Pro forma adjustments, explained simply
Where something changed part-way through the period, the historical figures capture only part of its effect. A pro forma adjustment shows the full-year effect so that the buyer sees the business as it now stands.
Pro forma adjustments rely on judgment about the future, so they attract the most aggressive claims. Negative adjustments are accepted readily; positive ones need strong evidence.
Pro forma adjustments to LTM EBITDA
IllustrativeAlder Creek Manufacturing, $ millions
The two changes net to a $0.05 million reduction in EBITDA.
Common pro forma adjustments
| Change | Effect on EBITDA |
|---|---|
| New senior hire part-way through the year | Decrease: full-year cost added |
| Loss-making product line closed | Increase: its losses removed |
| Price increase part-way through the year | Increase: if supported by evidence |
| Lost customer | Decrease: its profit removed |
| Bolt-on acquisition | Increase: acquired EBITDA added |
Worked example
Alder Creek made two changes in the last twelve months. A new CFO was hired in August at $240,000 a year; the LTM period contains two months of cost, so $200,000 is added, reducing EBITDA by $0.20 million. Prices rose 3% from July, and management claims a full-year benefit of $0.30 million. Signed customer contracts support only $0.15 million, which is accepted. Net effect: EBITDA falls by $0.05 million.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Pro forma adjustments make results reflect the business as it is today. They are also where the most aggressive claims tend to appear, because they rely on judgment about the future.
Red flags
- Only positive pro forma adjustments
- Cost savings claimed but not yet made
- Revenue from customers who have not signed contracts