![]() That is why you shouldn’t be surprised if a potential buyer also creates their own pro-forma to reassure themselves of your company’s growth.Ĭonsequently, if their statement doesn’t match your own, and you are unable to justify your differences, you may damage the all-important trust necessary during the M&A process. This is because, unlike recasting, a five-year pro-forma doesn’t have to follow Generally Accepted Accounting Principles (GAAP). This is why it’s important to seek professional advice when creating this statement for the next five years of your company’s existence – you might be selling the future growth of your business short, meaning your initial valuation is not a true reflection of its worth.Ī note of caution: while excluding certain aspects of your financials can help build a better picture of your true business value, it is also very subjective. These estimations therefore play a key role in eliminating risks associated with your business to a buyer. Therefore, the previous expenses won’t be applicable to a future buyer, and therefore these costs can be added back for a more accurate picture of your company’s future revenue. Plus, you might have recently changed the location of your company retreats to somewhere more cost-effective. ![]() However, your company just introduced a new product that is projected to supply an additional $50,000 a month to your EBITDA. So, it is possible to exclude certain one-off expenses or include future developments that will increase profitability over time, as long as you are able to justify them.įor example, say your business’s trailing twelve month (TTM) EBITDA is measured at $2 million. ![]() Therefore, it is wise to contact financial specialists and an M&A advisory firm to help you create one that is not only accurate, but also presents your business in the best possible light to prospective buyers. How to Approach a Pro-Forma StatementĪ pro-forma statement goes through a similar process to recasting, but with the focus firmly placed on the future. Our valuation team at Generational Equity are experts at guiding business owners through this process, creating projected financial statements that accurately reflect your company’s potential growth and helps push a deal towards completion.īecause, above all else, your pro forma financial statements aim to do two things – reduce RISK and establish TRUST. This five-year pro forma eases any doubts. Of course, experienced buyers and private equity firms will check over your historical growth and the healthiness of your current financials, as this demonstrates the success of your business.īut your company’s new owners can’t travel back in time, so they need reassurance that their acquisition is profitable in the future. This is essential, because when a buyer assesses your company as a potential investment opportunity, they are analyzing your company’s future, not the past. Put simply, a pro-forma estimates your business’s future revenue and overall finances. Pro forma statements, therefore, in summary, indicate the projected status of a company in the future based on current financial statements." ![]() These models forecast the anticipated result of the transaction, with emphasis placed most specifically on estimated net revenues, cash flows and taxes. "In a business sense, financial statements prepared with the pro forma method are made ready ahead of a planned transaction such as an acquisition, merger, change in capital structure or a new capital investment. What does this mean? Here is the Investopedia definition of ‘pro forma”: But, this is just one step in establishing your true business valuation – once recasting is done, it is time to think about your five-year pro-forma. This means you won’t get the optimal return on investment for your business or attract the attention from buyers your company deserves. Without this important process, you risk underselling the value of your biggest asset before you exit. One of our most recent insights placed a spotlight on recasting your business’s financials, the key first step in how to value a company. ![]()
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