How Is a Balance Sheet Used to Determine the Value of a Business?
The balance sheet is a simple but highly informative financial document. The balance sheet lists all of a company's assets and liabilities, making it easy to calculate the firm's book value. Calculate your company's book value to get an estimate of how much your business is worth.
The balance sheet summarizes all of a firm's assets. Assets are any properties of value, such as equipment, land, buildings and inventory. It also includes accounts receivable and other money owed to the business. Finally, the assets may include intangible assets like intellectual property. All of these assets are added up and listed as total assets on the balance sheet.
A firm's liabilities are also listed on the balance sheet. Liabilities are any debts that a company owes to outside stakeholders. Liabilities typically include accounts payable, such as rent or wages owed, as well as notes payable, which include long-term debts like mortgages. A business' total liabilities are listed at the bottom of the liabilities section of the balance sheet.
The book value of a business is calculate by simply subtracting the company's total liabilities from its total assets. Assume for example that you have assets of $100,000 and liabilities of $30,000. You would subtract $30,000 from $100,000, leaving you with a book value of $70,000.
The book value of a firm gives you a good indication of a firm's minimum value. If the company were to simply cease operating and liquidate its assets, the book value would be fairly accurate. But the book value does not take into account future revenues from a business that continues as a going concern. Finally, the book value doesn't take the market into account. People may be willing to pay more or less than the book value for a company, reflecting a different value in the real world.