What is Equity, How is it Calculated, and How Does it Value a Business?
Stockholders’s equity is the section of the balance sheet that represents the capital received by investors for company stock shares. It represents the stake of all the company’s investors held on the books. It is calculated in the following way:
Total equity = total assets – totalliabilities For example, if a company has $10 million is assets and $1 million in liabilities, the total equity equals $9 million.
If a small business is just starting, founders often seek an initial investment to get the company going. Here, another formula can be used to determine value:
Business value = investment offered / equity percentage allocated
For example, assume an investor offers you $250,000 for 10% equity in your business. By doing so, the investor is implying a total business value of $2.5 million, or $250,000 divided by 10%.
