The market value of the components (lines of business, divisions, units, etc.) of a firm, assumed to be sold off individually and operated independently (from the main firm). In simple terms, the sum-of-the-parts value is what a firm (and its components) would be worth if theses components (assets) were sold off and the corresponding liabilities were settled. If the sum-of-the-parts value exceeds its respective share in the firm’s market capitalization, a spinoff of a component will make economic sense.
The sum-of-the-parts value is the net asset value of a firm, assumed to be a “gone concern” rather than in operation with all its components (going concern). This value accounts for a sort of forced/ fire sale value of the assets (and settlement/ transfer of corresponding liabilities) under a hypothetical scenario (case of distress).
In calculation, sum-of-the-parts value is figured out as follows:
Sum-of-the-parts value = value of total assets – (total Liabilities + preferred shares + fair liquidation fees)
The resulting value is what a firm would be worth if its assets were sold off and its liabilities were paid off, either under normal or abnormal market conditions.
The sum-of-the-parts value is also known as a private market value, an intrinsic value, a net assets value, a breakup value, a liquidation value, or a gone concern value.
