For certain applications, however, this basic net worth calculation may not be adequate. If you hold copyrights, patents or other intellectual property (IP), you may need to calculate your "tangible" net worth, which is the sum of all your tangible assets minus the total amount of your liabilities.
KEY TAKEAWAYS
- Tangible net worth is the sum total of one's tangible assets (those that can be physically held or converted to cash) minus one's total debts.
- The formula to determine your tangible net worth is: Total Assets - Total Liabilities - Intangible Assets = Tangible Net Worth.
- Calculating your tangible net worth involves totaling all your assets—cash, investments, and property—and totaling all your secured and unsecured debt, and then subtracting the latter from the former.
What Is Tangible Net Worth?
Your tangible net worth is similar to your net worth in that it totes up your assets and liabilities, but it goes one step farther. It subtracts the value of any intangible assets, including goodwill, copyrights, patents, and other intellectual property.
Businesses, for example, calculate tangible net worth to determine the liquidation value of the company if it were to cease operations or if it were to be sold. This figure can also be important to individuals who are applying for personal or small business loans, and the lender demands a "real" net worth figure.
Your lender may be interested in your tangible net worth because it provides a more accurate view of your finances—and how much the lender could recoup if it had to liquidate your assets if you defaulted on their loan. You might want to calculate your tangible net worth to quantify how you are doing financially, or to evaluate your financial progress over time.
Tangible Versus Intangible Assets
The difference between net worth and tangible net worth calculations is that the former includes all assets, and the latter subtracts the assets that you cannot physically touch.
Assets are everything that you own that can be converted into cash. By this definition, assets include cash, investments, real property (land and permanent structures, such as homes, attached to the property), and personal property (everything else that you own such as cars, boats, furniture, and jewelry).
These are your tangible assets: They are all things that you can hold. (Strictly speaking, investments are financial assets, not tangible ones. But because they can be converted to cash, they're often put in the tangible category for purposes like this.)
Intangible assets, on the other hand, are assets you cannot hold. Goodwill, copyrights, patents, trademarks, and intellectual property are all considered intangible assets since they cannot be seen or touched even though they are valuable.
If you are selling your small business, you may be able to rightly argue that these intangible assets add value to the business. However, in the case of determining tangible net worth as part of the loan process, the bank may only consider those assets that are tangible because they could be more easily liquidated.
