Considering the Sum of Its Parts

Published 04-06-2018 , Updated 09-2018    I don’t know about you, but sometimes, I’ll have what I instantly see as worthwhile ideas coalesce around concepts I’ve never considered. It may be set off by a word, or a phrase, or a different way to think about a project or a concept.  That’s what happened with the “Sum of the Parts.”

Sum of the Parts

It’s called SOTP, or Sum of the Parts. Finance gurus are laughing right now because they understand exactly how this operates. But if you’ve not heard of it, this is a method where one takes apart the various offerings in a deal, reassigns specific values to them–often based upon different criteria– and arrives at a valuation for the whole deal which can exceed a valuation offered if one simply valued the deal, itself, standing alone. The old “greater than the sum of its parts” saying, applied to deal making.

My personal cognizance of this arose because I’m working with a client in a deal with several moving parts in her business, and she asked me to arrive at a valuation for the business. Call me conservative, but I’ve often considered investors stingy when it comes to valuations, and I’ve not really pursued SOTP in depth as a way to create valuations which represented all the different asset values in a deal.

In valuing some deals, for example, the deal is based upon assessing the price of associated real estate. Some value it only on a multiple of the ROI or a multiple of cash flow, or bottom line profit. But any business has other values, too. Any ancillary businesses which have sprung up as an adjunct to the business have a value.

Here’s a revolutionary viewpoint. In some businesses, even the people involved with the business bring value just to the business from their participation and involvement. In some businesses, their ability to see and plan future events and activities to aid the business growth is clearly an asset to the business. And in businesses operating across a span of different industries, the method for evaluating those might vary from industry to industry. Sum of the parts.

Human Resources as SOTP

I plan to start thinking about Human resources issues that way in my Consultancy…the Sum of the Parts. As a matter of fact, one should consider human resources utilizing that method. I’ve seen many managers in the past guilty of making decisions which were based on black and white, and not on shades of gray. There are certainly “gray shades” in human resources.

How do you value your personal contributions…as a single offering, or as a sum of the parts?

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