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. Without this important process, you risk underselling the value of your biggest asset before you exit. This means you won’t get the optimal return on investment for your business or attract the attention from buyers your company deserves. 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.
What does this mean? Here is the Investopedia definition of ‘pro forma”:
"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. These models forecast the anticipated result of the transaction, with emphasis placed most specifically on estimated net revenues, cash flows and taxes. Pro forma statements, therefore, in summary, indicate the projected status of a company in the future based on current financial statements."
Put simply, a pro-forma estimates your business’s future revenue and overall finances. 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. 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.
But your company’s new owners can’t travel back in time, so they need reassurance that their acquisition is profitable in the future. This five-year pro forma eases any doubts. 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.
Because, above all else, your pro forma financial statements aim to do two things – reduce RISK and establish TRUST.
A pro-forma statement goes through a similar process to recasting, but with the focus firmly placed on the future. 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. 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.
For example, say your business’s trailing twelve month (TTM) EBITDA is measured at $2 million. However, your company just introduced a new product that is projected to supply an additional $50,000 a month to your EBITDA. Plus, you might have recently changed the location of your company retreats to somewhere more cost-effective. 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.
These estimations therefore play a key role in eliminating risks associated with your business to a buyer. 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.
A 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. This is because, unlike recasting, a five-year pro-forma doesn’t have to follow Generally Accepted Accounting Principles (GAAP). 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.
Consequently, 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. As the old saying goes, it can take years to build trust, but it only takes a second to lose it.
That’s why at Generational Equity, we have established a strong relationship with many prevalent middle-market business buyers through our extensive portfolio at DealForce. The buyers we interact with trust our skilled advisors to present an accurate reflection of a company’s value. Therefore, as part of your exit strategy, we will go into great detail with creating the ideal pro-forma statement: one that presents the optimal value of your business and maintains trust with potential buyers.
A pro-forma identifies your company growth for years to come and forms a big part in any business valuation. If you’d like a stronger grasp on business valuations and the role it plays in the overall M&A process, you should consider attending a complimentary executive conference. These provide business owners with an invaluable insight into what makes an effective exit strategy, which is useful no matter when you decide to sell your business.
These are completely complimentary, and are hosted regularly across North America. The only cost is a few short hours of your time – for that, you receive comprehensive guidance from our experienced advisors, which will prove very helpful in forming your exit strategy.
For more information about Generational Equity services or to find out when our conferences are next in your area, contact us today on 972-232-1121.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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