inbetween. It's just haggling and nothing more for dumbing down for, as has been said several times over, TV.

But that's just semantics again. We know the valuation of the company isn't based on what's being said on TV. At most, that's a paper valuation. The point is, the dragons are making an offer at that time based, not on what the entrepreneur thinks their company is worth, but whatever the dragons think they can get out of it. And yes, I doubt that the offer is anywhere near as straightforwards as the show makes it out to be.

 

[DontAsk]

Math is a fascinating subject. I love how it is so binary yet it can be used to argue almost any point and twist even the simplest of logic into confusion.

For example, I love this one;
Three friends go for a meal; the bill comes to £25 so they each pay £10 each.
£10x3= £30

The waiter takes the £30 and gives them each £1 change and keeps £2 for himself as a tip.

They originally paid £10 each but got £1 back so in the end they each paid = £9
So that's £9 x 3 meaning that they paid in total £27
The total paid of £27 plus the £2 tip comes to £29
What happened to the last £1, where'd it go?

If anyone can't work that out, they must be stupid.

 

[AllUpHere]

If anyone can't work that out, they must be stupid.

I don't know; I had to think about it for a minute before I got my head round it. As soon as you realise the £27 includes the tip it's obvious, but I didn't twig on the first read through.

 

[Ozzy]

I don't know; I had to think about it for a minute before I got my head round it. As soon as you realise the £27 includes the tip it's obvious, but I didn't twig on the first read through.

Indeed, it's the way it's framed...which is my point about the valuation discussion in this thread. It's how it's framed

 

[Realervz]

Either it's 5 pages of people who don't under the logic. Or the logic is wrong.

Which is most likely?

I asked you to value a company, in one post it was worth £1bn, in the next £10,000. Can you explain using your logic, how you destroyed 99.9999% of the valuation, by adding more cash to the company?

Based on the 5 pages of responses I got, it really seems like most of the people don't understand the questions because responses mostly steer away from what is being argued. No offence, I do appreciate if you all are genuinely trying to answer my questions, but that's not what I am asking.

As for your questions, I am not sure what are you trying to prove but from what you are asking it shows that you don't understand what I am trying to ask too.

I realised that about four pages ago and decided he was just trying to get his post count up as seems to be arguing around in meaningless circles.

Sidetrack a little for "smartie" @WaveJumper. Regarding your post count theory, I guess there are much faster and smarter ways to up my post count than typing esay after esay just to explain and clarify what I am trying to ask and I am not sure why do I need to do that since I am not even from the UK and doesn't need to advertise anything here. The reason this is going round and round in meaningless circles is because as mentioned above most of the responses doesn't answer to what is being asked. It's either the reader did not understand what is being asked or not logical enough to comprehend the question.

The only few who can comprehend what I am trying to ask include @Mark T Jones. Some of the responses that at least shows understanding to the questions while debatable are:
1) The explanation is logically correct but it is irrelevant to the investment world as thing just does not work this way in the investment world.
2) The amount being asked for is already included in the valuation. (This makes the equation right but I have some doubt that it is included)
3) This is just an entertainment TV show, don't take their words too seriously. (Did they really, teach or present something incorrect?)

I guess after much discussion, I can't really get an absolute answer here like "you are wrong because your equation is missing X" or "the dragons use that logic that seems mathematically incorrect because ...".

The waiter takes the £30 and gives them each £1 change and keeps £2 for himself as a tip.

They originally paid £10 each but got £1 back so in the end they each paid = £9
So that's £9 x 3 meaning that they paid in total £27
The total paid of £27 plus the £2 tip comes to £29
What happened to the last £1, where'd it go?

Just for the fun.

They originally paid £10 each but got £1 back so in the end they each paid = £9
So that's £9 x 3 meaning that they paid in total £27
The total paid of £27 plus the £2 tip comes to £29
What happened to the last £1, where'd it go?

The red statement is incorrect. £27 is already including the £2 tips. The remaining £3 is the change given to them.

Find me a real binary example of an investment that works to the OP principle and I'll agree with the argument, until such time I will quote what I said to my investors before they invested into my business; which was something along the lines of;
It doesn't matter what I claim my business is worth, you have all the financials and the business plan. Make me an offer and I'll either like it and accept it or I won't.

You don't need any example. Just like your question above, it's math and it can't go wrong. An equation can only have an answer.

I valuate my business at £100k. You are the dragon and I don't care how much you think my business is worth. But if I ask you for another £100k investment for 50% share and you say that I am valuing my business at £200k then your statement is incorrect mathematically. That's what I am trying to say the entire time.

It's not about the dragon thinking that my business don't worth the amount I am valuing, or any negotiation tactic etc. just the math equation above, so don't go too deep into it.

 

[Fagin2021]

I valuate my business at £100k. You are the dragon and I don't care how much you think my business is worth. But if I ask you for another £100k investment for 50% share and you say that I am valuing my business at £200k then your statement is incorrect mathematically. That's what I am trying to say the entire time.

It's not about the dragon thinking that my business don't worth the amount I am valuing, or any negotiation tactic etc. just the math equation above, so don't go too deep into it.

Well, as you claim to know a bit about maths, perhaps you could enlighten us poor ignorant souls with a mathematical formula to prove your point. Shouldn't be too hard.

 

[Realervz]

Well, as you claim to know a bit about maths, perhaps you could enlighten us poor ignorant souls with a mathematical formula to prove your point. Shouldn't be too hard.

If up till here you are still asking this question, it shows that you didn't bother to read the main post or unable to comprehend. It has already been explained multiple times so there is no point for me to explain anymore.

 

[fisicx]

Your maths is correct but it is based on an incorrect set of suppositions. This is the counter argument everyone has been making. You are trying to extrapolate something from a statement made on a TV show whose purpose is to entertain the dumbed down masses.

 

[pentel]

If a Dragon is offered £50k for 50% of the company, and he is right to say that the business being valued at £100k, technically it means that the pitcher is offering £100k in value and the dragon is only offering £50k in value but both gets 50% of the business, you seriously think it is right?

My view is that the pitcher is valuing the company at £100k once they have the investor on board.

i.e they are saying "with the investment this company will be worth £100k". Not that the company is worth that amount without the investment.

 

[Ozzy]

You don't need any example. Just like your question above, it's math and it can't go wrong. An equation can only have an answer.

I don't know what business investment works like in Singapore but your logic you are trying to argue is the equivalent of "Is water wet?", it's entertaining to argue but ultimately no it isn't wet.
In a real business investment scenario if you tried to argue this case with me and I was the investor I'd entertain you for a few minutes, if I was bored, then I'd say "I don't care, I'm offering X for Y% take it or leave it".

 

[Fagin2021]

If up till here you are still asking this question, it shows that you didn't bother to read the main post or unable to comprehend. It has already been explained multiple times so there is no point for me to explain anymore.

You mean you can't.
I didn't ask for an explanation I asked for an equation.

 

[NickGrogan]

I valuate my business at £100k. You are the dragon and I don't care how much you think my business is worth. But if I ask you for another £100k investment for 50% share and you say that I am valuing my business at £200k then your statement is incorrect mathematically. That's what I am trying to say the entire time.

You value your business at £100k and you are going to stick to that. Good.

You ask me for a £100k investment - I agree and I give the business £100k. How much of your business do I now own?

All of it.

It's worth £100k and I invested £100k.

The fact that you're asking for a £100k investment, into a business that is worth £100k, means that you understand that the valuation of the business will increase at the same time as the investment is made.

ie, adding £100k (cash) to £100k (value) gives £200k (value).

QED

 

[OldWelshGuy]

Well I have looked at this, and based on the mindset of the OP, I'll not be making an offer and on that Basis, 'I'm Out' !

'Never confuse the battle with the war' is my position

 

[japancool]

Well I have looked at this, and based on the mindset of the OP, I'll not be making an offer and on that Basis, 'I'm Out' !

You mean, you're oot?

 

[OldWelshGuy]

You mean, you're oot?

NOOOOOO!

I'm Welsh not Scottish, I'm owt

 

[Realervz]

You value your business at £100k and you are going to stick to that. Good.

You ask me for a £100k investment - I agree and I give the business £100k. How much of your business do I now own?

All of it.

It's worth £100k and I invested £100k.

NOW... you have finally came out with something that is what I am asking but you can't get the logic.
For the first part, I am asking you to invest £100k more into the business, which already has £100k in value, why does it give you the entire business as you have claimed?
I have provided 100k worth of value into the business and now you have added £100k into the business, we both have provided equal value to the business which means we should have 50% share each.
If your friend has a can of beer which cost £1 and your friend ask you for £1 to buy another can of beer so that both of you can have a can of beer each, after you give you friend £1 and now there is 2 can of beers, so does the 2 can of beers ALL belongs to you or each of you will own one?

HOWEVER, if I am asking you to buy the entire business from me at £100k, then you will own all of it as the £100k you have given to me will go to my pocket and not into this business. You are buying the business from me. Just like you pay £1 to buy a can of beer from your friend, your friend keep the £1 and give you the can of beer, now the can of beer is entirely yours now.

What is so difficult to understand?

The fact that you're asking for a £100k investment, into a business that is worth £100k, means that you understand that the valuation of the business will increase at the same time as the investment is made.

ie, adding £100k (cash) to £100k (value) gives £200k (value).

QED

Using your example:
ie, adding £100k (Additional cash) to £100k (Initial value) gives £200k (New value)

My question has been why the dragon always say that the initial value is £200k? £200k should be the new value after their investment.

This is what I am trying to argue the entire time. Watch this youtube video to witness it yourself:
watch?v=NI7RuF7yY0Y&ab_channel=Dragons%27Den

This is one of the many they have been saying that.

Well I have looked at this, and based on the mindset of the OP, I'll not be making an offer and on that Basis, 'I'm Out' !

'Never confuse the battle with the war' is my position

If you can't understand my business, I rather you are out than you continuously giving me wrong advice and confusing others

 

[OldWelshGuy]

If you can't understand my business, I rather you are out than you continuously giving me wrong advice and confusing others

Was there need to be so ignorant? I and others have been nothing but polite to you and you start throwing around insults, why?

 

[Realervz]

Was there need to be so ignorant? I and others have been nothing but polite to you and you start throwing around insults, why?

Well I have looked at this, and based on the mindset of the OP, I'll not be making an offer and on that Basis, 'I'm Out' !

'Never confuse the battle with the war' is my position

Your above message doesn't seems very polite as well. Well, if I misread it, I apologise for being rude.

This is not the topic of this thread and should not be, so let's move on

 

[John Hemming]

Your above message doesn't seems very polite as well. Well, if I misread it, I apologise for being rude.

You are insulting people.

Some of the people who post on UKBF are involved in Corporate Finance on a personal basis both in terms of buying businesses and selling businesses. As a general point it is best not to be rude to people who you may wish to transact business with.

For the avoidance of doubt suggesting that someone does not understand something is in fact insulting.

 

[OldWelshGuy]

Your above message doesn't seems very polite as well. Well, if I misread it, I apologise for being rude.

This is not the topic of this thread and should not be, so let's move on

Certainly, moving on, and congratulations on being appointed as a moderator <this is a joke by the way in case the humour gets lost in translation.

Out of curiosity, what exactly is your business?

 

[Financial-Modeller]

Has it taken 120 posts to determine that a company with the funds (and contacts in the case of Dragons) it needs to achieve its ambitions is worth more than one that doesn't?