Group Valuation:
Valuing a straightforward single operating company usually involves understanding its ability to generate cash, normalizing its earnings, projecting a reasonable growth rate, and adjusting for debt to arrive at an equity value. In a corporate group or holding company, however, that approach becomes more complicated. This is not because classical valuation methods stop working, but because the value depends not only on the quality of the underlying businesses, but also on the structure that connects them: multiple legal entities, the financing of each subsidiary, minority interests, intra-group operations, tax factors, and practical constraints that prevent cash from easily “flowing up” to the parent company.
In holding companies, it is common to see a gap between “price” and “value.” Price reflects market sentiment and expectations. Value, if properly estimated, reflects the company’s cash-generating capacity and the risk of its assets. In practice, valuing a group correctly requires “deconsolidating” it: looking at each unit separately, understanding its risk, and then analyzing what portion of that value is truly accessible to the holding’s shareholder.
This blog post explains how to value a corporate group or holding company, covering:
- Why using the consolidated approach can lead to errors
- What SOTP (Sum of the Parts) is
- Why a group almost never has a single “correct” WACC
- How to treat central overhead costs, minority interests, and holding-company debt
- How to handle trapped cash and latent capital gains
- Why the “holding discount” exists
1. The big mistake in valuing corporate groups: assuming a single WACC
In a corporate group, business units with different risk profiles coexist—meaning there are also different costs of capital.
A subsidiary with recurring contracts, diversified customers, and a stable business tends to have lower risk. Another subsidiary in the same group might be cyclical, reliant on an expansion plan, or still developing its profit margins. If you apply the same “average” WACC to both, you will be using a rate that is too high for the stable unit (undervaluing it) and too low for the riskier unit (overvaluing it).
Sometimes this error is “hidden” in the consolidated accounts, but it doesn’t disappear; it simply leads to wrong decisions when a division is sold, a new investor joins, a carve-out is executed, or bank financing is negotiated. That is why, when a holding company combines several businesses, the correct approach is to think in terms of a WACC per unit or per segment. Even when presenting a consolidated DCF, one must ask whether that consolidated WACC is mixing risks inappropriately.
2. The “illusion” of consolidation: why the approach often fails
Consolidation is indispensable for reflecting control and the overall economic scope of the group, but it has clear limitations when used for valuation purposes.
The first limitation is the mixing of risks. Consolidated financials aggregate the revenue, EBITDA, CAPEX and debt of disparate businesses, then attempt to discount a single cash flow with a single WACC. This would only be reasonable if the group were an entirely homogeneous business—which is rarely the case.
The second limitation is intra-group elimination. Internal sales, intra-group profit margins, or services billed between entities are eliminated in the consolidated statements, but they can hide cross-subsidies or real inefficiencies. For valuation, one needs to understand the real economics of each unit: what margin it generates with third parties, what costs it truly incurs, and what internal dependencies exist.
The third limitation is book value. In groups with internally generated intangibles, historical real estate, or investments carried at cost, consolidated book equity is often a poor indicator of economic value. For that reason, valuing a holding company based only on the consolidated balance sheet tends to lead to mistaken conclusions.
3. Valuing corporate groups using SOTP (Sum of the Parts)
SOTP stands for “Sum of the Parts”—literally, the sum of the parts. It is a methodology particularly useful when a group has multiple businesses with different risk profiles.
The idea is simple: instead of valuing the group as if it were a single company, each business unit or subsidiary is valued separately, as if it were independent, and those values are then added together. After that, structural adjustments are applied to arrive at the value attributable to the parent company: holding-company debt, central costs, minority interests, trapped cash, latent tax liabilities (if applicable), etc.
Put very directly, SOTP answers the question, “How much would this group be worth if its parts were separate?” For this reason it is also known as the break-up value. It is the most coherent approach when no single WACC is truly representative of the entire group.
A solid SOTP valuation begins with proper segmentation. Accounting segments help, but they do not always align with the actual economic units. The correct approach is to group or split based on homogeneity in risk, growth, capital intensity, and comparables.
Next, each part is valued using the methodology that best fits its economics. Mature businesses are often valued using multiples (EV/EBITDA or EV/EBIT) after first normalizing EBITDA. High-growth businesses (or those with unrepresentative EBITDA) are usually valued with a DCF. Real estate assets are better suited to a NAV approach or yield/cap rate methods. Listed investments are generally taken at market value.
Here is a nuance that significantly improves the analysis: not all “prices” are comparable. The multiples of publicly listed companies generally reflect the pricing of minority stakes. If the holding company has control of a subsidiary (for example, 100% ownership or clear control), the economic value of that control can be higher than that of a passive stake. To avoid undervaluing control, it is sensible to cross-check against multiples from transactions (M&A deals) that include control, or to analyze whether a control premium is justified.
4. Structural adjustments in a holding: where value “at the parent” is determined
Once the parts have been valued, the total value of the group is not obtained by simply adding them up. You have to go through structural adjustments, which capture real frictions and avoid double counting. These are the main adjustments (and the order matters):
Intra-group: “real” EBITDA, working capital, and debt by entity
Internal sales with profit, central services, royalties, cash pooling, and intercompany loans distort EBITDA, working capital, and net debt at the individual company level. In a well-executed SOTP, one must decide whether to keep these internal transactions at market prices (arm’s length) or adjust them to approximate each unit as a standalone business. This is especially critical in carve-outs: what was previously implicit within the group becomes explicit contracts and costs.
Corporate overhead: subtracting the present value of the “cost of being a holding”
Management, corporate legal, audit, compliance, group reporting and support functions all consume cash. If subsidiaries are valued using comparable multiples and overhead is not deducted, the value will be overstated. An important nuance: many analysts treat these expenses as relatively “safe” cash outflows (difficult to cut in the short term) and, to be prudent, discount them at a lower rate than the WACC (often close to the cost of debt). This increases the adjustment and avoids overvaluing holdings with heavy corporate structures.
HoldCo vs. OpCo debt: subordination by default and exceptions through guarantees
Debt at the operating subsidiaries (OpCo) has priority claim on the assets and cash flows of those subsidiaries. Debt at the parent (HoldCo) relies on upstream cash and is, by default, structurally subordinated to OpCo debt. However, that subordination can be reduced if there are upstream guarantees, cross-guarantees, share pledges or intercreditor agreements that give HoldCo lenders recourse to subsidiary assets or cash flows. In valuation, if there are real restrictions on moving cash, it is usually more realistic to value the equity of each subsidiary individually (its EV minus its net debt), sum those values, and then subtract the holding’s own exclusive debt—rather than subtracting consolidated net debt as if cash were fully fungible throughout the group.
Minority interests: at economic value, not at book value
If the group consolidates subsidiaries that are not 100% owned, the consolidated EBITDA reflects 100% of their operations, but part of the value belongs to third parties. Subtracting minority interests at their book value is usually incorrect. The defensible approach is to estimate them at economic value—at market price if the stake is publicly traded, or via a valuation if it is private.
DLOM vs. holding discount: two different discounts at different levels
DLOM (Discount for Lack of Marketability) is a discount for illiquidity that may be applied to a private subsidiary or a stake that is hard to sell, affecting the value of that part before you add it up. The holding discount (or conglomerate discount) is applied to the whole after all adjustments, and reflects holding-level frictions (complexity, opacity, agency costs, capital allocation issues, etc.). Keeping these discounts separate improves clarity and avoids confusion about where value is being lost.
Cross-shareholdings and circularity
If A owns part of B and B owns part of A, adding values outright can lead to double counting. In such cases, an iterative calculation (to convergence) or simultaneous equations are used to isolate the real operating value and eliminate the artificial inflation.
Taxation and latent gains: depends on jurisdiction and deal type
Monetizing appreciated assets can carry a tax cost. In a liquidation, the full potential tax is usually considered. In a going concern, the tax can be deferred, and the sensible approach is to estimate its present value. Here, one must avoid automatic assumptions: the treatment depends heavily on the jurisdiction and the transaction structure, especially whether it is a sale of shares (stock deal) or of assets (asset deal). Therefore, neither deducting 100% by default nor ignoring taxes under the assumption of blanket exemptions is defensible without specific analysis.
5. Holding discount: why the market discounts the parent company
After building an adjusted SOTP (or an adjusted NAV), a conglomerate discount typically appears. This usually reflects real frictions: complexity, lack of transparency, agency costs, doubts about capital allocation, tax leakage, or illiquidity.
In practice, the discount narrows when the holding company demonstrates discipline and transparency: clear reporting by business unit, controlled central costs, a coherent investment policy, and simpler structures. In some cases, corporate moves like streamlining the corporate structure or selective divestments help close the gap between price and value.
FAQs: Frequently Asked Questions about valuing corporate groups and holdings
What exactly is SOTP and when should it be used?
SOTP (Sum of the Parts) means valuing each unit of the group separately and then making structural adjustments (for holding-company debt, overhead, minority interests, etc.) before summing the values. It is advisable when the group has multiple businesses with different risk profiles, or when considering selling the group in parts.
Is it wrong to use a single WACC for a group?
Yes. Mixing different risks forces you to apply an average WACC, which typically undervalues the more defensive units and overvalues the riskier units. In carve-outs, bringing in a new shareholder, or selling divisions, that mistake becomes very evident.
What is the difference between a DLOM and a holding discount?
DLOM is an illiquidity discount applied (when applicable) to a private subsidiary or hard-to-sell stake, affecting that part’s value before you add it to the total. The holding discount is applied to the entire group and reflects frictions specific to the holding company: overhead, complexity, corporate governance, capital allocation, etc.
Should I apply a control premium in an SOTP valuation?
It depends on the type of “price” you are using as a reference. If you value a controlled subsidiary using public-company multiples (which reflect a minority share price), you could be undervaluing control. To avoid that, compare against transaction multiples (M&A deals) that include control, or assess whether a control premium is warranted.
How does HoldCo vs. OpCo debt affect the holding’s value?
HoldCo debt usually depends on upstream cash and is subordinate by default to OpCo debt (though guarantees can mitigate this). In valuation, it’s best to treat debt on an entity-by-entity basis if there are real restrictions on moving cash within the group.
Conclusion: in valuing a group of companies, the cost of capital is not one-size-fits-all
A robust valuation of a holding company is not just a standalone spreadsheet exercise. It begins by defining what exactly is being valued (the parent company or a subsidiary, the exact percentage, and whether it’s a controlling or minority stake) and as of what date. It continues with a structural map: the organization chart, debt by entity, guarantees, covenants, agreements with minority shareholders, cash pooling arrangements, and intra-group transactions. Then comes normalization, the choice of valuation approach (SOTP, DCF or NAV), and the disciplined application of structural adjustments. Finally, the valuation is cross-checked with sensitivity analyses and documented so that it can be defended before banks, counterparties, investors, or the board.
In group valuations, WACC is not a mere formality; it is a critical decision. If the group has several different businesses, it will generally have several different costs of capital. The most reliable way to reflect this is to separate the units (via SOTP), use coherent valuation methodologies for each, and apply structural adjustments that translate value “below” into value “at the parent.”
At Maraz Corporate Finance, we conduct valuations of individual companies as well as corporate groups/holdings, oriented toward real corporate decisions: the entry or exit of shareholders, company purchases and sales, carve-outs, refinancings, reorganizations, and family business situations. Our approach combines financial valuation with structural analysis (debt, minority interests, tax considerations, and operational constraints) to produce a result that is defensible and useful in negotiation.
Javier de Rojas Roca de Togores
Partner – Maraz Corporate Finance
