The most common investment strategy for SMSFs is investing in shares of both publicly traded companies and private companies. SMSF Trustees are required to do asset valuations at the year end to ensure that Member’s balances accurately reflect asset holdings.
A company valuation determines the estimated financial worth of your SMSF’s business investments.
Here are some common methods for valuing a company:
1. Book Value Method
This method uses the company’s balance sheet to calculate the value by subtracting liabilities from assets.
- Property, inventory, equipment, cash reserves, accounts receivable, and intellectual property like as patents are all considered assets. Debts like loans, overdue taxes, and accounts payable (bills you owe) are all considered liabilities.
- For example, if a company has $10 million in assets and $5 million in liabilities, the book value is $5 million.
2. Liquidation Value Method
This method determines the value of the company based on the current market value of its assets, instead of the recorded book value. It assesses how much the company would be worth take into account of the value fluctuation due to external factors.
- Formula: Company value = Liquidation value of assets – Liabilities
3. Earnings Multiple
This valuation is based on the company’s annual earnings (either net profit or EBITDA), multiplied by a specific industry multiplier.
- Formula: Company value = Earnings x Multiplier
- The multiplier can vary among industries, typically ranging from 2x to over 10x, depending on the company’s strengths and market position.
4. Revenue Multiple
Similar to the earnings method, this method applies a multiplier to the company’s annual revenue rather than its profit.
- Formula: Company value = Annual revenue x Multiplier
- Industry-specific multipliers are often used for this calculation.
5. Free Cash Flow Multiple
This method calculates a company’s value by multiplying its free cash flow (money left after business and capital expenses) by a multiplier.
- Formula: Company value = Free cash flow x Multiplier
6. Entry-Cost Approach
This method values a company by estimating the cost to replicate it from scratch, including capital expenses, customer acquisition, and brand-building efforts. This approach may not be suitable to valuate the company that has lots of hard-to-replicate assets.
7. Market Value of Equity
For public companies, market capitalisation represents the total value of all shares outstanding.
- Formula: Company value = Share price x Number of shares
- When an SMSF invests in a private company, it may carry higher levels of complexity.
8. Enterprise Value
This method considers the combined value of shares, adjusted for debts and cash reserves.
- Formula: Company value = Market capitalisation + Cash – Debts
- This offers a more comprehensive view than market capitalisation alone and is often used alongside the Debt-to-Equity (D/E) ratio.
Annual Valuation
Trustees need to send Superannuation Warehouse the market value of the assets when sending the year end documents for preparing the annual return. Trustees can use the template to declare the market value of the SMSF’s assets at year-end.
