Sum of the Parts Valuation (SOTP): Steps, Example and Interview Answer

Sooner or later an interviewer hands you a company that does two unrelated things and asks how you would value it. A software business bolted onto a manufacturing business, say. The answer they want is a sum of the parts valuation, or SOTP. The method takes a minute to describe; the follow-ups test whether you understand why it exists.

Why one multiple cannot value two different businesses

A valuation multiple compresses a business's growth, margins and risk into one number. Two divisions with different growth, margins and risk deserve different numbers, and the gap between industries is wide. In Aswath Damodaran's January 2026 US sector data at NYU Stern, system and application software companies with positive EBITDA traded at about 24x EV/EBITDA as a group, while food processing companies sat near 10x.

Apply either figure to a group that owns both and you misprice half of it. A blended multiple splits the difference and gets both halves wrong. SOTP gives each segment the multiple its own peers command. (Valuation multiples explained covers the basics.)

Bankers reach for SOTP in two kinds of situation:

• Conglomerates and holding companies, where the divisions share an owner and little else.
• Spin-offs, carve-outs and divestitures, where the question is whether the pieces are worth more apart than together.

For a single-line business, or a company that does not disclose segment results, SOTP has nothing to offer.

Sum of the parts valuation in five steps

1. Split the company into segments. Start from the segment note in the annual report, which breaks out revenue and a measure of profit for each reportable segment.
2. Value each segment against its own peers. Pick the metric that fits each one: EV/EBITDA for a mature, profitable unit, EV/revenue for one growing fast and not yet profitable. Use trading comps, precedent transactions or a separate DCF per segment; a good model often shows more than one.
3. Add up the segments and subtract corporate costs. Head office (the board, group finance, legal) sits outside the segments. If segment profit excludes those costs, capitalise them at a multiple and subtract the result from the segment total; what remains is implied enterprise value.
4. Bridge to equity value. Subtract debt, preferred stock and non-controlling interests; add cash and any non-operating assets you have not valued yet, such as minority stakes in other companies. It is the same bridge you use at the end of a DCF.
5. Divide by diluted shares and compare the result with the current share price.

An illustrative two-segment example

A group has a software division, an industrial division and a head office that costs $30m a year outside both segments. Each segment is valued at an illustrative peer multiple, and the corporate costs at 10x, close to the group's blended multiple ($3,100m of segment value over $300m of segment EBITDA).

Illustrative: round numbers, made up for this example.

Subtract net debt of $600m from that enterprise value and equity value is $2,200m. With 100m diluted shares, the SOTP points to $22.00 a share.

Put one segment's multiple on all of the group's EBITDA instead, and the answer comes out too low or far too high:

Now suppose the shares trade at $18.00, about 18% below the SOTP value per share.

The conglomerate discount

That gap between $18.00 and $22.00 has a name: the conglomerate discount. Philip Berger and Eli Ofek put a number on it in a 1994 NYU Stern working paper. Using segment data for 1986 to 1991, they estimated that the average diversified firm destroyed about 15% of the value its businesses would have had as standalone companies.

In an interview, two explanations carry most of the weight:

• Capital allocation. Head office can use cash from a strong division to prop up a weak one, and investors price in that risk.
• Fewer natural buyers. A software fund that buys in has to take the industrial business too, and anyone who wants both can buy two focused companies, so demand for the combined shares is thinner.

Capturing the discount costs money. Each new company in a break-up needs its own board, finance team and systems, so total corporate costs go up; bankers call these dis-synergies. Selling a division can also create a tax bill on the gain, plus advisory fees. A credible SOTP shows break-up value net of those costs, and that net figure decides whether a spin-off or sale makes sense. If the answer is a sale, the work moves into a sell-side M&A process.

How SOTP comes up in interviews

The usual prompt is "How would you value a company with two very different businesses?" An answer you can give in under a minute:

"I'd use a sum of the parts valuation. I'd split the company into its reported segments and value each one against its own peer group, with the multiple that fits that business or a separate DCF. Then I'd subtract capitalised corporate costs, add up to enterprise value, and bridge to equity value by subtracting net debt and other non-equity claims. Dividing by diluted shares gives a value per share, which I'd compare with the share price to see whether the market applies a conglomerate discount."

Then stop and wait. These three follow-ups come up most:

"What do you do with a segment that loses money?" An EBITDA multiple on negative EBITDA produces a negative value, which tells you nothing. Use an EV/revenue multiple from peers at a similar stage, or a DCF that projects the path to profit.

"Why might the SOTP value sit above the market value?" Name the conglomerate discount and give the two explanations above. Then add the caveat: break-up value has to be net of separation costs before anyone calls the stock cheap.

"Would you value a banking or insurance subsidiary the same way?" No. In a financial business, debt is part of operations, so enterprise value multiples stop meaning much. Value that segment on equity metrics such as P/E or price to book, add it at the equity level, and keep its debt out of the group's net debt bridge.

How to practise it this week

1. Pick a listed company with at least two reported segments and find the segment note in its latest annual report. Write down each segment's revenue and profit, plus the corporate line.
2. Choose a peer set for each segment and run the five steps on one page. Rough multiples are fine; you are practising the structure.
3. Say the model answer out loud against a clock, then have someone fire the three follow-ups at you in random order.

SOTP draws on multiples, precedents, the DCF and the equity bridge at once, so it tests whether those pieces connect for you. More free material is in the Knowledge Base, and new pieces land in IBB Insights.