Pips & Bounce
Pips & Bounce and is a restaurant from Portland, OR, that specializes in bar food and a ping-pong experience. It was established by two brothers who found that ping-pong really brought them together.
They created their first location in Portland to feel like a social club with oak paneled walls, good music, and good food. Additionally, they have a line of signature "pongtail" drinks (custom cocktails).
The business was started three years before and, in that time, had $974,000 in first year sales. In the second year, the company made $1,330,000 in sales and followed that up with $950,000 in sales in the most recent year. The entrepreneurs estimate that they have a 7% profit margin on gross sales.
Mr. Wonderful takes issues with the entrepreneurs' numbers, though not for the usual valuation reasons. Instead, he states that with the franchise fees and royalties, each location should do at least 14% in gross margins and he doesn't see that with the current business and is, thus, not yet ready to be franchised.
One of the entrepreneurs counters that they have just signed a lease for Minneapolis, MN, where they intend to open the ultimate demonstration store for all potential franchise partners. They estimate that establishing this store will cost in the neighborhood of $1,000,000.
In terms of prior investment, the entrepreneurs put in a combined $300,000 to open the first location. When questioned about their valuation, they state that it was based on the potential value of having 500 locations earning $100,000 per location which... does not impress the sharks.
Mark is the first to drop out, stating as he does so that the entrepreneurs have yet to prove their model. Daymond is quick on his heals, but states first that he loves the entrepreneur's story and their drinks but that he just hates ping-pong. Lori follows quickly behind them, stating that she actually agrees with Kevin and thinks that it's far too early for the entrepreneurs to think about franchising.
The entrepreneurs attempt to rally the sharks to their cause by stating that, yes, there is risk in their business but that none of the sharks would be million or billionaires if they hadn't taken risk in the first place. But Mark bristles and states that risk is the purview of the entrepreneur and not the investor.
Kevin keeps pushing the entrepreneurs on their numbers, but eventually concludes that they look "very, very bad."
Guest shark Maria Sharapova says that she likes the idea of a location based around an activity but that she wishes there were "more there" and drops out. Mark follows quick behind her, stating that the company is nowhere near ready to franchise and that the value makes no sense.
Kevin actually says that he thinks the value is somewhere near four to five times the net profits of about $75,000 but no where near the $5,000,000 value the company have themselves and he drops out as well because of the over valuation Pips & Bounce and gave itself.