Sum-of-the-parts (SOTP) valuation is the standard interview tool for valuing a company that operates several distinct business segments — think an industrial group with an aerospace division, a consumer division, and a healthcare division, each with its own growth profile, margins, and peer set. Here's the method, step by step, in the order interviewers expect you to walk through it.

Step 1: Break the Company into Its Segments

Start from the company's segment reporting (most public companies disclose revenue and EBITDA by segment in their 10-K or annual report). List out each operating segment's key financial metric — usually LTM EBITDA or EBIT, though revenue multiples are used for early-stage or unprofitable segments. Don't forget the corporate/unallocated line: head office costs, board expenses, and shared services that don't belong to any single segment.

Step 2: Find the Right Multiple for Each Segment

This is the step people rush — and where the real analytical work of an SOTP happens. Each segment gets its own peer multiple, derived from a comparable company analysis of pure-play businesses in that segment's industry. A healthcare segment should be benchmarked against healthcare peers, not against the conglomerate's blended multiple or its industrial segment's peers. See What Is a Valuation Multiple? for a refresher on reading and applying EV/EBITDA multiples correctly.

Step 3: Value Each Segment

Multiply each segment's EBITDA by its peer multiple to get a standalone enterprise value:

Segment EV = Segment EBITDA × Peer EV/EBITDA Multiple

Apply the same logic to corporate overhead — treat it as its own "segment" with negative EBITDA, capitalized at a multiple reflecting how persistent that cost is. This produces a negative enterprise value that reduces the total.

Step 4: Sum the Segments into a Total Enterprise Value

SOTP EV = Segment 1 EV + Segment 2 EV + ... + Corporate Overhead EV

This is the "sum of the parts" — the enterprise value of the conglomerate if the market valued each business on its own standalone merits.

Step 5: Bridge to Equity Value

From here it's a standard EV-to-equity bridge: subtract net debt and minority interest (the portion of segment cash flows attributable to non-controlling shareholders, not the parent).

SOTP Equity Value = SOTP EV − Net Debt − Minority Interest

Divide by diluted shares outstanding to get an implied SOTP share price.

Step 6: Compare to the Current Share Price

The final step is where SOTP becomes actionable: compare the implied SOTP share price to where the stock actually trades today.

Conglomerate Discount (%) = (Implied SOTP Share Price − Current Share Price) / Implied SOTP Share Price

A meaningful positive discount (often 10–30% for complex conglomerates) is the basis for an activist thesis or a breakup recommendation — see What Is the Conglomerate Discount? for why this gap exists and when it's realistically closable.

Worked Example

For a full numerical walkthrough of every step above — three operating segments, a corporate overhead deduction, an equity bridge, and the resulting conglomerate discount calculation, worked entirely in dollar figures — see Case 52: Conglomerate Discount. For a company breakup analysis that stays purely at the enterprise-value level without a market-price comparison, see Case 43: Sum-of-the-Parts Valuation.

Common Pitfalls

Interviewers commonly probe candidates on three mistakes: applying one blended multiple to the whole company instead of segment-specific multiples (which defeats the purpose of the exercise entirely), forgetting to deduct corporate overhead as its own negative value, and dividing the price gap by the wrong denominator when computing the discount percentage. Getting the mechanics right is table stakes — the stronger answers also explain why a discount exists and whether it's realistically closable through a breakup, rather than just running the formula.