How to Calculate Your Small Business’ Net WorthLenders will want to know your tangible net worth, but you may also want to tally intangible assets that add value.
The net worth of your business seems like something you should know, but do you? Banks and other lenders and investors will want to know the number, and you’ll absolutely need it when it comes time to sell your business.
There are several methods accountants use to value businesses, but the most common net worth assessment is a straightforward calculation: the total assets of your business minus the total liabilities. Most if not all of the numbers you’ll need to do the calculation are readily available from your balance sheet.
Assets consist of property or equipment used primarily for your business, including real estate, hardware and inventory, as well as cash and investments.
Liabilities include all of your business’s debts and obligations — anything your business owes to another party. They include routine expenses like lease payments, accounts payable, interest payments and taxes.
Taking a deeper look
In principle, net worth calculations are straightforward. But it’s possible to overlook less obvious assets and liabilities.
Jon Amita owns two businesses and acknowledges the challenges of getting his net worth right.
“There is my trademark’s value, plus a whole list of customers who already own our product, good will in the market, as well as the capability to produce and our relationships with vendors.”
These are considered intangible assets. Not surprisingly, it can be challenging to properly assess the value of intangible assets. (A lender will probably want to know your tangible net worth, but you will want to know your total net worth if you’re planning to sell the company.) Scott Thompson, a managing principal at Bridge Business Consultants, recommends hiring a business appraiser to determine your business’s hidden value.
“Your business might have valuable patents, brand name recognition or even valuable real estate,” said Thompson. “And you don’t have to be a large company to have brand name recognition. In our small town of Statesville, North Carolina, we have a bicycle shop, First Flight Bicycles, with national brand recognition.”
That recognition has significant value that should be accounted for. “An experienced appraiser can help determine patent value, brand name value and in some cases even real estate value,” said Thompson.
There are a handful of sites that automate the net worth calculation. CNN, for example, has a Net Worth Calculator that prompts you to input all the most common assets and liabilities, so you’re more likely to capture it all if you don’t already have accurate balance sheets.
Bankrate.com has a similar net worth calculator. Designed for individuals, it’s easily adapted for business and includes a handy bar chart that estimates how your net worth will change over the span of the next 10 years.
One of the most sophisticated options is BizEquity. Rather than performing a straightforward “assets minus liabilities” calculation, it performs a more nuanced valuation by querying you about revenue, income, expenses, cash, receivables, inventory and other assets for a three year period, including projected numbers in the current year. It also asks about your projected growth, long term EBITDA (earnings before taxes, depreciation and amortization) margin, questions about stability of sales, the business owner and more. It is a powerful tool.
There are other ways to value a business, such as a discounted cash flow model. But calculating your net worth is relatively easy, and it’s a good number to know, even if you have no immediate plans to seek financing or sell your business.