Sum-of-the-Parts Valuation SOTP Definition

3) SunPower is already a self-sufficient company, and it will keep all its non-Maxeon divisions after the spin-off. There are no additional expenses to subtract because SunPower already has teams to handle functions such as accounting, IT, and HR. One problem with analyzing the divisions separately is that they often need services that the larger parent company provides. As a result, the company as separate entities could be worth more than the company as a single entity. But solar manufacturing accounted for only about half of SunPower’s revenue, so management and investors felt the company was undervalued. Before the spin-off, SunPower was a solar manufacturing, installation, and services company, but it had always traded at a significant discount to pure-play solar installation/services companies.

How to value companies with negative earnings

• For example, you might hear that a young technology company is “worth more than the sum of its parts,” meaning the value of the company’s divisions could be worth more if they were sold to other companies.
• An acronym expressing exaggerated dismay at one’s absurdly unfortunate situation, meaning ‘Fuck My Life, This World Is Absurd’.
• The following spreadsheet demonstrates how to set up the sum-of-the-parts analysis for a publicly traded company.
• For help on choosing the right valuation tool check out Investopedia’s guide to picking the right valuation method.
• If a company is controlled by the parent then its TEV is already part of the parent’s TEV.

You might skip this step for private companies because share prices are less meaningful there. The Sum-of-the-parts valuation is otherwise called the breakup value as it surveys what individual segments would be worth in the event that the company was broken up. Before we get started with each case, we shall calculate each company’s individual TEV. At the moment we are ignoring the % equity ownership of the parent within each entity. The sum-of-the-parts valuation (SOTP) is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company. And if the expenses for these services are not included in the separate financial statements, each division’s profitability might be overstated.

(5) Deduct net debt and add/subtract other non-operating/financial items from the EV range to determine a range of equity values. (4) Sum the values of each business segment, offset by corporate overhead, if appropriate. Sum-of-the-parts valuation, otherwise called breakup value analysis, assists a company with grasping its true value.

• Once we have all these individual pieces, we can put them together to estimate the value to shareholders if this spin-off proceeds as planned.
• The valuation gives a scope of values to a company’s equity by conglomerating the standalone value of every one of its business units and showing up at a single total enterprise value (TEV).
• And if the expenses for these services are not included in the separate financial statements, each division’s profitability might be overstated.
• 1) We’ve already re-allocated corporate overhead costs appropriately in the separate models.

Putting Together the Segment Results in a Sum of the Parts Valuation

If a company is not controlled by the parent, then only the relevant equity investment is part of the parent’s total equity and hence its TEV. For this example we shall use a diversified company with three distinct businesses – a retailer with brick and mortar retail operations, real estate assets and online operations. All 3 cases have the same sub-entities but the difference lies in the % of equity ownership of the parent within each entity. It focuses on measuring the value of a business with distinctively different divisions or varying degrees of equity investments in other companies. By doing so you can achieve a more accurate valuation than only using earnings, the balance sheet and cash flows.

The value of every business unit or segment is derived separately and not entirely set in stone by quite a few analysis methods. For instance, discounted cash flow (DCF) valuations, asset-based valuations and multiples valuations utilizing revenue, operating profit or profit margins are methods used to value a business segment. Sum-of-the-parts (“SOTP”) or “break-up” analysis provides a range of values for a company’s equity by summing the value of its individual business segments to arrive at the total enterprise value (EV).

The Step-by-Step Process for a Sum of the Parts Valuation

While both are valuation devices, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, esteeming a segment of a company might be finished with a DCF analysis. In the interim, the DCF utilizes discounted future cash flows to value a business, project or segment. The current value of expected future cash flows is discounted utilizing a discount rate. sotp meaning 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.

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The sum-of-the-parts (SOTP) valuation includes esteeming different business segments, and more valuations accompany more inputs. Too, SOTP valuations don’t consider tax suggestions, prominently the ramifications engaged with a spinoff. The valuation gives a scope of values to a company’s equity by conglomerating the standalone value of every one of its business units and showing up at a single total enterprise value (TEV).

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Sum of the parts analysis (SOTP), or break-up analysis, is a method of valuation of a multi-divisional company, holding company, or a conglomerate. The essence of the method is to determine what divisions would be worth if the conglomerate is broken up and spun off or acquired by another company;1 see Conglomerate discount. The analysis calculates a range of values for a conglomerate’s equity by summing the value of its individual business segments or divisions to get the total conglomerate’s enterprise value. The equity value is then calculated by subtracting net debt and other non-operating adjustments. 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.

It is likewise conceivable to involve this valuation in circumstances where a company is being revalued after a restructuring. This refers to a situation when the stock market values the assets of the diversified company at less than the estimated sum of the part. The price to earnings multiple of conglomerates tends to be lower than companies that focus on a single business. Sum-of-the-parts analysis estimates the TEV of the parent by adding up the individually estimated TEVs of the companies involved. If a company is controlled by the parent then its TEV is already part of the parent’s TEV.

Step 4: Determine the Entire Company’s Implied Enterprise Value

While understanding enterprise value, bottom up, we will calculate the TEV of the parent by adding the individual enterprise values using the above M&A consolidation rules. For calculating the EVs of each individual entity we shall use the EBITDA multiple method, but you can use any other valuation methodology such as DCF. The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs. As well, SOTP valuations do not take into account tax implications, notably the implications involved in a spinoff. Sum-of-parts valuation, also known as breakup value analysis, helps a company understand its true value. For example, you might hear that a young technology company is “worth more than the sum of its parts,” meaning the value of the company’s divisions could be worth more if they were sold to other companies.

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. The valuation provides a range of values for a company’s equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value (TEV). The equity value is then derived by adjusting the company’s net debt and other non-operating assets and expenses. The SOTP valuation is most ordinarily used to value a company contained business units in various industries since valuation methods contrast across industries relying upon the idea of revenue. It is feasible to utilize this valuation to shield against a hostile takeover by demonstrating the company is worth more as a sum of its parts.

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