Guide to Business Valuation in Hong Kong
Businesses need to know what they are worth, as it is critical to not only investors, but also buyers.
Hong Kong is considered one of the best places to start and run a business. With its free economy and simple & low tax system, it’s no wonder entrepreneurs decide to set up a new business in Hong Kong. However, many businesses tend to fail in their first year. The success for any business lies on how well you strategize and scale up your company. One way to figure out how your business is doing is by getting a business valuation in Hong Kong. Getting a business valuation can help you keep your company afloat by using it as a baseline for coming up with growth strategies.
Businesses need to know what they are worth, as it is critical to not only investors, but also buyers. This is where a business valuation is needed. When your business is valued, you can tell an investor, stakeholder, buyer, or banker what it is worth. Also, if an investor or stakeholder wants a portion of your business, you can set a proper price that they have to pay since you’ve gotten a business valuation.
What is a Business Valuation?
Business Valuation is the analytical process of determining an asset or company’s current (or projected) worth. The experts in business valuation are always looking for opportunities to conduct various valuation methods and determine the exact value of the business. They also guide business owners and entrepreneurs on scaling up the business and find the competitive advantages the business has.
Why is Business Valuation Important for your Hong Kong Business?
Business valuations help to form a baseline for businesses in Hong Kong. Valuations are good indicators of what one is doing well and what one should improve on. The worth of a company may increase some years and decrease slightly other years (particularly in the event of a market correction). However, you have no concrete evidence of how you’re doing until you know your baseline. Key performance indicators (KPIs) will be used in a complete valuation to look at the non-financial characteristics of a business that are actually the underlying value generators. Corporate structure, client demographics, technology utilization, and company infrastructure are only a few examples. KPIs help identify areas where the firm could improve – and, in turn, present methods to generate value.
Business Valuation in Hong Kong
Hong Kong offers a variety of valuation services that are extremely imperative for knowing the company’s net worth. Some of the business valuation services are explained below:
- Financial Instrument Valuation (HKFRS 9 Financial Instruments) – The amount for which a financial asset or obligation might be exchanged or settled on a particular date between two educated, willing parties in an arm’s length transaction under market conditions is the fair value of that asset or liability on that day.
- Impairment of Assets (HKAS 36) – If the carrying value of an asset exceeds the amount that can be recovered through use or sale, it is said to be carried at more than its recoverable value. If this is the case, the asset is classified as impaired, and the entity must recognize an impairment loss under HKAS 36.
- Purchase Price Allocation Valuation – Purchase price allocation (PPA) is a goodwill accounting technique in which one firm (the acquirer) allocates the purchase price of a second company (the target) to various assets and liabilities acquired as a result of the transaction.
- Private Equity Valuation – A publicly listed company’s market value can be calculated by multiplying its stock price by the number of outstanding shares. Private enterprises, on the other hand, face a more complicated and opaque process. Private companies don’t have to declare their financials to the public, and because they don’t have a stock listed on a stock exchange, determining their value can be tricky. Valuations are crucial in business, not only for companies but also for investors. Companies can use valuations to track their progress and success in the market, as well as compare their performance to that of others.
Common Methods for Business Valuation
These are the common business valuation methods that are used to determine the value of a company’s worth of assets. The five methods are given below:
- Market Capitalization – The most basic approach to valuing a company is to use market capitalization. It’s computed by dividing the company’s share price by the total number of outstanding shares.
- Time Revenue Method – The multiple of earnings valuation approach also considers a company’s future profits potential when determining its worth. This small business valuation approach, commonly known as the time revenue method, assesses a business’s maximum worth by multiplying current revenue by a multiplier. Multipliers differ depending on the industry, the economy, and other factors.
- Earnings Multiplier – The earnings multiplier, rather than the time revenue technique, can be used to acquire a more accurate representation of the company’s net worth. The only way to determine the profits is to analyze the current market; profits are the only parameters for understanding the earnings multiplier. Earnings Multiplier might be subjective regarding financial services, but it is not a mandate for any company to be implemented. Earnings Multiplier can only be possible if there is a constant increment in the profits.
- Discounted Cash Flow (DCF) Method – This method is based on future cash flow estimates that are updated to determine the company’s current market value. Valuation multiples are the fastest manner to price an organization and are beneficial in evaluating comparable companies (similar enterprise analysis). Finally, multiple valuations capture the market’s temper, a variable mainly omitted with the DCF method.
- Book Value – Your balance sheet is used in the book value approach to determine the value of your firm at any given time. Using this procedure, the value of your equity—or total assets minus total liabilities—is computed, and this amount represents the value of your company. The book value technique may be beneficial if your company has moderate profits but substantial assets.
- Liquidation Value – The liquidation value asset-based method to valuation assumes that the company is closed and its assets will be liquidated. In this example, the value is determined by the amount of net cash available if the business was complete and the assets were sold. Because liquidation value is generally substantially less than fair market value, the value of a company’s assets will likely be lower than usual.
Business Valuation Services in Hong Kong
The process in Hong Kong is based upon certain norms made by the company. A business valuation specialist assists business owners in obtaining an objective appraisal of their company’s value. They need the help of business valuation experts to assess a company’s fair market value, especially for business sales, partnership ownership, estate and succession planning, and divorce cases. In Hong Kong, the demand for business valuation specialists is growing as fair value reporting, and International Financial Reporting Standards (IFRS) become more widely recognized.
Why does a business need its valuation done by experts?
Most programs that offer business valuation accreditation need business valuation training, which can be obtained through in-house courses, independent study, or partnerships with third-party educators. Testing is required as part of the certification program, which can be done online or in a classroom setting. The accrediting organizations award the candidate certification whenever they are pleased with the candidate’s level of training. In certain situations, new members are required to pay an annual subscription fee in order to remain a member of the organization. The specialists are also expected to engage in accreditation bodies’ continuing education programs.
Why choose Eqvista for valuation services in Hong Kong?
Partnering with Eqvista offers long-term benefits where Eqvista enables businesses, investors, and shareholders to track, manage, and make informed decisions about their company’s equity. We make it possible for early-stage and pre-IPO companies to handle their equity electronically and track all shareholder activities. Incorporate your business and manage your own in one location to save time and effort. Use the Eqvista platform to issue shares and maintain contact with your investors.
Get high-quality business valuation reports from Eqvista!
We at Eqvista are providing a business valuation for companies, and our experts will guide you on the entire process of getting the business valuation. We also offer consultations for the management of your shares, accounts, and growth of the business strategies. The software that we provide is highly transparent and user-friendly, which helps our clients to get the most out of our services. If you want to get your valuation done for your company in Hong Kong. Fill up the signup form, and one of our executives will reach out to you for a free consultation.