One of the most difficult things in the business world is figuring out the worth of a company. How much a company is worth has many practical applications. If business owners want to sell shares, they’ll need a rough approximation of the value. If a business partner wants to leave the company, all partners will need to calculate the existing net worth. At times, lenders and other interested third parties can seek information on a company’s worth. While there is a somewhat simple formula for understanding the net worth of a company, many skilled consultants will point out that the inputs for the equation aren’t always so easy to calculate.
A simple equation that requires work
When you try to calculate your own net worth, you simply add up the value of your assets and the value of your liabilities. You subtract liabilities from assets, and the resulting number if your net worth. The same is true for calculating business net worth, but it’s much more difficult to nail down assets and liabilities in the context of a company.
Adding up assets
The first step is to calculate the combined value of all of a business’s assets. An asset can be something tangible, like cash in a business bank account or the value of a building the company owns. These things are easy. Imagine, for instance, that you own a restaurant. The building and land are both owned free and clear, so you have $600,000 in value there. The chairs and tables within the building, along with the artwork completed by a local artist, add up to another $50,000. You have $100,000 in a business checking account.
With these things added simply, you own $750,000 in assets. Where things get difficult, though, is in calculating the value of assets that are not so tangible and permanent. You have a strong brand name, which you spent money to trademark last year. This is intellectual property that has at least some worth. You might also have a process that allows you to create burgers more efficiently than competitors. Perhaps you have a special sauce recipe that sets your ribs apart from the crowd. All of this has value, but it can be very difficult to put a specific dollar figure on intangible assets. You may also have accounts receivable that haven’t yet been paid. You can’t quite claim 100% of those because you aren’t sure they’ll be paid.
Many companies bring in an expert or consultant to help them calculate the value of assets that aren’t so clear. Once they add everything up on the asset end, they go through the same process for liabilities. Liabilities include any loans or liens owed to third parties. Salaries and accounts payable must also be considered to come up with an accurate figure. Finally, smart business people come up with a picture of potential liabilities that need to be sorted out, including threatened lawsuits or other things that might come back to bite the business. Liabilities are then subtracted from assets to come up with the company’s net worth.