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.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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
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
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
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
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
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.
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
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.
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
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.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
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
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 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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.