medium · Private Equity value-creation
In a 'Sum-of-the-Parts' (SOTP) valuation, you value Segment A at 10.0× EBITDA and Segment B at 6.0× EBITDA.
Why wouldn't you simply use a blended average of 8.0× for the whole company?
- The two segments could share identical growth rates, which would make using separate multiples for each one redundant.
- Tax rates are applied differently to each operating segment once results are combined into a single consolidated tax return.
- SOTP is a valuation approach reserved strictly for companies planning to liquidate every asset immediately.
- The weighting of EBITDA between the two segments may be unequal, making a simple average mathematically incorrect.
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