Question on Net Worth Calculation

[Breannee]

I inherited a portion of a small family business a few years back. It provides me with a "dividend" each year. When calculating my net worth should I also include the value of the stock I own in the private business? It seems very much like owning public stock. Maybe this is a dumb question, but would like some reassurance in my thinking. Thanks!

[Cheddar Stacker]

It can be included, but can also be very hard to value. Private stock can be hard to sell for a lot of reasons. Has there been a valuation of the company recently, perhaps when you inherited the stock.

I own some private, restricted stock and I disclose it, but don't count it as part of a SWR or my NW. It also doesn't pay any dividends.

[Breannee]

Hmmm... yes, it is hard to calculate since it hasn't been re-evaluated since I initially inherited it. I haven't been counting it towards my net worth calculation, but wondered if maybe I should be. I can estimate what it LIKELY could be worth, but I wouldn't be able to actually sell it publicly since it's a family business.

[ken]

The value of the stock is what someone else can/will currently pay you for it. Restrictions, such as not being able to sell because it is a family business, appropriately reduce that value. There is a reduced pool of people you can sell it to (other family members) so it has less value. You could value it at what another family member would offer you or you could value it at the NPV of the future dividends (cash flow) it provides if they are stable and predictable.

This shows why some folks would choose to be conservative in including it in a NW calculation. Especially if that NW calculation is going to be used to determine a SWR.

[Cheddar Stacker]

If it is a stable dividend each year as Ken mentioned, you can use the dividend as part of your cash flow thereby reducing your stache needed to fund the SWR. The dividend might exceed 4% of the stocks' value anyway, so it might serve you better to hold onto it. Then the value really doesn't matter much.

[seattlecyclone]

You might even want to consider calculating your net worth a couple of different ways: one way for how much money you could get if you had to liquidate everything right away, and another way for if you were in no particular hurry to sell any one item. It may be that a family member might agree to gradually buy you out over a number of years for a certain price, but they would not be able to pay as much if you had to sell in a lump sum. You can apply the same principal to real estate or any other relatively illiquid asset: you can often get a better price if you're in a position to wait for a good offer.

[forummm]

You might consider diversifying your other assets away from whatever industry this business is in. It may not be worth it or affordable to do. It sounds like a relatively small business, so the sector risks may be smaller than a lot of others. But if your name is Disney and you own a bunch of Disney stock you can't sell, then maybe put your other funds into consumer staples, utilities, etc, that won't be affected as much if there's a big recession and people realize it's insane to spend $140 entry plus $50 for food per person to ride for one day on some advertisements for other products.

[Franklin]

Absolutely count it in your net worth.  Here are two options you could use for valuation:

1.  Multiple - Multiply your company's present annual revenue times the standard multiple of your industry.  For instance, your company makes 1M and the industry multiple is a 9, so your company value is 9M.  Then of course you divide in your shares.

2. Book Value - Ask your accountant for the total liquidated value of your company if you were to shut your doors and sell all assets.  Also figure in any good faith value such as patents, branding, etc.  Then once again divide in your shares.

This is not necessarily dead-on accurate valuation, just boiler plate methods.  The key is for you to be conservative and consistent.

[Cheddar Stacker]

Absolutely count it in your net worth.  Here are two options you could use for valuation:

1.  Multiple - Multiply your company's present annual revenue times the standard multiple of your industry.  For instance, your company makes 1M and the industry multiple is a 9, so your company value is 9M.  Then of course you divide in your shares.

2. Book Value - Ask your accountant for the total liquidated value of your company if you were to shut your doors and sell all assets.  Also figure in any good faith value such as patents, branding, etc.  Then once again divide in your shares.

This is not necessarily dead-on accurate valuation, just boiler plate methods.  The key is for you to be conservative and consistent.

Those methods can both get you a decent starting point.

The problem though is the discounts for marketability and control (DLOM and DLOC). Based on the facts presented, Breannee likely has no authority to liquidate the company, no ability to demand any dividends, no ability affect change within the company at all. And if there is a limited pool of buyers, which there is by nature of privately held stock, there is an automatic discount for lack of marketability.

I work with plenty of companies that sound just like this one.

Imagine this scenario which I've seen multiple times: Right now things are fine. In a few years, maybe during the next generation of family ownership, maybe during the next economic downturn, there could be zero profits and thus zero dividends. The people with majority ownership, who likely are the people running the business and earning a nice wage, have no incentive to reduce their wages in order to increase profits and dividends. They will act in their best interest and leave their wage as is.

Will they look to sell the company? Not likely. Will they look to liquidate the assets? Again, not likely. Doing so would benefit all owners at the expense of their own ongoing wages. Even in a family run/owned business, hell sometimes because it's family owned to be honest, there can be an immense lack of loyalty, honesty, and fairness.

My point is this - when you have no control, discount heavily. Don't count on that dividend stream indefinitely unless the industry is absolutely rock solid. Don't count on getting 100% of that stock value at book, or fair market value, however you decide to perform those calculations.

[Franklin]

Absolutely count it in your net worth.  Here are two options you could use for valuation:

1.  Multiple - Multiply your company's present annual revenue times the standard multiple of your industry.  For instance, your company makes 1M and the industry multiple is a 9, so your company value is 9M.  Then of course you divide in your shares.

2. Book Value - Ask your accountant for the total liquidated value of your company if you were to shut your doors and sell all assets.  Also figure in any good faith value such as patents, branding, etc.  Then once again divide in your shares.

This is not necessarily dead-on accurate valuation, just boiler plate methods.  The key is for you to be conservative and consistent.

Those methods can both get you a decent starting point.

The problem though is the discounts for marketability and control (DLOM and DLOC). Based on the facts presented, Breannee likely has no authority to liquidate the company, no ability to demand any dividends, no ability affect change within the company at all. And if there is a limited pool of buyers, which there is by nature of privately held stock, there is an automatic discount for lack of marketability.

I work with plenty of companies that sound just like this one.

Imagine this scenario which I've seen multiple times: Right now things are fine. In a few years, maybe during the next generation of family ownership, maybe during the next economic downturn, there could be zero profits and thus zero dividends. The people with majority ownership, who likely are the people running the business and earning a nice wage, have no incentive to reduce their wages in order to increase profits and dividends. They will act in their best interest and leave their wage as is.

Will they look to sell the company? Not likely. Will they look to liquidate the assets? Again, not likely. Doing so would benefit all owners at the expense of their own ongoing wages. Even in a family run/owned business, hell sometimes because it's family owned to be honest, there can be an immense lack of loyalty, honesty, and fairness.

My point is this - when you have no control, discount heavily. Don't count on that dividend stream indefinitely unless the industry is absolutely rock solid. Don't count on getting 100% of that stock value at book, or fair market value, however you decide to perform those calculations.

Agreed.  My final sentence said the same thing but less eloquently.  My point was more in line with his actual concern, which was whether he should count the value of his minority ownership as part of his net worth.  After reaching a valuation that he is comfortable with, my answer would be "hell yes".