When contemplating a business acquisition, you’re going to have to speak the same language as your banker and accountant.
The formula for Calculating ANTW: Total Assets – Total Liabilities – Intangible Assets = Tangible Net Worth
Assets are broken down into two categories:
Current assets: Assets that have the ability to be converted into cash within one year.
Noncurrent assets: Assets that cannot be converted into cash within one year.
Current assets include items such as accounts receivable, inventory, and cash. Noncurrent assets include items such as investments, property, plant, and equipment. Within noncurrent assets, there is a subcategory called long-term investments which can include longer-term stocks and bonds or real estate investments.
There are different classifications of liabilities:
Current liabilities – Liabilities that are expected to be paid off in one year. (e.g. credit card debt, income tax payable)
Non-current liabilities – Liabilities that are not expected to be paid off in one year (e.g. mortgage, bank loan)
When a business is sold, all of its assets are normally included in the sale. However, it’s not always clear what the true value of those assets is. In some cases, they may have to be valued by an expert or appraiser. Here are some common business assets and how they’re valued:
Land and buildings: Generally, real estate is valued based on comparable sales (sales of similar properties in the same area). An appraisal can also be done by a professional appraiser who estimates the property’s market value.
Inventory: This is usually valued at cost (or less if there’s some reason to believe that it’s less valuable than its cost).
Vehicles: Vehicles are usually valued at book value (the depreciated value of the vehicle) rather than market value.
Equipment and machinery: These items are generally valued at book value (the depreciated value of the asset), but in some cases, an appraiser may be used to determine their fair market value. In either case, the equipment must be fully insured by the company at current replacement cost.
Goodwill: Goodwill is an intangible asset representing such things as a company’s reputation within its market area or its level of customer loyalty. You can establish goodwill through