Tangible Net Worth

Tangible net worth (TNW) is a company's net worth, or equity, calculated after removing intangible assets such as goodwill, capitalized software, trademarks and other assets that cannot readily be sold to meet obligations. In US financial regulation, state agencies use tangible net worth as the minimum capital test that a money transmitter must pass to obtain a money transmitter license and must keep meeting while it holds one. Lenders also use the measure in loan covenants.

Because each state defines the measure in its own statute or rules, the relevant figure is the one calculated to the regulator's definition, which can differ from what a company reports as equity in its own audited financials.

The basic formula is:

Tangible net worth = Total assets − Total liabilities − Intangible assets

The starting point, total assets minus total liabilities, is ordinary net worth. Intangibles are then deducted. Depending on the regulator, deductions may also include receivables from affiliates or officers, prepaid expenses, deferred tax assets, or other items considered unavailable to cover customer obligations. Some regulators require the calculation to follow US generally accepted accounting principles and to be supported by audited statements.

Example

A payment company reports total assets of $12 million and total liabilities of $8 million, giving net worth of $4 million. Its assets include $1.5 million of goodwill from an acquisition, $0.8 million of capitalized software and a $0.4 million loan to its parent company. If the state deducts all three, tangible net worth is $4.0 million − $1.5 million − $0.8 million − $0.4 million = $1.3 million. A company that believes it has $4 million of capital may therefore find it has far less for licensing purposes.

State money transmission laws require licensees to maintain minimum tangible net worth alongside a surety bond and permissible investments equal to outstanding customer obligations. Historically the minimums varied widely, from fixed amounts in some states to sliding scales tied to transmission volume or number of locations in others.

The Money Transmission Modernization Act (MTMA), the model law developed through the Conference of State Bank Supervisors (CSBS) and adopted by a growing number of states since 2021, standardizes the test. It requires a licensee to maintain at all times tangible net worth of the greater of $100,000 or a percentage of total assets that declines in tiers as assets grow: 3% of the first $100 million, 2% of assets between $100 million and $1 billion, and 0.5% of assets above $1 billion. Regulators may grant exemptions or require more in particular cases.

Applicants usually demonstrate compliance in the license application through the NMLS, and licensees report it in periodic filings such as NMLS MU filings and annual audited statements. A fall below the minimum can lead to a requirement to inject capital, restrictions on activity or suspension.

Capital requirements exist so that a licensee can absorb losses without failing to pay customers. Goodwill and similar intangibles have value only while the business is a going concern and are hard to sell in an insolvency. A company built through acquisitions might report large equity that consists mostly of goodwill, yet have little real loss-absorbing capacity. Deducting intangibles gives regulators a more conservative measure, similar in spirit to the deductions from bank regulatory capital under Basel rules.

• Different definitions: a company licensed in many states may have to compute tangible net worth several ways.
• Group structures: capital held by a parent does not count unless it is in the licensed entity, which is one reason regulators examine a change of control closely.
• Growth: under asset-based formulas, fast growth raises the requirement, so capital planning must track the balance sheet.
• Relationship to other tests: tangible net worth is separate from liquidity and safeguarding of customer funds; a firm can meet one and fail another.