Negative Owner's Equity
Recently, when I have been doing valuations for printers, I have seen a few balance sheets where the owner’s equity is a negative number. These are not distressed companies albeit they are not showing great profits. When I pointed out the negative equity, most said it’s not a problem is it?
In all of these cases, the owners are looking at their options – is it time to sell, merge or have my partner or employees buy me out?
Negative equity occurs simply by the owners or stockholders taking out more money than the company started with including the annual profits over time. Most printers unless they bought their business, start with very little initial capital. Profits less the dividends are accumulated in your equity account. Most healthy businesses accumulate additional equity over time.
Why is it bad to have negative equity or very low equity? Theoretically it means that if you liquidated your assets and paid off all of your liabilities you would have little or nothing left over. Most printers rationalize this issue by saying their equipment and/or inventory is worth more than what shows up on their balance sheet. That may be true but ask anyone who had to liquidate recently how much they got paid on their equipment and inventory?
Take a hard look at your balance sheet and if the equity is low or negative, take positive steps to change it. Negative equity is a big red flag to a bank if you are borrowing money or to someone who may want to buy your business.