Which statement is a con of using precedent transactions?

Which statement is a con of using precedent transactions?

• A. Data based on past transactions that may not reflect current market conditions
• B. They are all perfectly comparable
• C. They always reflect current market conditions
• D. They guarantee precise valuation

Answer: (A)

When valuing with precedent transactions, you look at multiples from completed deals to estimate a target’s value. A key drawback is that those multiples come from historical market conditions and may not reflect what’s happening today. Financing access, risk appetite, and overall market dynamics can shift, so the prices paid in past deals might misrepresent current realities—potentially leading to overpaying or undervaluing a deal. Additionally, not all past transactions are truly comparable. Differences in deal size, strategic rationale, target mix, synergies, timing, and capital structure can distort the relevance of those multiples for a new transaction. So the main con is that data based on past transactions may not reflect current market conditions. The other statements—about perfect comparability, always reflecting current conditions, or guaranteeing precise valuation—don’t hold true in practice.

When valuing with precedent transactions, you look at multiples from completed deals to estimate a target’s value. A key drawback is that those multiples come from historical market conditions and may not reflect what’s happening today. Financing access, risk appetite, and overall market dynamics can shift, so the prices paid in past deals might misrepresent current realities—potentially leading to overpaying or undervaluing a deal.

Additionally, not all past transactions are truly comparable. Differences in deal size, strategic rationale, target mix, synergies, timing, and capital structure can distort the relevance of those multiples for a new transaction.

So the main con is that data based on past transactions may not reflect current market conditions. The other statements—about perfect comparability, always reflecting current conditions, or guaranteeing precise valuation—don’t hold true in practice.