Your net worth can be calculated by subtracting your liabilities from your assets. If your assets exceed your liabilities, you will have a positive net worth. Conversely, if your liabilities are greater than your assets, your net worth will be negative. You might calculate your net worth to quantify how you are doing financially at this point in time, or to evaluate your financial progress over time. For certain applications, however, this basic net worth calculation may not be adequate. If you are the holder of copyrights, patents or other intellectual property (IP), you may need to calculate your tangible net worth - the sum of all your tangible assets minus the total amount of your liabilities. Businesses, for example, determine tangible net worth to determine the liquidation value of the company if it were to cease operations and be sold. This figure can also be important to individuals who are applying for personal or small business loans, and where the lender demands a "real" net worth figure.
What Is Tangible Net Worth?
Similar to net worth in that it takes into consideration assets and liabilities, your tangible net worth goes one step further and subtracts the value of any intangible assets, including goodwill, copyrights, patents, and other intellectual property. The basic formula for calculating tangible net worth is:
Tangible Net Worth = Total Assets - Total Liabilities - Intangible Assets
Your lender may be interested in your tangible net worth because it provides a more accurate view of your real net worth - what the bank could expect to make if it had to liquidate your assets because you defaulted on the loan.
Tangible Versus Intangible Assets
The difference between net worth and tangible net worth calculations is that the former includes all assets, and the latter subtracts those assets that are not physical in nature. Assets are everything that you own that can be converted into cash. By this definition, assets include cash, real property (land and permanent structures, such as homes, attached to the property), and personal property (everything else that you own such as cars, boats, furniture and jewelry). These are your tangible assets since they are all things that are physical in nature; that is, you can hold them.
Intangible assets, on the other hand, are still assets; however, they are non-physical in nature. Goodwill, copyrights, patents, trademarks and intellectual property are all considered intangible assets since, even though they are valuable, they cannot be seen or touched. If you are selling your small business, you may be able to rightly argue that these intangible assets add value to the business. However, in the case of determining tangible net worth as part of the loan process, the bank may only consider those assets that are tangible and that could be quickly assigned a value and liquidated if necessary.
Valuation of Intangible Assets
The valuation of intangible assets is a difficult and uncertain process. The rise and subsequent fall of many dot-com companies in the late 1990s and early 2000s, whose main assets were intangible, is one factor that drew attention to the need to properly account for and value these increasingly important assets. Ask Jeeves, Inc.'s common stock, for example, sold around $180 per share in late 1999; its market value was almost 200 times stockholders' equity at that price. While the balance sheet showed assets of $32 million (mostly cash, cash equivalents and investments), the indicated market value was nearly $4 billion. This discrepancy between the balance sheet and indicated market value represented how investors valued Ask Jeeves' intangible assets. 18 months later, Ask Jeeves shares sold for about $1, with an indicated market value of a greatly-reduced $50 million, demonstrating that Ask Jeeves' intangible assets had likely been incorrectly valued.
While outside the scope of this article, today's intangible asset valuation is a multi-step process. The valuation process may begin with the following considerations:
- Purpose - Why is the asset being valued? (for example, financial reporting, bankruptcy/reorganization, litigation or transaction strategy)
- Description - What is the asset?
- Premise - How will the asset be used now and in the future?
- Standard - Who will buy the asset?
The answers to these questions help determine the best methodology for valuation. For example, the transactional method looks at the price paid for similar intangible assets under similar conditions (this can be compared to the sales comparison approach in real estate valuation). Other methods include the income method, which analyzes projected cash flows, the economic life of the intangible assets, and the discount rate; and the replacement cost method, which estimates the cost of developing a similar intangible asset in the future. At times, multiple valuation methods may be used simultaneously to provide confirmation that the valuation is accurate.
Many individuals and businesses will consult with qualified professionals who specialize in intangible asset valuation to accurately determine the value of their trademarks, patents, copyrights, customer lists and other intellectual property. The intangible asset valuation methods used by such professionals are appropriate for financial reporting requirements under U.S. Generally Accepted Accounting Principles (GAAP).
Calculating Your Tangible Net Worth
The formula for calculating your tangible net worth, as previously mentioned, is fairly straightforward:
Tangible Net Worth = Total Assets - Total Liabilities - Intangible Assets
Your liabilities are relatively easy to quantify since they represent all of your outstanding debts, and for which you likely receive monthly statements or reminders. These statements are based on actual numbers - not estimates - and show exactly what you owe. The challenge is to correctly determine the value of your assets. To calculate your tangible net worth, you must first determine your total assets, total liabilities, and the value of any intangible assets:
|Total Assets||Total Liabilities||Value of Intangible Assets|
|Cash and cash equivalents
|Secured liabilities - auto, mortgage, home equity loans, etc.
Unsecured liabilities - credit cards, medical, student and personal loans, taxes, etc.
Once you have determined the value of these intangible assets, you can use the formula to determine your tangible net worth. A sample worksheet is shown below.
|Cash and Cash Equivalents||Secured Liabilities|
|Certificates of deposit||Auto loans|
|Checking account||Home equity line|
|Money market account||Margin loans|
|Savings account||Rental mortgage|
|Treasury bills||2nd home mortgage|
|Annuities||Credit card debt|
|Life insurance cash value||Personal loans|
|Mutual funds||Student loans|
|Retirement plans||Other debt and bills|
|Second home||Intangible Assets|
|Jewelry||Total Intangible Assets|
|- Total Liabilities|
|- Total Intangible Assets|
|Tangible Net Worth|
The Bottom Line
Your tangible net worth is equal to the value of all of your assets, minus any liabilities and intangible assets including copyrights, goodwill, intellectual property, patents and trademarks. While a standard net worth calculation (assets - liabilities) will suffice for most individuals, those who hold intangible assets may be required to calculate their tangible net worth to satisfy a lender's requirements for a personal or small business loan. As with any net worth calculation, placing accurate values on assets is critical; many individuals and businesses prefer to solicit the advice of qualified professionals when valuing intangible assets. If you want to save some time, use our free Net Worth Tracker which allows you to calculate, analyze and record your net worth for free.