Why Business Valuation Matters
An accurate business valuation is essential in mergers and acquisitions, shareholder disputes, estate planning, admission of new investors, employee share schemes, and matrimonial proceedings.
Common Valuation Approaches
Income Approach — Discounted Cash Flow (DCF)
The DCF method values a business by discounting projected future free cash flows to a present value using a risk-adjusted discount rate. This approach is theoretically sound but highly sensitive to assumptions about revenue growth, margin expansion, and terminal value.
Market Approach — Comparable Transactions and Trading Multiples
This approach benchmarks the subject company against comparable M&A transactions or listed companies in the same sector, applying multiples such as EV/EBITDA, EV/Revenue, or Price/Earnings.
Asset Approach — Net Asset Value
The NAV method values the company based on the fair value of its assets less liabilities. Most appropriate for asset-holding companies or businesses being wound up. For operating businesses, NAV is typically used as a floor value.
Key Value Drivers for Hong Kong SMEs
- Quality and sustainability of earnings — customer concentration, contract tenure, recurring revenue
- Management depth and founder dependence
- Brand and intellectual property
- Regulatory licences and barriers to entry
- Working capital efficiency
- Growth prospects in the sector
Case Study: Shareholder Dispute
Two equal shareholders in a Hong Kong professional services firm entered a dispute over the exit of one shareholder. Aaron Wong & Co. was appointed as independent valuer. Using a combination of DCF (60%) and market comparable approaches (40%), the firm’s value was determined at HK$8.4 million. The independent valuation was accepted by both parties, resolving the dispute without litigation.