sotp

Sum-of-the-parts (SOTP) valuation is a method used in corporate finance to value a diversified company by independently valuing each business unit and then summing the results. The approach is particularly relevant for conglomerates, groups with distinct lines of business, or assets that are not well captured by a single, unified business model.

To apply SOTP, analysts first delineate reportable segments or operating units. For each unit they select an appropriate valuation technique, such as discounted cash flow (DCF) analysis, comparable company multiples, or precedent transactions. They estimate the unit's standalone cash flows, profitability, and growth, and adjust for any required capital structure, minority interests, or corporate overhead that would not be borne by the unit if it were a separate entity. The resulting value can be expressed as enterprise value or equity value for the unit, and the pieces are then added to form the total company value. Where intersegment cash or debt exists, practitioners allocate or adjust to avoid double counting.

The SOTP method offers advantages when segments have very different risk profiles, growth prospects, or capital requirements, enabling clearer visibility for investors. However, it relies on segmentation choices and assumptions about discount rates, growth, and synergies, which introduces subjectivity. It may over- or understate value if interdependencies are ignored or if units are not truly separable.

SOTP is commonly used in the valuation of conglomerates, spin-offs, or recapitalizations. It is often contrasted with entity-level multiples and should be accompanied by sensitivity analyses and transparent disclosure of segmentation criteria.