Company Equity - An Understanding Of A Company's Worth And Ownership
When determining the worth of a company, it is not enough to check the book values
of liabilities and assets, and this is something that every investor needs to know. Finding out what the current market value is can tell you more accurately what the company equity is.
The company's financial statements, in the simplest sense, would only tell you the financial position of the company at some time before. It is not the most current indicator of their worth and can never completely represent the firm's actual value. Note that there is always a difference between what a company is worth on paper and in the market.
The balance sheet follows:
Liabilities + Company Equity = Assets
But to illustrate more easily the relationship between the financial decisions of the managers and the investor equity, the equation should be:
Assets - Liabilities = Company Equity
From this equation, you can easily observe that the stockholder's equity is residual in nature, and it is basically the difference between the assets and the liabilities. If you want to accurately estimate the company equity, check the stock price for the shares that the company is selling.
Protecting Company Equity
For ordinary people who have set up their own business, equity may not seem like a very important word but it is in fact very crucial. Equity is about ownership, represented in shares. However, regardless of how many shares a company has, the value remains the same.
As mentioned, the market would determine the value of a company. It would tell you how much a company is worth and an entrepreneur's ownership is determined by how many shares he owns in that company. This being said, it is therefore very important that an entrepreneur puts due consideration on the ownership percentage he has as years go by. Essentially, for every move he makes that uses equity will reduce the ownership that he has over the company. This includes enticing investors and recruiting people to work for them.
In line with this, let us talk about the advantages and disadvantages of getting investors. If you know of people who would like to invest, such as your friends and family, this can be both good and bad for your business. Remember, this affects your company equity, thus, it affects your ownership percentage.
The Good
Obviously, you get to raise enough capital to run your business instead of getting a loan and having to pay high interest rates. Having investors also means you share the risks with them and probably not have to pay them back if the business will not take off successfully.
The Bad
Well, as mentioned above, when you sell shares or allow others to invest in your business, they will end up getting a larger share of the profits. They become co-owners and this means you have to communicate every aspect of the business with them. This translates to you not being able to take full control over a lot of things that have to do with your very own business.
by: Ajeet Khurana
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