In Hong Kong’s financial market, the buying and selling of Licensed Corporations (LCs) has always been a complex and opaque domain. In particular, Type 1, 2, 4, 5, 6, 7, and 9 licensed corporations often show significant price variations due to different regulatory requirements, business scopes, and market demands. This article will delve into the valuation principles, common transaction phenomena, and practical considerations in LC transactions.

I. Dual Nature of Market Prices

The Concept of “Dual Market Prices”

In an LC transaction, a buyer might pay HKD 3 million, but the seller only receives HKD 1.5 million, with the difference being distributed among various intermediaries and service providers.

Due to information asymmetry and multiple layers of intermediaries, the same transaction can simultaneously have two “market prices” (buyer’s cost and seller’s net receipt), both considered “market prices,” reflecting the opacity of market pricing.

Common Causes of Dual Pricing

• High commissions charged by intermediaries or facilitators
• Asymmetric transaction information between buyers and sellers
• Various additional services or responsibilities attached to transaction terms

II. Impact of Multi-Layer Intermediary Structure

Intermediary Commission Structure

• Multiple layers of intermediaries are common in the market, from first-hand introduction to second and third-hand referrals
• Lack of standardized commission standards, with different intermediaries having their own models (fixed fees, percentage-based commissions, or both)

Transaction Process Complexity

• Multiple intermediaries often increase communication costs, distort information transmission, and even lead to disputes over profit distribution
• If commission structures aren’t agreed upon in advance, it may affect price predictability and stability

Conflicts of Interest

Intermediaries may prioritize quick deal completion to earn commissions while neglecting the genuine needs or risks of both buyers and sellers.

III. Valuation Considerations

Company Operating History

• Long-operating companies: Having customer base, revenue records, or mature business models can command certain valuation premiums
• Zero operating history companies: Some buyers prefer “clean” licenses due to simpler due diligence, lower compliance risks, and absence of historical liabilities or potential litigation

Compliance Records and Potential Risks

• Has the company received warnings or fines from regulatory authorities?
• Is the internal compliance system robust? Do senior management and Responsible Officers (ROs) have any compliance violations?
• These factors influence final valuations during negotiations

Market Demand and Regulatory Environment

• If certain license types are in high demand (e.g., mainland investors’ strong demand for Hong Kong asset management licenses), market prices may be pushed higher
• If regulators tighten license issuance standards, existing licensed companies may command higher premiums

IV. Latest Market Price Trends

Type 1 License (Securities Trading)

• General market premium range is approximately HKD 1.5-3 million
• Companies with stable clients and revenue, or meeting specific compliance conditions, often trade above market average
• Actual prices vary significantly based on intermediary levels and buyer demands

Type 4 and 9 Licenses (Securities Advisory and Asset Management)

• Market premium range is approximately HKD 1.2-2.5 million, slightly lower than Type 1 licenses
• Additional licenses (e.g., Type 5 “Advising on Futures Contracts”) or accompanying business items affect final transaction prices

Other Categories (Types 2, 5, 6, 7 Licenses)

• Despite lower transaction volumes, they’re similarly affected by regulatory and market demand fluctuations
• Specific prices depend on company compliance records, business conditions, and buyer purposes

V. Market Behavior Characteristics

Investor Mindset Changes

• Recently, some mainland investors have adopted a “me too” mentality, showing increased interest in Hong Kong licenses, driving up market prices
• Some view license company purchases as “collectibles,” lacking clear business plans, disconnecting prices from real business value

Multi-License Company Paradox

On the surface, multi-license companies are considered more valuable as they can conduct various financial activities simultaneously.

However, actual operating costs and compliance requirements also increase:

• More potential conflicts of interest to avoid
• Need for more compliance staff and senior management
• Business operations may face stricter regulatory restrictions

Therefore, multi-license advantages may not offset complex operation and compliance burdens.

Practical Transaction Considerations

• Legal/lawyer escrow arrangements: The financial sector generally hesitates, viewing processes as cumbersome and costly
• Buyers and sellers usually prefer direct communication or familiar intermediary facilitation to expedite transactions

VI. Market Choices and Recommendations

New Application vs. Acquisition

New License Application:

• Application time may take 6-12 months (depending on license type and case specifics)
• Advantage of being “clean” with no historical burdens and transparent compliance records

Existing License Acquisition:

• Can immediately commence operations if company has operational foundation
• May have historical debts or compliance risks, requiring more thorough due diligence

In Hong Kong practice, time differences between these approaches may not be as significant as imagined; consider personal needs to choose the most suitable approach.

Pre-Transaction Preparation

Buyer:

• Prepare financial budget and risk assessment, particularly noting intermediary commissions may far exceed expectations
• Conduct detailed due diligence on target company, including finances, compliance, business model, client portfolio

Seller:

• Clear historical debts and poor records to enhance valuation
• Communicate transaction terms early with potential buyers or intermediaries to reduce price discounts from misunderstandings

VII. Common Post-Transaction Challenges and Risk Alerts

Business Continuity Issues

• Clients may leave after ownership changes; need advance client retention strategies
• If unwilling to continue existing business, assess transformation costs and timeframe

Hidden Risk Identification

• Some companies may deliberately conceal compliance issues or financial risks pre-transaction; buyers should particularly note audit report continuity and details
• Consider business traces beyond official documents, such as historical contracts, tax situations, employee personnel disputes

Actual Transaction Costs

• Intermediary fees may exceed expectations, especially in multi-layer intermediary structures
• Post-transaction compliance maintenance, hiring suitable ROs and compliance staff are ongoing expenses

VIII. Conclusions and Recommendations

Key aspects of Hong Kong LC transactions:

• Comprehensive information mastery: Buyers need deep understanding of market conditions, transaction processes, and intermediary fee models; sellers need proper company compliance and financial organization to enhance visibility and competitiveness
• Reasonable cost estimation: Beyond license transfer fees, consider intermediary commissions, legal services, auditing, subsequent compliance maintenance, and other hidden costs
• Attention to post-transaction integration: After completion, management transition, client relationship maintenance, and compliance risk assessment cannot be ignored

For potential acquirers, it’s recommended to set clear objectives before transactions, clarifying budget, timeline, and potential difficulties; simultaneously consult professionals (lawyers, accountants, financial advisors) to reduce risks. In a market lacking complete transparency and unified standards, seeking authoritative and trustworthy partners becomes more crucial.

Extended Discussion: Questions for Further Consideration

Compliance Structure and Personnel Arrangements

• Do you have or have you found suitable Responsible Officers (ROs) and compliance executives?
• Do you understand SFC requirements for senior management background and experience?

Transaction Structure Design

• Do you prefer one-time payment or installment/earn-out methods?
• Would you consider retaining original shareholders or management partial ownership to ensure smooth transition?

Risk Management and Subsequent Investment Planning

• Post-transaction, do you have clear business promotion or client expansion plans?
• How to prevent and handle potential complaints, litigation, or regulatory investigations?

Multi-License Integration and Business Direction

• If planning multiple license acquisitions, have you analyzed overlapping business compliance risks and conflicts of interest?
• Can multi-license companies effectively achieve synergies in practice, or will they increase costs and restrictions?

Transaction Negotiation and Intermediary Fees

• Do you understand each intermediary’s actual value and service scope in the transaction process?
• How to evaluate and control intermediary fees, avoiding “large price differences” or multi-layer commission structures?

Market Macro Changes

• If Hong Kong’s regulatory environment or international financial market conditions change significantly (e.g., strengthened anti-money laundering requirements, stricter cross-border fund flow restrictions), would it affect your expected operational strategy?

For further discussion on specific aspects or clarification of particular issues, please share your concerns and needs. I can provide more in-depth analysis and recommendations. Wishing you success in Hong Kong licensed financial company transactions and subsequent operations!