Today's Viewpoint: A MarshBerry Publication

How Does Value Subjectivity Impact Your Firm?

Valuing your business is highly important, but valuations can also be very subjective. Who you hire to value your firm can mean the difference between an accurate assessment that accounts for the business’s unique qualities vs. one that potentially undervalues your asset. 

 “Value is in the Eye of the Beholder” or “One Man’s Trash is Another Man’s Treasure” are well-known sayings that convey the subjectivity of value. While this may be inherently true, it’s often difficult to accept, especially when you are the owner (and potential seller) of something valuable. And particularly when contemplating the value of something in which you’ve invested significant time and energy, such as your business. 

Valuations are not one size fits all 

In order to accurately value a business, you would likely seek out someone who understands the market for that type of business. It stands to reason that a person with specific market knowledge can better identify what makes your property unique and possibly superior to other investment opportunities. It would be even better if that person had knowledge of the transaction values for similar types of assets. For example, you wouldn’t take a rare coin to an antique auto collector for an appraisal. The value of an insurance broker or wealth advisor is unique and complicated, with intricacies that are likely to be missed by someone with little or no financial services industry knowledge. 

But how does value subjectivity impact your firm? You may view the regular exercise of getting a valuation done as a “check the box” task. Something to be done at the lowest possible expense with the least amount of effort because “Aren’t all valuation firms the same?” Actually, no. In fact, the expertise of the valuation specialist can have a significant impact on the concluded value of any asset, and your firm is no different. 

Popular valuation methods can yield very different results 

Two common valuation methods are the Discounted Cash Flow (DCF) and comparable transactions approaches. Both these methods are often applied to insurance agencies and brokers or wealth management firms, and the accuracy of each depends on the evaluator’s expertise.  

The DCF method projects future earnings for the subject company after normalizing historical earnings for certain “add backs.” The evaluator relies on their industry expertise to know what these normalizing adjustments could be, while projecting growth and margins into the future. These earnings are then discounted back to present values at a rate specific to the individual subject company (and the industry), a figure also affected by the evaluator’s professional judgement based on their detailed review of the firm. 

The comparable transactions method identifies a set of comparable firms that were sold in order to determine the external “market” value for the subject company. Many valuation firms rely on transaction databases comprised of public transactions or private data that has been anonymized and broadly categorized by industry (for example, “restaurants”) to build this set of comparable transactions. But this method does not lend itself well to finding truly comparable companies. The valuation analyst is relying on inference and incomplete information to build a set of sellers similar to your firm.   

Be careful who you entrust to value your firm 

MarshBerry has both the industry knowledge and transaction experience to provide your firm with a valuation that considers its unique qualities and how those may impact value. Many times, a business owners’ most valuable asset is the business itself. Who are you trusting to calculate the value of one of your most important business assets? If you aren’t working with a firm that has the expertise in the industry in which the business operates, you may be taking your insurance or wealth management firm to the proverbial “auto dealership” for a quote. And as the saying goes, you get what you pay for. 

If you have questions about Today’s ViewPoint, or would like to learn more about how to navigate the complexities of valuing your firm, email or call Courtney Ferrara, Director, at 440.392.6586.  

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Contact Courtney Ferrara
If you have questions about Today's ViewPoint, or would like to learn more about how MarshBerry can help your firm determine its path forward, please email or call Courtney Ferrara, Director, at 440.392.6586.

MarshBerry continues to be the #1 sell side advisor in the industry (as ranked by S&P Global). If you’re considering selling your firm, we are the best choice to help you through the complicated process. If you don’t hire MarshBerry, hire a reputable advisor that can help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to do this on your own.