Module II· Sum-of-the-PartsAdvanced
Question
How do you handle tax inefficiencies in an SOTP?
Answer
A group tax structure can create value:
- Cross-segment tax-loss sharing (one segment's NOLs offset another's profit).
- Internal transfer pricing optimizes the group tax rate.
- Holding structures in low-tax jurisdictions. In a spinoff: these advantages disappear — each standalone entity has its own tax rate. Modeling: (standalone tax rate − group tax rate) × pre-tax EBIT × discount.
Deep diveShow more details
Example
group tax rate 22% (thanks to NOL sharing), a standalone segment would pay 30% → an 8% × segment-EBIT loss. In an SOTP valuation: where tax inefficiencies are clearly quantifiable, treat them as a negative standalone adjustment.
Pitch tip
'Tax inefficiency post-spinoff: $15m annual EBIT loss capitalized at 8x = −$120m drag on SOTP value.'