Tangible Net Worth

Tangible net worth (TNW) starts with book equity and subtracts assets that would be worth little or nothing in a liquidation: goodwill, trademarks, capitalized software, deferred financing costs, and often receivables from owners and affiliates. What remains approximates the real cushion standing between creditors and loss. A company showing $10M of equity, $6M of which is goodwill from an acquisition, has $4M of tangible net worth — and that smaller number is the honest one for credit purposes.

TNW is the standard denominator in lending covenants and a common anchor in trade credit policies, precisely because it resists accounting inflation. Many credit departments cap single-customer exposure as a percentage of the customer's TNW — for example, no unsecured limit above 10-15% of TNW — which automatically scales limits down for acquisitive companies whose balance sheets are goodwill-heavy.

When computing TNW from private-company statements, be deliberate about owner and affiliate items. Loans receivable from shareholders are usually best treated as intangible (they get repaid last, if ever). Conversely, subordinated owner loans on the liability side can reasonably be added back to TNW if a subordination agreement actually exists — verify it rather than assume it.