Sum of Parts Valuation (SOTP)
Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above business by itself, On unitary basis it should be Rs 200 i.e. Value of C company = Value of A company + Value of B company.
It seems so simple; however it is not the way how valuation actually happens in the real life scenarios. That’s where the role of a valuer becomes significantly important. A corporate valuer always focus on the risk involved while undertaking any SOTP valuation and gives appropriate discounts accordingly. In the
In real life scenario there are companies which are engaged in diversified business, and each business has different product line, profit margin etc, so to value diversified companies on a consolidated level, like consolidated sales and consolidated profit may not able to give a true value of the company as some business segment may fetch a high comparable companies multiple and some low Multiple. Similarly the cash flow generating components of each Biz would also be different.
What is Sum of the Parts Valuation?
It is the Value of a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another company.