When using comps or precedent transactions, how should you account for potential synergies or cost savings from add-ons or platform exits?

• A. If synergies are credible, adjust multiples upward or apply scenario-based adjustments; avoid double counting by isolating one-time or structural synergies and testing sensitivity
• B. Always ignore synergies to avoid bias
• C. Always adjust downward for synergies
• D. Synergies are not considered in comps

Answer: (A)

When valuing with comps or precedent transactions, you treat potential synergies from add-ons or platform exits as value drivers only if they are credible and realistically realizable. If you believe the synergies can be achieved, you can reflect them by adjusting the multiples upward or using scenario-based adjustments that show different outcomes (base case, synergy realization, etc.). The key is to avoid double counting: isolate the synergies that are truly incremental and not already baked into the target’s current financials or the deal price, and test how sensitive the valuation is to different levels of synergy realization. Distinguish between one-time or structural synergies and ongoing, recurring benefits, and reflect only the latter in the long-run value, treating non-recurring effects separately.

This approach is better than ignoring synergies, since add-ons and platform exits often change the future cash flow profile and cost structure, making a higher multiple justified under credible scenarios. It’s also preferable to not always cut values; synergies can increase value, so downward adjustments would biasedly undervalue the deal. Finally, synergies shouldn’t be assumed to exist in every comp or precedent transaction; only include them when there is solid, executable evidence and scale them through careful sensitivity analysis.