Net Worth

What Is Net Worth?

Net worth is the simplest measure of overall financial value. For a business, the calculation is: Net Worth = Total Assets - Total Liabilities. It represents the residual claim of the owners on the business after all debts are settled. The terms net worth, equity, and book value are often used interchangeably in this context.

For example, a small law firm with $300,000 in assets (cash, receivables, office equipment) and $120,000 in liabilities (loans, accounts payable) has a net worth of $180,000. If the firm were liquidated, the owners would theoretically receive $180,000 after paying all debts.

Why It Matters for Your Business

Net worth provides a high-level view of your business's financial progress and stability.

• Wealth building: Tracking net worth over time shows whether your business is creating or destroying value. Consistent growth is a sign of healthy management.
• Borrowing capacity: Lenders consider business net worth when approving loans. Higher net worth generally means better loan terms and higher credit limits.
• Exit planning: If you plan to sell your business someday, net worth is one of the foundational inputs for determining the sale price, though market value often exceeds book value.

Note that net worth based on book values may understate the true value of your business. Assets are typically recorded at their purchase price minus depreciation, which may be far less than their current market value. Intellectual property, brand recognition, and customer relationships add value that does not appear on the balance sheet.