Sum of the Parts Valuation

Key Highlights

• SOTP is a method used to estimate a company’s total value by assessing its individual business units or divisions on their own and then adding those values together.

• Total Value = (Value of Part 1 + Part 2 + …) − Debt + Extra Assets − Extra Liabilities

What is Sum of the Parts Valuation?

SOTP is a method used to estimate a company’s total value by assessing its individual business units or divisions on their own and then adding those values together. It gives a clearer picture of what the whole company is truly worth. It’s like pricing each piece of a puzzle and combining them to see the whole picture. Afterward, you adjust for things like debt or extra assets to get the final value.

Key Steps

• Break It Down: Split the company into its separate parts, like different divisions or subsidiaries.

• Value Each Part: Use methods like cash flow projections or comparisons to similar businesses to estimate each part’s worth.

• Add Them Up: Combine the values of all parts to get the total company value.

• Adjust for Extras: Subtract any debt and add or subtract other assets or liabilities that aren’t part of the main business.

Formula

Total Value = (Value of Part 1 + Part 2 + …) − Debt + Extra Assets − Extra Liabilities

When It’s Used?

• Common for big companies with different types of businesses, like conglomerates.

• Helpful in mergers, acquisitions, restructurings, or defending against takeovers.

• Shows if some parts of the company are worth more than the market realizes.

Limitations

• Needs detailed data on each part, which isn’t always easy to get.

• Involves lots of assumptions, which can lead to mistakes.

• Might miss tax issues or benefits from how the parts work together.