Is the book value of a business what it is worth?

Book value is an accounting figure, and a business’s worth is a judgment about what a buyer might pay. They can overlap, but they are not the same thing. If you are an owner reading your balance sheet, treat book value as one input to a valuation rather than the answer.

What book value is

BDC says the balance sheet reveals the book value of a company’s assets, liabilities and shareholders’ equity, and that it summarizes them at a specific point in time. It is a snapshot of the records on a given date. It is not an estimate of what the assets would sell for, or of what the business can earn.

Why it can mislead

BDC lists “using the book value of assets rather than fair market value” among the mistakes to avoid when determining company value. In its asset-based approach, information is taken from the balance sheet to estimate the fair-market value of the assets, and total debts are subtracted to give net asset value. The balance sheet is where you start, and the assets are then re-estimated at fair market value.

When earnings matter more

BDC says earnings-based approaches are commonly used for established businesses that generate reasonable returns and whose value is greater than that of their assets alone. For such a business, a valuator reviews forecasted earnings or cash flow and past results. Asset-based approaches are typically used where value is asset-related rather than operations-related.

What to do with it

Ask a chartered business valuator which methods suit your business, and whether book value will be adjusted to fair market value. Remember that a valuation is a guideline, and BDC says the final price is often different. For a wider view, see what my business is worth. A similar-sounding term, “book of business”, refers to client relationships; see book of business.