Module II· Sum-of-the-PartsIntermediate
Question
How do you handle inter-segment eliminations in an SOTP?
Answer
Inter-segment sales
when Segment 1 sells to Segment 2, the revenue is double-counted in the aggregate. IFRS 8 segment reporting shows sales with and without inter-segment. In an SOTP valuation: segment EBITDA margins should be based on 'external sales' — otherwise applying the segment multiples overstates the value.
Deep diveShow more details
Example
Segment 1 reported sales $500m incl. $100m inter-segment → external sales $400m. EBITDA at a 20% margin = $80m (presumably reported on an external basis). Applying the multiple: external EBITDA × pure-play multiple. Pitfall: segment margins 'inflated' by internal transfer pricing — the pure-play comparison can be distorted.
Pitch tip
'Segment EBITDA on external-sales basis; intercompany pricing benchmark-tested vs. arm's length comparables.'