How to Calculate Your Tangible Net Worth

You can calculate your net worth 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, or to evaluate your financial progress over time.

For certain applications, however, this basic net worth calculation may not be adequate. If you hold copyrights, patents or other intellectual property (IP), you may need to calculate your "tangible" net worth, which is the sum of all your tangible assets minus the total amount of your liabilities. Businesses, for example, calculate 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.

Your tangible net worth is similar to net worth in that it takes into consideration assets and liabilities, but your tangible net worth goes one step farther. It 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, which is what the bank could expect to make if it had to liquidate your assets if you defaulted on their loan.

The difference between net worth and tangible net worth calculations is that the former includes all assets, and the latter subtracts the assets that you cannot physically touch. 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 you can hold.

Intangible assets, on the other hand, are assets you cannot hold. Goodwill, copyrights, patents, trademarks and intellectual property are all considered intangible assets since they cannot be seen or touched even though they are valuable. 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 because they could be more easily liquidated.

Placing a value on intangible assets is tricky. The rise and subsequent fall of many dot-com companies in the late 1990s and early 2000s illustrates what can happen to companies that rely heavily on intangible assets. Ask Jeeves Inc.'s common stock, for example, sold around $180 per share in late 1999 and its market value was almost 200 times stockholders' equity at that price. While the company's 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. However, 18 months later, Ask Jeeves shares sold for only about $1, with an indicated market value of a greatly-reduced $50 million, demonstrating that Ask Jeeves' intangible assets had been incorrectly valued.

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. Other methods include the income method, which analyzes projected cash flow, the economic life of the intangible assets and the discount rate. The replacement cost method 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).

The formula for calculating your tangible net worth 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 you likely receive monthly statements or reminders for them. 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:

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.

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 Investopedia's free Net Worth Tracker to calculate, analyze and record your net worth.