Which is a flaw of precedent transactions?

Which is a flaw of precedent transactions?

• A. Past transactions are rarely 100% comparable.
• B. Data on precedent transactions is easy to find.
• C. They reflect market sentiment exactly.
• D. They are not used in valuation at all.

Answer: (A)

When valuing with precedent transactions, you look at multiples from similar deals that have already happened to gauge what a buyer might pay for a target. The key issue here is imperfect comparability. No two deals are exactly the same: differences in industry, growth prospects, size, leverage, payer type, deal structure, and the timing of the deal all affect the multiples. Because of these differences, the multiples from past transactions can’t be transplanted perfectly onto a current case, making past deals inherently not 100% comparable. That’s why this flaw is the best answer. The other points don’t fit as well: data availability can vary and isn’t always easy to assemble, but that isn’t the flaw highlighted by the question; market sentiment isn’t captured exactly by past deals since conditions change, and precedent transactions are indeed used as a valuation reference rather than being useless.

When valuing with precedent transactions, you look at multiples from similar deals that have already happened to gauge what a buyer might pay for a target. The key issue here is imperfect comparability. No two deals are exactly the same: differences in industry, growth prospects, size, leverage, payer type, deal structure, and the timing of the deal all affect the multiples. Because of these differences, the multiples from past transactions can’t be transplanted perfectly onto a current case, making past deals inherently not 100% comparable.

That’s why this flaw is the best answer. The other points don’t fit as well: data availability can vary and isn’t always easy to assemble, but that isn’t the flaw highlighted by the question; market sentiment isn’t captured exactly by past deals since conditions change, and precedent transactions are indeed used as a valuation reference rather than being useless.