To create an SOTP model and valuation for GE, you would build out financial models for the individual components, including valuations if desired, and sum them together to arrive at the WholeCo level (combined company and entire business). In the General Electric scenario, it’s obvious that you will need different revenue and expense builds for each segment of the business. The company has (or had) offerings across aviation, healthcare, and financial services, among many others. Each of these will have totally different product offerings, revenue models, cost bases, and valuations. 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.

  1. 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.
  2. The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs.
  3. 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.
  4. By multiplying the EV/EBITDA multiple by the corresponding EBITDA metric for each segment, we can determine the segment enterprise values.
  5. As previewed above, SOTP refers to the practice of segmenting businesses into different parts for the purposes of valuation or financial modeling.

This may be a large conglomerate, such as General Electric, or a smaller company that has a few different offerings. For help on choosing the right valuation tool check out this guide to picking the right valuation method. Below is a list of examples of when this type of analysis is useful, and when it isn’t. Upon completing each division’s valuation, the values are added up to arrive at the total enterprise value (TEV).

An SOTP financial model of the document printing business will require analysis of foot traffic, print volumes, pricing by document type, cost of paper, rent, store employees, etc. Conversely, the eCommerce model will require a view on number of printers sold, price of the printers, cost of goods for the printers, warehouse space, online advertising expense, etc. Sum-of-the-parts, or SOTP, is a modeling and valuation approach frequently used by bankers and investors. This guide will provide background on the methodology, cover how to employ it yourself, and just give you a real explanation of the term if you’re simply curious about the meaning of SOTP.

Learn More About the SOTP Valuation

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 first step is to determine what the appropriate business segments should be to value the firm.

When to Use SOTP Valuation

One sector in which SOTP analysis is relied upon is the biotech sector, particularly for clinical-stage, pre-revenue companies. Your model should have a consolidated view of the business with clear sotp meaning breakdowns of the different parts. This will most likely take the form of a consolidated Income Statement, with revenue, expense, and EBITDA subtotals reflecting the business lines included.

(6) Divide by the sum of diluted shares outstanding to arrive at a range of equity values per diluted share. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. 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.

Sum-of-the-Parts Valuation (SOTP) Meaning, Formula, Example

Any opinions, analyses, reviews or recommendations expressed here are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any financial institution. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. Our SOTP modeling tutorial will start with some background details regarding the hypothetical company. We’ll now move to a modeling exercise, which you can access by filling out the form below.

For more complex models with advanced revenue and expense builds you’ll likely need multiple tabs for each segment. In this case, make sure they’re grouped together and all coded in the same color (use different colors for each segment). For simple models, keep each part isolated on different tabs, with revenue and expenses building to EBITDA for that segment. The most important point for this business will be the difference in value between the two segments.

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. To do so, ask yourself what the key value drivers are and whether or not one segment is driving/distorting the overall company value. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs. We endeavor to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. This section will cover some common best practices to ensure you build a great sum-of-the-parts model and valuation. Every scenario will be different, but these guidelines should be broadly applicable.

The Sum-of-the-parts valuation is also known as the breakup value as it assesses what individual segments would be worth if the company was broken up. 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. For help on choosing the right valuation tool check out Investopedia’s guide to picking the right valuation method.

Say the physical printing business is quite a bit bigger in terms of both revenue and EBITDA. The SOTP methodology is not limited to the largest multinational conglomerates (as some textbooks might have you believe). In reality it’s also hugely helpful for any business with disparate divisions or offerings. SOTP is commonly used when you’re modeling or valuing a company with different business lines.

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. 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. A DCF analysis for certain segments may also be a useful tool when forecasted segment results are available or estimable. While both are valuation tools, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation.

At the highest level, your Excel tab structure will become more important in an SOTP model. 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. Now that we’ve covered types of businesses where an SOTP approach is helpful, we can now talk about a few practical applications. Note that SOTP is helpful and used frequently in standard M&A and capital raising transactions, but these specific scenarios are even more tailored to the approach. This dynamic is reflected by applying different multiples to each segment, say 8.0x EV / EBITDA for the physical printing and 15.0x EV / EBITDA for the eCommerce business.

Then, upon deducting net debt from the enterprise value, the implied equity value can be derived. There is no doubt it will come up over and over again through your career, and can be a helpful tool in your toolkit. Generally, the valuation work should take place on one tab for all segments, https://1investing.in/ Link in the various EBITDAs and make sure you clearly label everything. 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.