DETERMINING YOUR BUSINESS’S EQUITY

Recently, I got a call from a fellow small business owner who was trying to figure out the best way to quantify her business’s value. Knowing the worth of one’s business is essential as it will come up if you are applying for a business loan, refinancing an existing loan, or applying for a grant; basically, any engagement requiring finances will include knowing the worthiness of the business.

So, where should you go to determine the quantifiable value or equity of your business? You go to the business’s financial statements, particularly the balance sheet report. The balance sheet has three (3) main sections:

  1. Assets – these are the items owned by the business that help generate income on a daily basis. Assets include cash, accounts receivable, financial investments (stocks, bonds, etc.), equipment, and goodwill.
  2. Liabilities – liabilities are items the business owes third parties that are used to generate income daily. Examples of liabilities include accounts payable, accrued payroll, loans payable, and credit card payables.
  3. Equity – equity is the difference between a business’s assets and liabilities. That is,

                                                                                   Assets – Liabilities = Equity

A positive net difference means the business’s equity, or value, is greater than zero. A negative net difference means the business’s equity is less than zero. A positive equity implies that the business can cover its liabilities, which is what every business should strive to be able to do. Using the example below, assets = $177,000, liabilities = $87,000, therefore equity = $177,000 – $87,000 = $90,000. Hence, this implies that after paying off all its liabilities using its assets, the business has $90,000 in its pocket. Or said differently, the business’s worth is $90,000.

Every business owner should pay close attention to her business’s equity to ensure it does not become negative.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.