Written by The Financialization of Everything
As we enter a world of the financialization of everything, it is likely we see a future where there is a publicly available price for every asset. Meaning shares of your company could be purchased by investors similar to shares of Apple or Facebook.
I believe it is crucial that small business owners start recognizing their business as an asset, rather than a day job. To put a dollar amount on this asset, we need to analyze its financial statements. First we need to analyze the balance sheet and its book value.
What is Book Value?
Book value is a company’s total assets minus its total liabilities.
If ABC Company has $100k in cash and cash equivalents, $50k in accounts receivable, and $20k in inventory, it has $170k in total assets.
Additionally, if ABC Company has $40k in long-term debt, $15k in credit card debt, and $30k in accounts payable, it has 85k in total liabilities.
In this simplified equation, ABC Company has a book value of $85k. If the company has 1,000,000 shares in existence, during a liquidation (due to bankruptcy or otherwise) it would likely sell for 8-9 cents per share.
Why Most Companies Won’t Sell for Book Value
When a company sells for book value, it is likely that the revenue has (or once had) has been severely diminished and even completely wiped out. If a company is being purchased for book value, its income likely has to be rebuilt from the ground up by its new owner(s).
Why Book Value is Still Important
Knowing the book value of your company allows you to understand your bottom line and your liquidity and will prevent you from making any foolish decisions with debt and large expenses. Keeping a positive book value is crucial to maintaining a healthy balance sheet.