Shareholders Equity
Successful companies build equity. Reported equity is presented on the company's balance sheet. This is true for public companies trading stock and privately held companies that generally do not release this information to the public.
The simple definition of shareholders equity is that it is the difference between assets and liabilities. When a company earns net income, equity increases. The more income it makes, the higher the book balance of the equity.
For purposes of this presentation, the focus in on the equity of privately held companies. Generally the equity of private companies is in real estate, fixed assets net of depreciation, inventory, accounts receivable and cash. Those are the measurable values reflected in the books and records. There are many companies where the shareholder equity is owned by one or a few people. When a business is owned by a few people, often it is family members.
As discussed in the Revenue section of The Profit System and in the Asset section under goodwill, a major unrecorded component of equity is the customer list. Generally, anyone looking to buy a business is evaluating the hard assets (real estate, inventory, fixed assets, accounts receivable ) and the ability of those assets to continue generating a profit. Well, customers are key to generating profits. Premiums or discounts to net fair market value of assets is one way of arriving at the purchase price of a business.
The Profit System is about helping companies maximizing the value of the business whether it is for sale or not.
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