What is a key disadvantage of a Sum-of-the-Parts valuation?

The key disadvantage of a Sum-of-the-Parts (SOTP) valuation is that it requires extensive time to build separate discounted cash flows (DCF) for each division or segment of a company. In a SOTP analysis, each business unit is evaluated independently, which means that an analyst must gather detailed data about each division's cash flows, growth rates, and other relevant metrics. This process is not only time-intensive but also necessitates a thorough understanding of each segment's operational intricacies and market conditions.

Furthermore, the complexity of different divisions, especially if they operate in distinct industries or have varying capital requirements, adds to the challenge. Consequently, the need to create individual DCFs for each segment can significantly extend the time and effort required to complete the valuation, making it a notable disadvantage in situations where speed and efficiency in valuation are crucial.