How to Calculate Net Worth

• Net worth reflects the value of a business or other entity based on assets and debts. Net worth is calculated by adding together the value of all assets and the value of all liabilities, such as debts to lenders. There are two popular methods of determining the value of assets: market approach (market value) and cost approach (original purchase cost of the asset, minus depreciation or plus improvements). The net worth value is determined by subtracting the liabilities from the assets.
  
  

How to Calculate Market Value

• Market value is based on the marketplace and is the approximate sale value of a business, entity or asset at a point in time. Market values fluctuate depending on a variety of factors, including need, availability, historical sale prices of similar entities or goods and economic outlook. Market value also may help to determine net worth, as greater market value often equates to greater net worth.
  
  

Business Net Worth

• The net worth an owner has in his business is the same as the equity the owner has — or amount of the business the owner actually owns. If a business owner takes out a loan for a business, the lender may own a portion of the business covered by the loan until the loan is repaid. That means the lender would have equity, which decreases the business owner’s equity in the business and increases the owner’s liability. The amount of that liability (or debt) is subtracted from the net worth of the business.
  
  

Business Market Value

• Determining market values for businesses varies by industry and business type. For example, to determine the market value of a service-oriented business, owners may need to design special metrics to valuate their intellectual property and proprietary processes. To determine the market value of a retail store, a business owner may need to calculate the cost of goods in the store’s inventory, compared to consumer demand. Businesses may also calculate one market value for the business as a whole, or they may break the business into separate parts. For example, with a retail store, there may be one market value for inventory and another for the store’s real estate holdings.
  
  

Net Worth and Market Value for Homeowners

• Homeowners serve as a common example of how net worth and market value vary. For example, as the market value of a home increases, a homeowner’s net worth increases because the amount of money the homeowner could get by selling the home increases, but the homeowner still owes the lender the same amount. As a result, the homeowner has greater equity in the home. If the market value decreases, the homeowner’s equity in that home decreases, resulting in a smaller net worth.