What is a limitation of using precedent transactions in valuations?

Using precedent transactions in valuations indeed comes with several limitations, one of which is the challenge of finding sufficient and relevant data. The data required for these transactions often may not be publicly available, especially for private companies or for transactions that occurred a long time ago. This limitation can present difficulties in accurately determining valuation multiples or in ensuring that the selected transactions are directly comparable to the subject company being valued.

Being able to source the correct and comparable transactions is vital for the integrity of the valuation process. If the data is scarce or of low quality, the results of the valuation could be misleading, leading to erroneous conclusions. This is particularly pertinent in scenarios where industry conditions, market environments, or buyer/seller motivations have changed, making accurate assessments more challenging.

In contrast to the other options, the assertion that precedent transactions are always comparable or that they reflect current market prices is too simplistic. Additionally, while precedent transactions can be adjusted for inflation, such adjustments don't negate the fundamental issues around data availability and relevance. Therefore, the difficulty in accessing reliable data is a significant limitation when utilizing precedent transactions for valuations.