Net Worth : Comparing Real vs Fake Assets
Net Worth : What is it?
Definition of net worth according to Wikipedia:
Net worth is the value of all the non-financial and financial assets owned by an institutional unit or sector minus the value of all its outstanding liabilities.
On the surface, this sounds pretty simple. Value from hard assets (real estate, life insurance policies, cash) compared to what I call “soft” assets (business values, database of customers, personal items).
What Factors Should Contribute to Net Worth?
When considering ownership of a particular asset, how does the time to manage these assets factor into net worth?
How reliable is the asset? Does it lose value if not properly nurtured? Does it lose value if not being handled by anyone other than the owner of the asset? Does it depreciate with market conditions?
Perhaps net worth needs to take into consideration more than just a simple value.
What’s a Realtor’s Book of Business Worth?
Let us take into consideration a successful Realtor in a given neighborhood. Let’s say that Broker closes 100 sale transactions per year. This broker markets at a cost of 25% of gross revenue annually and is well known enough to receive a healthy dose of referrals every year.
What is their business worth?
In essence, what is the value of the relationships with their existing client base? How sustainable is the business if the broker were to step away for one month? Three months? How about a year?
What about the value of listing contracts? If they are one year long and could pay out $25,000 in commissions, what does this translate too in net worth value?
Not all Net Worth is Valued the Same
Point being, not all net worth can be called the same.
Understanding the variables behind what makes a transparent net worth is what we should all be shooting for. Finding business structures that lead to the ability to have variances sure to things we can or can not control is what leads to a less valuable asset and ultimately to less net worth.
While contracts can be structured in a means to assist to sway the value of the asset to favor the buyer because of the variables involved in the purchase of an asset, it’s important to not over negotiate your position on the basis of the value of the asset not being transparent.
INVEST IN ASSETS WITH A TRANSPARENT VALUE.
When building a business, consider the factors that will contribute to a clear value.
Relationships are valuable but unless they are tied to a long contract, your merely setting a bookmark with your reputation.
Consider the liabilities that come with setting a value to the business you are building. Do they set the precedent to building the value of the business in a transparent means that will grow the value over time or do they simply mortgage the potential value of the business or make the value fizzier due to the nature of the expense?
Start tracking your net worth on a monthly basis. Here’s a link to assist you in assembling this information:
Sort your assets based upon those in which you are very confident in value to those in which you have little confidence with the fluctuation in value of variables that play into making a transparent value.
Find those assets that are the most interesting to you and sort out those that need to be deleveraged due to the weight the bring to your financial goals. Regardless, track your net worth!
Pay attention to your value in life and your value will pay attention to you.