How to Answer “Walk me through a Sum-of-the-Parts (SOTP) valuation.” in Investment Banking Interviews
In investment banking interview prep, one of the highest-signal valuation prompts is: “Walk me through a Sum-of-the-Parts (SOTP) valuation.” A strong answer shows you can break a diversified business into distinct segments, apply the right valuation method to each, and then reconcile everything back to an equity value per share.
The key is to deliver a clear SOTP valuation explanation that’s structured (not spreadsheet-level), highlights the major assumptions, and ends with a clean bridge from segment enterprise values to implied equity value.
What Interviewers Test with This SOTP Valuation Explanation
This sum-of-the-parts valuation interview question tests whether you can choose appropriate valuation techniques when one “single multiple” would be misleading. In investment banking, SOTP comes up for conglomerates, multi-vertical platforms, businesses with a “stub,” or situations with meaningful non-operating assets and liabilities.
Interviewers are also evaluating how you handle judgment under uncertainty: what you use as the segment metric (EBITDA vs EBIT vs revenue), how you treat corporate costs, and whether you understand double counting (for example, valuing an associate separately while also embedding its earnings in consolidated EBITDA).
Finally, it’s a communication test common in investment banking technical questions: can you articulate a repeatable workflow—segment values → adjustments → ownership → per share—while calling out the few assumptions that actually drive the answer?
Sum-of-the-Parts Valuation Interview Question: Step-by-Step Framework
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Step 1: Set up the SOTP and define the segments
Start by stating what SOTP is for: valuing a company by valuing each business line separately and adding them up. Then define the segments in a way that matches how investors and management view the business (usually reporting segments, sometimes product/geography if it better reflects economics).
At analyst level, add two setup choices that show maturity:
- Valuation basis: Are you valuing each segment on an enterprise value basis (typical) and then bridging to equity at the end?
- Financial metric alignment: Make sure each segment’s metric is “clean” (e.g., segment EBITDA before corporate allocations if that’s what comps reflect), and specify the valuation year (LTM vs forward).
Close the step by noting you’ll select the best-fit method for each segment (trading comps, precedent transactions, DCF for a unique asset, or net asset value for financial/real assets).
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Step 2: Choose segment-level valuation techniques and build EVs
For each segment, pick the method that best matches its peers and cash-flow profile—this is the heart of valuation techniques for interviews.
- Operating businesses: apply a segment multiple to the right metric (e.g., EV/EBITDA for mature cash-generative segments; EV/Revenue for early-stage/high-growth where margins aren’t stable; EV/EBIT for capex-heavy where depreciation is more meaningful).
- Businesses with different risk/growth: use different multiples; that’s the point of SOTP.
- Financial stakes and associates: value the stake explicitly (mark-to-market if listed; or apply an appropriate multiple/DCF) and be clear whether the segment financials already include equity income.
Then compute segment EVs consistently (Multiple × Metric), and if you’re using forward multiples, ensure the metric is forward too. Mention you would sanity-check implied multiples vs the comp set, and keep a range (low/base/high) rather than a single point estimate.
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Step 3: Treat corporate items and avoid double counting
A clean SOTP answer must address what sits “above” the segments.
- Corporate overhead: If corporate costs aren’t embedded in segment EBITDA, you need to reflect them—commonly by valuing a negative stream (capitalise corporate EBITDA at an appropriate multiple) or subtracting an NPV/DCF of corporate costs. The key is consistency with how the segment metrics were defined.
- Intercompany effects: Flag transfer pricing or shared services that can distort segment margins; you don’t need to model it in an interview, but showing awareness is valuable.
- Pensions, environmental liabilities, restructuring provisions: treat as debt-like items in the bridge.
- Associates / minority investments: ensure you’re not counting value twice (e.g., valuing a stake separately while also valuing consolidated earnings that already include it).
This is where many candidates lose credibility—so explicitly say you reconcile what’s included in segment earnings vs what you add as separate line items.
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Step 4: Convert to equity value and implied price per share
Once you have total enterprise value from summing segment EVs (plus non-core assets, minus corporate adjustments), bridge to equity value.
A standard flow:
- Total SOTP EV = Σ(segment EVs)
- Add: non-operating assets (excess cash, investment portfolio at fair value, real estate if not in segment EVs)
- Subtract: net debt, leases (if treated debt-like), pension deficit, provisions, preferreds
- Adjust for: minority interest (if consolidated EBITDA includes 100% but you don’t own 100%)
- Equity value = adjusted EV
- Implied price = equity value ÷ diluted shares (and mention you’d include options/RSUs using treasury stock method if applicable)
Tie it back to output: present a range and name the 1–2 biggest sensitivities (usually the multiple for the largest segment and the treatment of corporate costs/net debt).
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Step 5: Sanity checks and interpreting the result for a pitch
Finish like a banker: interpret what the SOTP implies and check for reasonableness.
- Cross-check vs consolidated multiple: compute an implied EV/EBITDA for the whole company and compare it to peers; large gaps should be explainable (mix shift, margin differences, leverage).
- Value attribution: identify which segment drives most of equity value and whether a “sum is greater than the parts” (or not).
- Catalyst framing: mention how SOTP supports strategic angles—spin-off potential, divestiture, re-rating of a hidden asset, or whether the market is applying a conglomerate discount.
If time permits, say you’d run a quick sensitivity table on key segment multiples and corporate cost assumptions, which is often what an investment banking SOTP valuation walkthrough looks like in practice.
Analyst Model Answer for an SOTP Walkthrough
A Sum-of-the-Parts valuation values a diversified company by valuing each major segment on its own and then adding those values together, before bridging to an implied equity value per share.
I’d start by defining the segments in a way that matches reporting and how investors think about the business, and I’d choose a consistent valuation date and metric—typically LTM or next-twelve-month EBITDA/EBIT by segment. Then, for each segment, I’d apply the most appropriate method: usually trading comps multiples for straightforward operating businesses, sometimes precedents if we think M&A pricing is more relevant, and for non-core items like listed stakes or investment portfolios I’d mark them to market or value them explicitly.
After I calculate a segment enterprise value for each piece, I’d deal with corporate items so I’m not overstating value—most importantly corporate overhead if it’s not already embedded in segment profitability, plus any debt-like items. Then I’d sum the segment EVs, add non-operating assets like excess cash if it’s truly surplus, and subtract net debt, leases or pension deficits as appropriate. I’d also adjust for minority interest if consolidated financials reflect 100% of a subsidiary but equity holders only own a portion.
That gets me to equity value, and I divide by diluted shares to get an implied price range. I’d sanity-check the implied consolidated multiple versus peers and call out the main sensitivities—typically the multiple on the largest segment and assumptions around corporate costs—so the output is interpretable for a pitch or a view on break-up value.
- Lead with the purpose of SOTP, then the workflow: segments → methods → adjustments → equity per share.
- Show judgement by matching valuation methods to segment economics (not “same multiple for all”).
- Explicitly mention corporate overhead, minority interest, and double-counting checks.
- End with a range and 1–2 key sensitivities to sound like a banker, not a calculator.
Common Mistakes in SOTP Valuation Interviews
- Using one multiple across all segments without explaining why the segments deserve different valuation frameworks.
- Forgetting corporate costs or treating them inconsistently with how segment EBITDA/EBIT is defined.
- Double counting associates/minority-owned subsidiaries (valuing the stake and also valuing earnings that already include it).
- Bridging from segment EVs straight to per-share value without debt-like items (leases, pensions, provisions) or minority interest adjustments.
- Not sanity-checking the implied consolidated multiple or failing to explain why the SOTP implies a premium/discount.
- Presenting a single point estimate instead of a range and not identifying the main sensitivities.
Follow-Ups Seen in Investment Banking Technical Questions (SOTP)
How do you handle corporate overhead in an SOTP?
If corporate costs aren’t included in segment profits, I reflect them separately—either by capitalising corporate EBITDA at an appropriate multiple or subtracting an NPV—so the sum doesn’t overstate value.
When would you use a DCF for one segment in a SOTP?
When a segment is unique with limited comparable peers, has very different cash-flow timing, or is asset/contract-driven where a cash-flow model is more defensible than a multiple.
How do you treat minority interest and equity method investments?
If EBITDA is consolidated at 100%, I include the full EV but then subtract minority interest in the bridge; for associates, I avoid double counting by valuing the stake separately and adjusting for any equity income already in earnings.
What’s the difference between SOTP value and break-up value?
SOTP is the valuation method; break-up value is the interpretation—what the company could be worth if separated—often requiring assumptions on separation costs, taxes, and dis-synergies.
What are the biggest drivers in a SOTP output?
Usually the multiple (and metric) on the largest segment, any growth/margin differences versus comps, and how corporate overhead and net debt-like items are treated.
How to Practise Valuation Techniques for Interviews (SOTP Focus)
- Deliver a 90-second core first (definition + steps), then add detail only if prompted—this is the safest way to handle advanced investment banking technical questions.
- Build a mental checklist for the bridge: net debt, leases, pensions/provisions, minority interest, non-core investments, diluted shares.
- Practise a “segment method selection” line (why comps vs precedents vs DCF) so your SOTP valuation explanation sounds judgment-based, not memorised.
- Record yourself explaining SOTP with one real conglomerate example; tighten to a 3–4 minute version, then rehearse follow-ups on overhead and double counting.
- Use AceTheRound to run timed drills and get feedback on structure, missing adjustments, and whether your answer sounds like an actionable step-by-step guide to SOTP valuation rather than a spreadsheet walkthrough.
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