Quick answer: Buyers test projections in layers. They bridge the first forecast year to the last twelve months, compare past budgets with actual results, reconcile backlog and pipeline to source systems, call key customers, check capacity and run sensitivities in their own model. Each test has evidence that passes it: a driver-by-driver bridge, saved budgets with variance notes, system exports, contracts and the seller’s own downside runs. Projections that pass earn credit for growth. Those that fail are replaced by the buyer’s case.
Key points
- Buyers read projections as evidence about management. They test whether each step from LTM to the first forecast year has a driver and a document.
- Price is usually anchored on LTM or run-rate earnings. The forecast moves the credit given for growth, the use of an earnout and the amount a lender will fund.
- Past forecast accuracy is the test sellers underestimate, and a monthly budget-versus-actual routine started before launch begins to improve it.
- Backlog and pipeline are tested against source-system exports, so an export with dates and stages carries more weight than a summary slide.
- A seller who runs its own sensitivities shows which assumptions matter and sets the terms of the downside conversation.
What a buyer wants from a forecast
A buyer reads a seller’s projections as evidence about management, not as a promise. Every test comes back to two questions: whether each step from the last twelve months (LTM) to the first forecast year has a driver and a document, and whether management has been right before. Projections that pass earn credit for growth, and projections that fail are replaced by the buyer’s own case, as the guide to management case and buyer case describes.
The forecast matters even though price is usually anchored on LTM or run-rate adjusted EBITDA, as the guide to LTM, run-rate and forward EBITDA explains. It moves three things around that anchor. It sets how much credit the buyer gives for growth beyond the anchor. It decides whether a gap between the two sides’ views is bridged with contingent payment. And it shapes how much a lender will finance, because the lender works from the buyer’s version of the numbers.
The tests, and the evidence that passes each
The tests belong to due diligence, and the buyer’s accountants run several of them inside the quality of earnings review. The early tests can be run from documents the buyer already holds. The later ones need access to people, systems and the plant, which usually comes after the letter of intent.
| Test | What the buyer does | Evidence that passes |
|---|---|---|
| Bridge from LTM | Walks revenue and EBITDA from LTM to the first forecast year, one driver at a time | A schedule where each step names a driver and points to a contract, price notice, order or hire |
| Forecast accuracy | Compares prior budgets with actual results and looks for a pattern of bias | Budgets saved as issued, monthly variance reports, notes on each large miss |
| Model mechanics | Checks that revenue builds from drivers, statements tie and formulas are not typed over | A balance sheet that balances, history that reconciles to the financials, labeled hard-coded cells |
| Backlog and pipeline | Reconciles backlog to signed orders and weighs pipeline by stage and age against past conversion | System exports with dates and stages, contract copies, win-and-loss history |
| Customer evidence | Reads contracts and renewal history, then calls selected customers about next year | Contracts, purchase history by customer, customers whose answers match the model |
| Capacity | Tests whether the plant, fleet or team can deliver the volume on the forecast dates | Utilization history, a capacity analysis, a hiring plan and spending dated ahead of volume |
| Sensitivity runs | Puts the seller’s case in its own model and lowers price, volume or margin to find where returns or loan terms break | The seller’s own sensitivity table naming the assumptions that matter most |
The bridge from LTM, sorted by evidence
The bridge is the first schedule a buyer builds if the seller has not, so the seller should build it first. It starts at LTM revenue and ends at the first forecast year, with a row for each driver and a column for the evidence in hand. Items already contracted or in effect sit apart from items that still have to be won, and the split shows the buyer how much of the growth rests on documents.
Illustrative example: A revenue bridge sorted by evidence
A company with LTM revenue of $10,000,000 builds a bridge to its first forecast year.
| Step | Amount | Evidence in hand |
|---|---|---|
| LTM revenue | $10,000,000 | Financial statements |
| Price increase already in effect, full-year effect | +$200,000 | Customer price notices and invoices |
| Contracted volume above the LTM level | +$400,000 | Signed renewals and open orders |
| Customer lost late in the LTM period, full-year effect | -$300,000 | Date of the last invoice |
| New customers still in the pipeline | +$700,000 | Opportunity list, not yet signed |
| First forecast year | $11,000,000 |
Net growth is $1,000,000, or 10 percent. Evidence is in hand for $300,000 of it ($200,000 plus $400,000 less $300,000), and the other $700,000 depends on wins that have not happened. A seller who shows this split frames the conversation. A seller who shows only the growth rate leaves the buyer to build the split, and the buyer’s own case then starts from the documented part and asks for proof of the rest. The numbers are invented to show the mechanics and are not benchmarks.
Past budgets against actual results
Buyers ask for prior budgets and forecasts because accuracy is evidence nobody can create after the fact. They compare each line with actual results and look for a pattern more than any single miss: revenue always over, costs always under, new products always late. A pattern of bias tells the buyer how far to adjust the current forecast without arguing about any assumption. The seller’s diligence checklist lists past forecasts among the usual requests.
Owner-run companies often have no formal budgets. The buyer then falls back on monthly trends and customer history, and the seller loses the chance to show a record. The remedy available before launch is a monthly budget-against-actual routine, kept on dated versions, with a short written reason for each large variance. Budgets revised after the fact tend to be spotted from file dates and cost more credibility than having none.
Tests that reach outside the model
Pipeline and backlog. A buyer’s analysts take the export from the CRM or order system, group opportunities by stage and age, and apply the company’s own history of conversion from each stage to a signed deal. Opportunities with no recent activity drop out. Backlog is checked against contract copies and cancellation rights, because backlog that can be cancelled at no cost is closer to pipeline. An export can be re-run, which a summary slide cannot. The guide to revenue forecasting covers the methods behind these numbers.
Customers. Contracts and renewal history come first and calls come later, once the buyer is committed, usually with agreement on whom to call. The forecast should already be consistent with how the largest customers would answer, because growth assumed from a customer that has added a second supplier fails in one phone call. The guide to customer diligence covers the contract review and the calls.
Sensitivities. The buyer lowers price, volume and margin in its own model, delays new initiatives and removes the largest customer, to find where its loan terms or its return break. The seller can run the same changes first. Showing which assumption matters most, and what happens if it misses, tells the buyer that management understands the downside, as the guide to base, upside and downside cases describes.
A rehearsal checklist for the seller
A rehearsal is a mock diligence run by someone who did not build the model, such as the company’s CPA or an M&A advisor. It follows the order buyers use, and it assumes the model was built as the hub guide to financial projections describes.
- Build the LTM bridge and sort every step by the evidence in hand.
- Collect prior budgets as issued, with variance notes for the large misses.
- Re-export backlog and pipeline from the source systems before each buyer meeting and reconcile them to the model.
- List the largest customers and write down, from contracts and purchase history, what each would say about next year.
- Compare forecast volume with capacity and show the hiring and capital spending that closes any gap.
- Run price, volume, margin and timing sensitivities and note the break points.
- Ask a reader outside finance to trace revenue through the model to the financial statements, and fix every typed-over cell.
- Assign each driver to the manager who owns it, and have that manager present it.
Gaps found in rehearsal have three remedies. Reduce the base case to what the evidence supports, move the rest into an upside case, or accept that the buyer will pay for it only through an earnout.
Frequently asked questions
Do buyers rely on a seller’s projections to set the price?
Price is usually anchored on LTM or run-rate adjusted EBITDA, not on the forecast. The forecast decides how much credit the buyer gives for growth, whether part of the price becomes contingent through an earnout, and how much a lender will finance. Projections that fail testing are replaced by the buyer’s own case.
What is a forecast bridge?
A schedule that starts from LTM revenue or EBITDA and walks to the first forecast year one driver at a time, such as price, volume from existing customers, new customers and lost customers. Each step carries its amount and the document behind it. Buyers build one for themselves if the seller does not provide it.
What if the company has never prepared a budget?
The buyer substitutes monthly trends, seasonality and customer history, and the seller has no record of accuracy to show. Starting a monthly budget-against-actual routine before launch, with dated versions and a short note on each large variance, gives buyers something real to read even if it covers only a few months.
When do buyers call the seller’s customers?
Generally late in the process, once the buyer is committed and confidentiality allows, and usually with the seller’s agreement on whom to call. Customers are asked about their plans for next year, their satisfaction, their alternatives and price. The forecast should already match how the largest customers would answer.
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Related guides
- Management Case vs Buyer Case: How Buyers Adjust Your Projections: How a buyer turns a management case into its own case: the adjustments it makes, a reconciliation of the gap, and how sellers defend assumptions with evidence.
- Quality of Earnings Report: What It Is and What Buyers Test: A quality of earnings report tests whether a company’s reported profit is real and repeatable. See what buyers examine, how it affects price and how sellers prepare.
- Revenue Forecasting for a Sale: Backlog, Pipeline, Recurring and Cohort Methods: How to forecast revenue for a sale: backlog conversion, pipeline weighting, recurring revenue and churn, and cohorts, with the evidence buyers accept.
- Customer Due Diligence: Contract Review, Retention Analysis and Customer Calls: How buyers run customer due diligence: contract terms, retention by cohort, pricing history, credits and disputes, and the customer calls that test revenue.
- Driver-Based Forecasting for a Business Sale: Build a Model Buyers Can Test: Driver-based forecasting builds a sale projection from units, price, utilization and retention. See driver trees for a manufacturer and a services firm.
- Base, Upside and Downside Cases: Scenario Analysis for Sale Projections: Scenario analysis for a sale: what moves between base, upside and downside cases, how to label assumptions and how lenders and buyers use the downside.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.