Have you heard that any firm has an “X” amount of Valuation? If you are still not aware of it or you know, but you do not have a clear understanding of what is valuation or SOTP? Let’s make it easy to understand for you. So there are few questions which may have popped up in your head like what is a firm? What is valuation? And how is it calculated?
What is SOTP?
SOTP stands for Sum-Of-The-Parts. It is used for a firm who has different types of business segment or few subsidiaries.
If you are still confused with the definition then let us make it more clear.
Suppose you have a company and your company has other businesses. Now you have the main company who has a controlling power and your main company will guide your other subsidiaries or segment of businesses to run perfectly. Now your main company will be known as a firm. So at this point, your firm has to perform SOTP also known as valuation. Also, you can follow some Indian Stock Market Instagram Accounts to gain some financial knowledge
How to perform valuation (SOTP) of a company/firm?
For performing SOTP or valuation of a firm you have to calculate the value of each subsidiary or business segment after finding out the valuation of your subsidiaries you have to add them together to get the value of your firm. There are a few different types of techniques to perform the valuation of your firm.
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Let’s see the few steps which will help you to perform the valuation:-
1. Dictate the segments of the business
This step is essential. Finding out the segments of business will make your work of valuation of the company very easy. If you miss this step you may have some difficulty conducting the performance of each company.
2. Give the Value of each segment
Now it’s time to do some math. After dictating the segments of your business. You need to perform the valuation for each segment. You have to pick any valuation methods like DCF or COMPS MODEL to value each segment.
3. Calculate Sum!
Now we are almost done. Just add all of them together to get the final valuation of a firm.
When to use SOTP valuation for a firm/Company?
Now we know what is a valuation? But some of you may still have a confusion that “What if you have a single segment of business or no subsidiary?” Do you still need to perform SOTP or valuation for your company? Answer is absolutely NO.
Let’s see for whom valuation is suitable?
- For the company who has different segments of the business. For example – Amazon
- For the conglomerate company. Means the company who holds a lot of company. For example – Adani Group, Aditya Birla Group etc.
- When there is a need for top-notch detail.
Not Suitable for:
- For the company who is doing business in a single line.
- For the company where the details are not found and they don’t show any other segments.
- If a company has a very less detailed model.