When selling your business, one of the things you might find helpful is knowing your company’s net worth. Continue reading this article to find out what net worth is, and how you calculate it.
What Is a Business’ Net Worth?
A business’ net worth is an indicator that shows the value of your business assets after liabilities are subtracted. Net worth is the total amount of income that is left over after all debts are paid. Net worth is helpful when you want to assess your financial health, get more funding or sell your business.
While net worth is one of the things to look at when you are valuing your business, that isn’t all there is to it. When you look at business valuation calculations on a site like Valuator, you will see there are many other factors that contribute your business’ value.
Calculating Your Business Net Worth
When it comes time to calculate your business’ net worth, the process is easy. You only need to subtract your liabilities from your assets. Your small business balance sheet should have all of the information you need for this equation.
Your business’ assets all company-owned items or properties which have value. Assets can pay expenses, salaries, debts, etc. It doesn’t matter if your assets are intangible or tangible. Tangible assets are physical and intangible items are those that are not physical. If you need the help of an appraiser, you should hire one to look over your intangible assets.
Your business’ liabilities are debts owed to companies, employees, the government or vendors. There are two categories or liabilities which are short-term and long-term liabilities.
Assets – liabilities = net worth.
Why You Should Know Your Net Worth
When you get a complete valuation of your business, you get an overall view of your company finances. Calculating your company’s net worth allows you to see the health of your finances. When you know your net worth you are able to see what you owe vs. what you own.
Knowing your net worth allows you to see where you’ve been and where you are. You’ll be able to track your progress and see how you are performing as you move forward in your business. Your goal is to increase your assets and decrease your liabilities. This allows you to become more attractive to investors or potential buyers if you are looking to sell.
When you look at your net worth in-depth, you can get a deeper understanding of your debt. You’ll be able to see how much you owe and how much money you have to pay on your debt. If your assets are larger than your debt, your business is likely healthy. If you have much higher debts than you do assets, then you should look into debt management.
Knowing your net worth is in a good place can allow you to get outside funding. When your business shows itself to be a good investment, you can more easily secure the money you need to go to the next level in your business. If you don’t know your net worth, investors aren’t going to pay attention to you or your company. You should have access to your net worth and proof of how much your business is worth on demand.
If you want to get a line of credit with a bank, this is often the best way to show the bank you are able to be trusted with credit. You may desire to get other funding from your bank, and this will require you know your business’ net worth a well.
Which Business Valuation Method Should You Use?
When you want to know how much your business is worth, there is more to valuing your business than net worth. While net worth is the least complicated of equations, there are other things to factor into the equation if you want to know how much you should price your business when you are selling it.
Depending on what your goals are, you might need a different valuation than someone else. If your business is profitable, you want to use a method that will take future profits into account. If your business is going to close soon, you should look into how much money your business will be worth once it is liquidated.
Many business owners don’t look into the value of their business until after their business is in trouble. Instead of playing on the defensive, it is a good idea to look at the value of your business where it is now. If you see any warning signs, you can take care of them and keep bad things from happening with your business.
While there are things that can happen and we can’t help it, there are plenty of other things we can look at the signs and make necessary adjustments to get the results that we desire.
Your Business Valuation Prepares You for the Future
Even if you don’t need a business valuation right now, it is not a bad idea to begin conducting one now. Instead of worrying about how your business is performing, you will know if there are weak spots and how you can fix them. Knowing the value of your business is a wise move as a business owner
