What is a Sum of the Parts valuation?
Answer
This is when you’ll value each division of a company differently. Let’s use a software company as an example:
- Total Entity: $150mm of Revenue, $30mm of EBITDA
- AP Automation Software: $50mm of Revenue, $20mm of EBITDA
- Accounting Services: $100mm of Revenue, $10mm of EBITDA
So, they have both a software offering and a services offering. Given the capital requirements for each, room for growth and stability of each stream, they will receive different valuation multiples.
Software Offering: Let’s say this gets an 18x EBITDA multiple, now their contribution of value would be 18 x $20mm = $360mm.
Accounting Services Offering: Given it’s less attractive than the software, let’s give this piece a 9x EBITDA multiple. Their contribution to valuation would be 9 x $10mm = $90mm.
So, the business would be worth $450mm, with a blended EBITDA multiple of 15x.
Why this matters to bankers
Occasionally, bankers have to use a Sum of the Parts valuation. This is typically needed when a business has vastly different types of business lines. If you were to value the business as a whole, you would under-value certain lines and over-value others.