Important Aspects of Business Equity
As a business owner, you are likely to invest a good amount of your savings when starting your business. Studies show that 77% of all startups rely on personal savings for initial funding. The initial funds you put into the company is the beginning of building business equity. As your business grows, equity increases and turns from being the initial investment to items such as the client base, net worth, brand, income streams and franchise opportunities. You, as the owner of the business, have all the rights over assets and liabilities in your company. The business equity belongs to you!
So, then, what is business equity?
Business equity is defined as the difference between assets and liabilities or debts. The simple accounting formula below shows how much a business is worth.
Equity = Assets – Liabilities
If you have assets worth $15000 and your liabilities amount to $10000, your equity will be $5000. This result is reported on the company’s balance sheet. If the difference is high, it indicates that the business is doing well and is worth more. There are different forms of equity as discussed below:
The Various Forms of Business Equity
- In the event of bankruptcy and forced liquidation, the amount of money you remain with after paying off your debts is your ownership equity or liable capital/risk capital.
- Equity is the difference between the fair market value of your property and what you still owe on the mortgage.
- Investors’ ownership interest in any business in the form of common stock or preferred stock is called equity. When you no longer own 100% of the firm but share ownership with others, the shareholders are said to have equity in your business.
- You can record equity as retained earnings, preferred stock and common stock in a company’s balance sheet.
- If you engage in margin trading, equity is the difference between the value of securities in the margin account and what you have borrowed from a brokerage house.
How can you use equity to raise money and take your business to the next level?
As your business expands, so does the demand for extra capital. You can increase your capital base by borrowing or inviting co-partners to invest in your company. Getting venture capitalists can take a lot of time and energy, coming with its share of advantages and disadvantages.
Advantages of having equity shareholders are:
- Equity investors have experience in running various businesses. They will offer advice, moral support and assistance on how to grow your business and take it to the next level.
- Equity investors do not operate like financial institutions who demand that their loans be repaid even if your business collapses – they understand that they are not guaranteed any payment. You, however, have to discuss all the risks involved in the industry before signing a partnership agreement.
Disadvantages of having equity shareholders are:
- Inviting people to invest in your business means you no longer have 100% ownership of the company. Most equity shareholders end up taking a more substantial portion of the business profits depending on how risky the venture is. Note that equity shareholders have no guarantee that they will get back their investments, and as such, must be compensated with a more significant payoff.
- Investors also have a right to be involved in any decision you make regarding the company. It means you will have to share vital information about your business, information that you would previously have kept to yourself. Your new partners may sue you if they feel you do not value their input in the running of the company. You will, therefore, have to inform them of every decision you make regarding the company.
As an entrepreneur, you should work on increasing your business equity. Having a lot of assets and fewer liabilities means your business is worth more. Enhance your investment as the company grows and use it to raise funds and improve your capital base. If you choose to get venture capitalists as a way of raising funds to expand the business, consult widely from legal and financial experts before making that move, because of the inherent implications. Either way, make the best decision that will help your business grow and thrive!
If you are considering expanding your business and you don’t have the funds, give us a call. We can guide through the process of equity partnerships.