Pro forma financial statements restate a target company’s historical income statement and balance sheet to show what the business would look like immediately after a proposed transaction closes — add-backs, a new capital structure and the deal’s own terms applied — so a buyer and its lender are underwriting the deal on the numbers the business will actually run on, not the numbers it happened to report last year.
An acquisition lender does not price a loan off the seller’s bare financial statements. business acquisition financing asks applicants for “information about your business” and evidence the business is “generating revenue” before it will discuss “the documents needed for our analysis” — in practice, the pro forma package that shows the lender the post-close entity it is actually being asked to finance, not the standalone seller.
Because a pro forma statement is built by restating the seller’s own numbers, its add-backs need independent support before a buyer or lender will rely on them. That is the job a quality of earnings report does: it tests each normalization the pro forma assumes rather than taking the seller’s adjustments on faith. Where the pro forma numbers feed a formal valuation conclusion, the valuator preparing that conclusion is bound by CBV Institute’s Valuation Practice Standards, which as of January 1, 2026 set the “minimum requirements… to establish a credible and properly supported conclusion of value” — support the pro forma restatement itself does not automatically carry.
A fund is evaluating a $9.2 million asking price for a specialty distributor. The seller’s income statement shows $1.1 million of EBITDA, but it also carries a $180,000 above-market salary paid to the departing owner and a one-time $95,000 lawsuit settlement. The buyer’s pro forma restates EBITDA at $1.1 million plus the $180,000 owner-compensation add-back plus the $95,000 non-recurring item, for $1.375 million, and pairs that with a post-close balance sheet assuming a new $6.5 million senior term loan replaces the seller’s existing debt at closing — the two figures the lender will actually underwrite against.
See also: Quality of earnings report · Run-rate revenue · Faster diligence: where AI actually shortens the timeline.
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