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What is Tangible Net Worth?
Tangible net worth is a calculation that can apply to both individuals and businesses. For individuals, the formula is fairly easy to calculate. It is the sum of all things you own that are tangible, such as a cash balance in your bank account, your home, your cars or other vehicles, and anything else that could fetch money should you be unable to pay your debts. Usually tangible net worth, especially when you’re applying for loans or credit, doesn’t include the small stuff. It also subtracts any debts or liabilities from what you owe. If you are paying off a car, for instance, the debt remaining would be subtracted from the value of the car, and only your equity in the vehicle would be part of tangible net worth.
In businesses, tangible net worth is also evaluated by things like cash, inventory in the business, and both small and large property of the business. From this amount is subtracted liabilities and intangible property. There are a long list of things that can be considered intangible property. These include any patents and intellectual property, which are things that might make money in the future but aren’t making it now. It also includes something called goodwill. Goodwill is essentially a business reputation that represents customers’ interest in your business.
If you’re selling a business, and you have inventory, you may be able to argue that goodwill makes your business a better deal, because you have a steady and reliable customer base. On the other hand, if you’re obtaining a loan, this is not counted because goodwill is unstable. Instead, a lender tends to look at the property of the business based specifically on how much this property would fetch if all assets were liquidated immediately. Customer loyalty has little to do with this, and thus can’t count as part of tangible net worth.
Lenders are interested in real net worth because they may be called upon to liquidate your assets if you’re unable to pay your debt to them. This worth tends to fluctuate from the time that it is first calculated. Physical property can be worth more or less depending upon the market and the aging of the property, and inventory amounts can change too. New machines your company owns become old machines eventually, and aren't worth as much. On the other hand, real estate holdings may go up in value the longer you hold them. Thus a calculation of tangible net worth today doesn’t represent a static amount of financial worth of your company.
For this reason, lenders may turn away companies seeking loans if they don’t have significant cash holdings that could easily cover loans. Alternately, they may ask business owners to personally secure loans by adding the tangible net worth of their personal property. This means that lack of repayment could cost you both your business and your private holdings. When a business is not doing well, you should consider whether it is worthwhile to put up your personal funds and property as collateral because this represents much greater financial risk to you.
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