Sum-of-the-Parts Analysis

This section will cover some common best practices to ensure you build a great sum-of-the-parts model and valuation. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month.

Then make sure you have clear inputs for multiples (or other valuation drivers) across each of the segments. Show a per segment valuation, and then show a sum of the segment-level valuations as your WholeCo valuation. Sum-of-the-parts, or SOTP, is a modeling and valuation approach frequently used by bankers and investors.

When employing this tactic, your model will have different builds for revenue and expenses across each of the ‘Parts,’ ultimately building to segment-level EBITDAs. From there, the sum of each of the segment-level EBITDAs will generally equal the EBITDA of the whole company (WholeCo). Sum of the Parts Analysis (SOTP), or “break-up analysis”, estimates the value of each business segment within a company separately, which are then added together to arrive at the company’s implied total enterprise value. The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs.

  1. The following spreadsheet demonstrates how to set up the sum-of-the-parts analysis for a publicly traded company.
  2. Sum Of The Parts (SOTP) valuation is an approach to valuing a firm by separately assessing the value of each business segment or subsidiary and adding them up to get the total value of the firm.
  3. Here, the comps-derived valuation is estimated using the “Low” and “High” end of the EV/EBITDA multiple ranges pulled from each segment’s peer group.

This approach is often used for conglomerates to determine what the company would be worth if its segments were to be sold off separately. It allows analysts to identify potentially undervalued or overvalued segments within a larger company. The discounted cash flow technique is a method of valuation in which the discounted future cash flows of a business are used in the valuing of the business.

Once the firm values have all been calculated, the final step in our modeling exercise is to subtract net debt, which we assume to be $200m. Here, the comps-derived valuation is estimated using the “Low” and “High” end of the EV/EBITDA multiple ranges pulled from each segment’s peer group. As implied by the name, SOTP entails valuing each underlying piece of a company separately and then adding them together, rather than valuing the entire company in aggregate using traditional means.

Step 1. Segment-Level Financial Assumptions

Upon completing each division’s valuation, the values are added up to arrive at the total enterprise value (TEV). The product-level assumptions are intended to address the uncertainties surrounding a product’s path to commercialization, namely the clinical FDA trials as part of the regulatory approval process. Such questions allow an executive team to formulate a strategy for delivering an agreed upon sales, inventory, and operations plan. To do so, ask yourself what the key value drivers are and whether or not one segment is driving/distorting the overall company value.

How to Perform Sum of the Parts Valuation (SOTP)

The equity value is then derived by adjusting the company’s net debt and other non-operating assets and expenses. Sum-of-the-Parts Valuation (SOTP) is a financial modelling technique, often used in financial analysis and business valuation, where you break down a company’s operating segments or subsidiaries and value each one individually. Those different parts are then added back together to calculate the total value of the company. The https://1investing.in/ following spreadsheet demonstrates how to set up the sum-of-the-parts analysis for a publicly traded company. Note that the analysis will typically calculate the premium/discount to the current share price to suggest whether or not the public company is worth more or less when separated into its individual businesses. We’ll cover this in more detail later, but these segments are also helpful to piece together individual valuations.

The SOTP valuation is most commonly used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue. It is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts. It is also possible to use this valuation in situations where a company is being revalued after a restructuring. In the formula above, ND means net debt, NL means non-operating liabilities while NA refers to non-operating assets. Using the above formula, the value of each of the business is derived separately first before they are aggregated or summed up to realize the value of the firm or company as a whole.

With multiple parts, you’ll need to make sure that your model is easy to navigate, both for yourself and for anyone else who looks at your work. The last thing you need is a disorganized mess — you’ll hate your life and be way more likely to make mistakes. The most important point for this business will be the difference in value between the two segments. Say the physical printing business is quite a bit bigger in terms of both revenue and EBITDA. On the lower end of the valuation range, the implied equity value of our company is $860m, whereas, on the higher end of the range, the implied equity value is $1.24bn. Clearly, Segment A contributes the most EBITDA to the company, but the total firm valuation multiple appears to be weighed down by its comparatively lower EV/EBITDA multiple.

How Do You Know If You Need a SIOP Process?

At its core, S&OP will result in a sales plan, an operations plan (manufacturing, purchasing, distribution, logistics, staffing), an inventory plan, and related financial plans (capital, cash, P&L) to support business plans. sotp meaning The sum of the parts valuation can lead to more accurate analysis because it looks at each segment of the business separately. Moreover, it helps identify less profitable or underperforming segments within the company.

If there is one metric that every client has been focused on during these unstable times it is OTIF (on-time-in-full) and how customers are feeling about service, proactive communication and the partnership in general. For help on choosing the right valuation tool check out Investopedia’s guide to picking the right valuation method. (6) Divide by the sum of diluted shares outstanding to arrive at a range of equity values per diluted share. Your model should have a consolidated view of the business with clear breakdowns of the different parts.

SOTP Meaning: Closing Thoughts

The Sum-of-the-Parts Valuation (SOTP) is a valuation method that financial analysts and investors often use to determine the value of a diversified company or conglomerate. The primary objective of a SOTP valuation is to evaluate what a company could be worth if its business units or underlying assets were separately valued and added together. This approach can help analysts understand the overall worth of a business by breaking it down to its constituent components, revealing any potential undervaluation or overvaluation that a more holistic analysis might miss. The SOTP valuation method is particularly useful when auditing an organization that operates in various sectors or has several diversified business units.

DCF is also applicable to the valuing of the future cash flow of a business segment, division or project using a discount rate. In most cases, DCF is a valuation tool that is incorporated into Sum-of-parts valuation (SOTP), it is used to determine the value of the segments or units of a business. For a company with different business segments, each segment is valued using ranges of trading and transaction multiples appropriate for that particular segment. Relevant multiples used for valuation, depending on the individual segment’s growth and profitability, may include revenue, EBITDA, EBIT, and net income.

For example, consider a multinational corporation with operations in real estate, energy, and retail. If a standard unified valuation approach doesn’t adequately account for variances in the industries’ value drivers, an analyst might use SOTP to derive a more accurate valuation. A SOTP valuation can reveal hidden value by assigning specific valuations to different divisions based on relevant multiples or comparable companies in respective sectors. This method also helps in the context of mergers and acquisitions by providing a breakup value should a firm disassemble and sell its parts independently. The value of each business unit or segment is derived separately and can be determined by any number of analysis methods. For example, discounted cash flow (DCF) valuations, asset-based valuations and multiples valuations using revenue, operating profit or profit margins are methods utilized to value a business segment.