BEA Explainer: What is Equity and What does it mean for your Small Business?
Understanding some business terms and how they work is very important to a small business owner as ignorance, which is inexcusable, may cost you everything you have laboured for.
Equity is one of the popular words often used in the business world but not many understand the depth of it. This piece lays it out in a layman language.
What is equity?
As a business owner, equity is the worth of your business after you have paid off all your debts. In other words, equity is your asset minus liabilities.
Let’s break it down further:
Assets – These are what you have
Liabilities – These are how much you owe
Equity – This is how much you have left (after you’ve removed what you owe)
In equation, it is: Assets – Liabilities = Equity
It does not matter whether your company is a conglomerate or a one-man business, the formula is the same thing.
The equity of a small business is the value of all the company’s assets (cash, equipment, product inventory, facilities, and property) minus all its liabilities. This is usually called ‘owner’s equity’. If the business owner is in partnership with another person or more, it must have been agreed that the owner’s equity would be shared among the partners. The owner might own 60% stake in the business while 40% is split between other partners.
Moreso, equity is not limited to physical possessions alone. When calculating the total value of assets, it must include both tangle and intangible assets.
What is intangible Equity?
Intangible equity is gained over the years that a company has been in business. It is the company’s reputation, intellectual property and brand identity. For example, a popular brand in a particular industry will have more value than a new brand that just entered the market.
This is why a big company that has successfully served customers for decades would have more intangible equity than a business that is just starting out.
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