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Dealing with Negative Net Worth in a Business

Posted by Chris Peterson | Jun 24, 2015 | 0 Comments

Dealing with Negative Net Worth in a Business

Whether yours is a partnership, limited liability company, sole proprietorship or corporation, the notion of having indebtedness that is greater than your assets can be very disturbing. However, with the work of a College Station business attorney you may well find yourself able to manage the storm and recover.

Dealing with Negative Net Worth in a Business

The Balance Sheet and Negative Equity

Many companies, including restaurants, which notoriously run on very low returns for their investment find they have a negative balance sheet when seeking a business loan. Accelerated depreciation of a business and flow through entities do not help matters. In partnerships, often certain members will opt to buyout which contributes to negative net worth. It can take years before a company so shaken to recover its financial soundness for loans.

Does Negative Net Worth Mean the Business is a Failure?

Far from it. A business that has developed negative equity is still a viable enterprise. A lender is not going to look simply at the company's negative net worth, but will look at the amount of business is flowing through the enterprise that can be made available to pay the basic fixed charges like rent, employees, etc.

What is most important is that a company has effective leverage, which means that before rent is paid does the company have a debt to cash flow.

How to Deal with Negative Net Worth:

  • Determine the fair market value of your assets and find the difference between them and the depreciated value, especially of real estate. You may, in fact, have an increase in real estate value. Then, you may consider doing non-GAAP financials, These will reflect fair market value of your assets as opposed to the book value.
  • Secure equity from another source, say a wealthy retired relative.
  • Develop a detailed analysis of your equity account. Determine whether any extraordinary expenditures that have been made will not be recurring. These could be from the buyout of a shareholder or a legal settlement.
  • Convert the debt you owe to shareholders to equity.

For Further Legal Assistance

These are a few sample ways of handling negative net worth in a business. Such matters can be highly technical in nature and should best be dealt with by a legal professional. Call a College Station business attorney today to discuss any difficulties you are having with your business at Peterson Law Group: 979-703-7014 or 936-337-4681.

About the Author

Chris Peterson

Founding Attorney Chris Peterson is the owner of Peterson Law Group. He practices primarily in the areas of wills, trusts and estate planning; probate and trust administration; elder law; and business law. In addition to the law practice, Chris is involved in Aggieland Title Company and Brazos 1...

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