What is your company actually worth?
Every founder has a number in their head. The trouble is that the moments that really matter, selling shares, raising money, settling a dispute, all demand a number that survives someone else's scrutiny.
That's what a valuation is for. Here are the methods used in Hong Kong, when you genuinely need one, and how to prepare so the number holds.
When you actually need one
Valuations get bought for events. The common triggers here:
- Selling or transferring shares, including to family or co-founders
- Raising investment and negotiating equity
- Stamp duty adjudication on a share transfer
- Shareholder disputes and buyouts
- Financial reporting items that require a fair value
- Divorce or estate matters involving company shares
Different triggers need different levels of rigour. Something to help you negotiate is one thing. A report that has to stand up in front of a court or the Stamp Office is quite another.
The income approach
This values a business by the cash it's going to generate.
The best known version is discounted cash flow, which forecasts future earnings and discounts them back to what they're worth today. It suits established companies with reasonably predictable cash flows.
Its weakness is that the output is only as honest as the forecast going in. Aggressive projections produce impressive valuations that no buyer or professional valuer will accept, which is exactly why the assumptions are the first thing anyone challenges.
The market approach
This values your business by what comparable businesses actually sell for.
Valuers look at pricing multiples, usually of earnings or revenue, drawn from similar transactions and listed peers, then adjust for size, growth and risk. It has the advantage of grounding the number in reality rather than in a spreadsheet.
The Hong Kong difficulty is comparability. Private deal data is thin, so choosing genuinely similar comparables is where the skill lives, and where the argument usually happens.
The asset approach
This values the business as its assets minus its liabilities, adjusted to current values.
It fits holding companies, property-heavy businesses and wind-down situations. It also acts as the floor for a lot of valuations, since a profitable business is normally worth more than the sum of its parts.
For a services company with very few tangible assets, this method understates value badly. Choosing the method is itself a judgement call, and a good valuer will usually triangulate between two or three of them.
The trigger nobody expects: stamp duty
This is the one Hong Kong founders run into without seeing it coming.
Stamp duty on a share transfer is assessed on the higher of the price paid or the net asset value behind the shares. So transferring shares cheaply between related parties doesn't produce a cheap stamp duty bill. The Stamp Office can simply assess duty on the real value instead.
A client planned a HKD 1 share transfer in a company that held property. Getting a proper valuation done first meant the duty was calculated correctly from the start, and there was no dispute afterwards. Doing it the other way round is how people end up arguing with the Stamp Office.
What it costs
Cost follows purpose and rigour.
An indicative valuation for your own internal decision-making is the lightest and cheapest thing you can buy. A full formal report for a transaction, the Stamp Office or a court sits considerably higher, priced by how complex the business is and what standard the report has to meet.
Work out what the valuation needs to withstand, then buy exactly that level. Paying for a formal report to settle a casual internal question wastes money, and so does taking an indicative number into a stamp duty adjudication.
How to prepare
Valuers work from your records, so your records set the ceiling on how good the answer can be.
Have ready: clean financial statements for recent years, up-to-date management accounts, and defensible forecasts with the assumptions written down. List any one-off items, related-party transactions, and anything a stranger would raise an eyebrow at.
Messy books don't just slow the process down. They push every judgement call against you, because uncertainty always discounts value.
The short version
Valuation in Hong Kong is a toolkit. Income, market and asset approaches, matched to whatever event triggered the question in the first place. The number that matters is the one built for its actual purpose, on records that hold up.
If shares are about to move or investment is on the table, value first and negotiate second.
Common questions
What are the main valuation methods?
The income approach, which values future cash flows. The market approach, which uses comparable transactions. And the asset approach, which is assets minus liabilities. Valuers frequently combine them.
When does a Hong Kong company need a formal valuation?
Share transfers and stamp duty adjudication, fundraising, shareholder disputes and buyouts, certain financial reporting items, and legal matters involving shares.
How does valuation affect stamp duty?
Duty is charged on the higher of the price paid or the underlying net asset value. Undervalued related-party transfers get reassessed, so valuing first avoids the dispute.
What does a valuation cost?
It varies a lot with purpose and complexity. Indicative valuations for internal use cost least, formal reports for transactions or courts cost considerably more. Match the rigour to the need.
What will a valuer ask for?
Recent financial statements, current management accounts, forecasts with the assumptions stated, and disclosure of one-off items and related-party dealings.
Can I value my own company?
Roughly, for your own curiosity. For any transaction, tax or dispute purpose, an independent professional valuation is what counterparties and authorities will actually accept.