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Wealth and Cash Flow Lessons from Shark Tank

By Keith Wheelan Subscribe to RSS | August 4th 2012 | Views:
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Will Your Investment Decisions Help You Sink or Swim? 

At the end of a busy week I look forward to winding down by watching…five human sharks attack unsuspecting start-up entrepreneurs.  Alright, that’s a bit overstated.  For those of you who haven’t yet seen it, “Shark Tank” is a reality show where early stage entrepreneurs seek funding from five successful and very wealthy business owners.

The business ideas are varied (everything from Talbott Teas to “Rent-a-Grandma”) and the pitches are often entertaining. But if you watch closely you’ll notice a common thread in how the sharks assess the feasibility – and value – of a business.  It involves the relationship between wealth and cash flow, and that same relationship applies to your personal investment decisions.

Each pitch starts with the entrepreneur’s proposal to the sharks, usually a request for an amount of money (say, $100,000) in exchange for an ownership stake in the business (20%, for example).  This in turn leads to the “information gathering” phase of the process, a 5-on-1 grilling by the sharks.

When evaluating an investment, think like a shark! 

Yes, ask the “wealth” question (Will the asset grow in value?)

but also ask the “sales” question (Will it generate cash flow?)

 What’s the first question they typically ask?  It’s “How much have you done in sales?”  There’s a good reason for this.  As experienced serial entrepreneurs, the sharks know that sales volume is an indicator of whether the business concept is viable (are enough people buying the product?)  But it also determines how quickly they can recoup their investment.  Higher annual sales means faster payback – followed by steady positive cash flow.  So the cash flow question comes first because it’s the shark’s most important consideration.

Separate but related to the first question is: What is the value of the business?  The answer to this is also important, but for a different reason.  A pitch from a recent episode illustrates the point.

 Sink under the weight of the asset or swim in the income stream?

The owner of a clothing business requested $500,000  from the sharks in exchange for a 15% ownership stake. What was unique about the clothing was its “technology enabled” pockets for cell phones, iPods and other electronic devices.  The garment design was protected by a patent.

Annual sales?  $5 million this year and an anticipated $12 million next year.   That got the sharks’ full and undivided attention.  That is, until the owner clarified that his offer was only for the asset value associated with the patent and not for the retail sales of the clothing.

After recovering from the blow, the sharks countered with offers that included part-ownership of what they called “the real business” – the retail sales.  They wanted a piece of the cash flow, not just the asset.  But the owner wouldn’t budge. So he walked away empty handed.  Game over.

The lesson?  When evaluating an investment, think like a shark!  Yes, ask the “wealth” question (Will the asset grow in value?) but also ask the “sales” question (Will it generate cash flow?)

Keith Wheelan - About Author:
Keith Whelan is Cash Flow Navigator’s founder, resident financial expert, and author of the “Wealth is Good, Cash Flow is Better” e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife Cindy, and their two sons live in New Jersey.

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