Business Valuation in Hong Kong

The demand for business valuation in Hong Kong has been growing steadily over the years along with the growth of the number of listed companies in Hong Kong. Listed  company requires business valuation to fulfill the requirements of fair value accounting. Business valuers or appraisers are also appointed in acquisition or disposal transaction to support the board of directors’ decision making and provide formal documentation of  the rationale of setting the price of a deal. Besides, business valuation is also involved in transactions in private companies, fundraising, project tender, litigation process (such as matrimonial cases) and assessing tax implications.

Another reason for seeking valuation opinion is to deal to increasingly stringent regulations regarding valuation. The SFC of Hong Kong has become increasingly concerned that some listed companies are acquiring assets at unreasonably high prices or selling assets which are substantially undervalued. Appointing professional valuer ensures that the whole valuation of a particular project or company is transparent and justified.

Business valuation is a systematic process to determine the economic value of a business or company as at a specific valuation date. Key concepts in business valuation includes ownership rights, the base of value, appropriate valuation methodology, reasonable valuation assumptions, economic and industry considerations, capital structure considerations, operating and non operating assets. Generally speaking, valuation is more of an art than a science. Business owners, management and potential buyers form their view of valuation from their own perspective. The role of business valuation professional is to balance the factors and make justified valuation conclusion. The key information supporting the valuation is well documented in a formal valuation report.

Financial modelling technique is essentials. Accounting and financial reporting knowledge are also important as you need to understand the financial statements. The bigger the valuation target is, the more accounting knowledge is required as the book and accounting policy is much more complicated for larger group or corporations. Experience in the industry also matters. Experience allows valuers to ask relevant questions and obtain necessary information from the company to support the valuation.

Business valuation is a specialized profession in Hong Kong. Unlike other most specialized professions, business valuation does not have a industry-wide institute and registered qualification in Hong Kong. Fortunately, International Valuation Standards published by International Valuation Standards Council provided solid guidelines for how a professional valuation engagement should be conducted. To me, a qualified valuation means should consider all material factors affecting the value of a business under the base of value selected. The disclosures in the report should be enough for the intended users of the report.

The importance and responsibility of performing business valuation is getting higher in the financial market. Business valuation will atract more attention in Hong Kong. The issues faced by valuation professional are getting more diverse and complicated. Development of necessary data and technology solution will the future of valuation industry.

At Valtech Valuation, we invest in comprehensive training for our valuers, honing their expertise in various domains. Our consulting team is equipped to offer a wide spectrum of valuation and financial analysis assistance, spanning from standard financial models to sophisticated quantitative models in finance. Additionally, we emphasise matching the right consultant with specific asset types. For instance, property and land valuations are handled by qualified surveyors, while business valuations are entrusted to individuals fully qualified in financial analysis (holding either CPA or CFA qualifications) to ensure accurate and well-informed conclusions.

You will be able gain the all-round supports from our valuation consultants in the following area:

• Financial Analysis: Proficiency in financial analysis is fundamental for valuation. This includes understanding and interpreting financial statements such as balance sheets, income statements, and cash flow statements.
• Understanding of Valuation Methods: Knowledge of various valuation methods, such as discounted cash flow (DCF), comparable company analysis, comparable transaction analysis, and asset-based approaches, is crucial. Each method has its strengths and limitations and is applicable in different situations.
• Industry Knowledge: Being familiar with the industry in which the asset or business operates is essential. Industry dynamics, trends, and benchmarks can significantly impact the valuation process.
• Forecasting and Projections: The ability to create realistic financial projections and forecasts is vital for DCF and other valuation models that rely on future cash flows.
• Econometrics and Statistics: Understanding basic econometrics and statistical concepts is beneficial, especially for analysts who work with regression analysis and other statistical models in valuation.
• Market Research: Conducting thorough market research helps in identifying comparable companies or transactions and understanding market trends that affect valuation.
• Risk Assessment: Assessing the risks associated with an investment or business is crucial for an accurate valuation. This includes analyzing both systematic (market-related) and unsystematic (specific to the company) risks.
• Excel Proficiency: Valuation often involves complex financial modeling and data analysis in spreadsheets. Proficiency in Excel is essential for handling and manipulating financial data efficiently.
• Communication Skills: Effective communication is necessary for conveying the valuation results and their underlying assumptions to clients, colleagues, or stakeholders clearly. This is extremely helping when regulator and auditors may have questions on the valuation result.

Market approach is commonly applied in the business valuations in Hong Kong. Business valuation multiples and discounts are common tools used in the valuation process to estimate the value of a business. These multiples and discounts can vary based on the industry, economic conditions, and specific circumstances of the business being valued. Here are some common business valuation multiples and discounts:

Valuation Multiples:

• Price-to-Earnings (P/E) Ratio: Compares the market price per share to the earnings per share. It’s often used for publicly traded companies.
• Price-to-Book (P/B) Ratio: Compares the market price per share to the book value per share. This is particularly relevant for industries with significant tangible assets.
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: Compares the enterprise value (market capitalization plus debt minus cash) to earnings before interest, taxes, depreciation, and amortization. It’s useful for assessing the entire value of a business.
• Revenue Multiples: Compares the business’s market value to its revenue. Common revenue multiples include Price-to-Sales (P/S) and Enterprise Value-to-Revenue.
• Gross Profit Multiples: Compares the market value to the gross profit generated by the business. This can provide insights into operational efficiency.
• EBIT Multiples: Compares the market value to earnings before interest and taxes. It’s useful for assessing operational profitability.
• EBITDA Multiples: Similar to EBIT multiples, but using earnings before interest, taxes, depreciation, and amortization.
• Industry-Specific Multiples: Some industries have unique valuation multiples based on specific financial metrics relevant to that industry

Premiums and Discounts:

• Lack of Marketability (DLOM): This discount reflects the fact that shares of a private company are typically less liquid and trade at a discount compared to shares of a publicly traded company.
• Lack of Control (DLOC): When a valuation is for a minority interest in a business, a discount might be applied to reflect the lack of control over the business’s decisions.
• Illiquidity Discount: Similar to DLOM, this discount reflects the difficulty of selling or converting an asset quickly.
• Market and Economic Conditions: Discounts might be adjusted based on the current state of the economy or the industry, affecting the perceived risk and potential return on investment.
• Size and Scale: Smaller businesses might have discounts applied due to potentially higher risk or limited economies of scale.
• Asset-Specific Discounts: Discounts might be applied to account for specific assets that are not easily marketable or have limited utility.
• Control Premium: In some cases, a premium might be applied to account for the added value of controlling a business.