Quick answer: Pro forma and run-rate adjustments restate a period as if a change already made had been in place for all of it, such as a price increase, a signed contract, a lost customer, a cost saving, an acquisition or a closed location. Buyers credit changes that have happened and are documented, deduct losses without being asked and give little or no credit for hoped-for growth. Because the multiple scales every dollar, this is the most contested group of adjustments.
Key points
- A pro forma adjustment restates a past period as if a completed change had been in place all along. A forecast of what might happen is not an adjustment.
- Credit follows evidence: a signed contract, an invoice at the new price, a termination notice or a closing statement earns credit, while a pipeline or a plan earns little.
- Pro forma adjustments run in both directions. A buyer deducts a lost customer or a granted wage increase whether or not the seller lists it.
- Present pro forma items in a separate schedule below historical adjusted EBITDA, so contested items cannot weaken the supported history.
- Annualize costs with revenue. A new contract or price increase is credited net of the cost to serve it and of any volume that left.
What a pro forma adjustment claims
A pro forma adjustment restates a period as though a change that has already happened had been in place for the whole of it. A run-rate adjustment does the same for a recurring item, taking the current level and annualizing it. Buyers apply one rule to both: the change must be complete, documented and durable. It must already have happened, a document must prove its size, and nothing in the evidence should suggest it will reverse.
Historical add-backs correct what happened in the period. Pro forma adjustments ask the buyer to pay for what the numbers would have shown, which is a request to pay a multiple on earnings the company has not yet produced. That difference is why they are treated separately. The choice of period a buyer prices is covered in the guide to LTM, run-rate and forward EBITDA, and the full sequence of adjustments is in the guide to normalizing earnings.
Adjustments buyers see and the evidence they require
| Adjustment | What the seller claims | Evidence buyers require | Credit buyers give |
|---|---|---|---|
| Price increase already in effect | The part of the year not yet at the new price | Price list, invoices at the new price, order data after the increase | Strong when volume held; reduced for customers lost |
| Contract signed, not yet started | Full-year margin from the new customer | Signed agreement, start date, cost to serve | Partial until deliveries begin; none without a start date |
| Customer lost or contract expiring | Nothing; the buyer raises it | Notice, expiry date, contribution by customer | Deducted in full, whoever raises it |
| Cost saving already executed | The annual saving not yet in the period | Signed vendor contract, payroll records showing the position removed | Strong, net of the cost to achieve it |
| Cost saving planned | Savings from steps not yet taken | A plan | Little or none, since it depends on the next owner’s decisions |
| Acquisition completed in the period | Full-year earnings of the acquired company | Closing statement, the target’s monthly results, integration costs | Credit for verified earnings; synergies excluded |
| Location or product line closed | Removal of the unit’s losses | Closure date, lease termination, results of the closed unit | Strong once truly closed; stranded overhead stays in costs |
| Wage, rent or insurance increase already granted | Nothing; the buyer raises it | Payroll records, renewal documents | Deducted in full |
Why pro forma credit is the most contested
Every other adjustment corrects the record. This one asks for credit on results the company has not reported, and the multiple turns each dollar into several dollars of price. The buyer has no way to verify the outcome except through the documents the seller provides, so it discounts for execution risk.
Four habits cause most of the disputes. Sellers list the gains and leave out the matching losses. They credit revenue without the cost to serve it. They assume volume held after a price increase without showing order data. And they include savings or growth that depend on the next owner, which are the buyer’s to earn and not the seller’s to sell. Each habit makes a buyer read the whole schedule as an advocacy document, and the guide to how buyers challenge add-backs shows how that reading spreads to other adjustments.
Annualizing revenue together with its costs
A pro forma figure is a margin, not a revenue number. A price increase flows to EBITDA nearly in full, but only for the customers who stayed, so the buyer looks for order data from the months after it took effect. A new contract adds revenue and the people, materials and working capital that serve it, and buyers credit the contribution after those costs. An acquisition adds the target’s earnings and the costs of integrating it, and excludes the savings the seller expects from combining the two.
Seasonality is the other trap. Multiplying the latest strong quarter by four, or the best month by twelve, carries a seasonal peak into the whole year. A buyer compares the same months in the prior year to see the seasonal shape, and a business with a cycle cannot use a short window as its run-rate. What buyers refuse outright is a short list:
- Savings that depend on actions the buyer, not the seller, would take.
- Growth from a pipeline, a proposal or an unsigned letter of intent.
- A price increase announced but not yet implemented.
- The best recent period annualized in a business with a seasonal cycle.
How a pro forma schedule is credited
Illustrative example: From historical to pro forma EBITDA
A company has historical adjusted EBITDA of $2,400,000, supported by documented add-backs and shown first. The owner then lists five pro forma items, and the buyer tests each. A placeholder multiple of 5.0x is used for the arithmetic.
| Item | Seller claims | Buyer allows | Reason |
|---|---|---|---|
| Historical adjusted EBITDA | $2,400,000 | $2,400,000 | Supported add-backs, shown separately |
| Price increase in effect for the last quarter | +$300,000 | +$300,000 | Invoices at the new price; orders held after the increase |
| Contract signed, starting after the period | +$150,000 | $0 | Not started, no purchase orders, needs a hire |
| Largest customer’s notice of non-renewal | $0 | -$210,000 | Notice on file; its contribution will be lost |
| Vendor contract renegotiated two months before the period end | +$100,000 | +$100,000 | Signed contract; invoices at the new rates |
| Planned reduction of two positions | +$160,000 | $0 | Not yet taken; depends on the new owner |
| Pro forma EBITDA | $3,110,000 | $2,590,000 | |
| Value at 5.0x | $15,550,000 | $12,950,000 |
The price increase adds $400,000 a year, of which one quarter, or $100,000, is already in the numbers, so $300,000 remains. The vendor saving is $120,000 a year, of which two months, or $20,000, is already in the numbers, so $100,000 remains. The buyer credits a net $190,000, worth $950,000 on top of the $12,000,000 that the historical figure supports. The seller’s version is $2,600,000 higher than the buyer’s. The omitted customer loss accounts for $1,050,000 of that gap, the unstarted contract for $750,000 and the planned reductions for $800,000. The numbers are invented to show the mechanics and are not benchmarks.
Presenting pro forma items apart from history
Show historical adjusted EBITDA first, with its supported add-backs, and list pro forma items beneath it in their own schedule. If a buyer rejects a pro forma item, the history stands untouched. If the items are mixed into one list, one rejection puts every line in doubt.
For each item, state the effective date, the amount already in the period, the annualized amount, the cost to serve or achieve it, the net effect and the document that proves it. Include the negative items yourself, since the buyer will find them. Where a buyer will not pay for an item the owner believes in, the dispute can move out of price and into structure, because an earnout pays for the item if it appears in results. Items that depend on events after closing are forecasts, not adjustments, and they belong in the management case that buyers test separately, as the guide to the management case and the buyer case explains. The overview of EBITDA add-backs covers the historical items that sit above the line.
Frequently asked questions
What is the difference between pro forma and run-rate EBITDA?
Run-rate EBITDA annualizes the current level of a recurring item, such as a price now in effect or a new monthly fee. Pro forma EBITDA restates a period for a structural change, such as an acquisition, a closure or a signed contract. Buyers apply the same test to both: has it happened, and can it be documented?
Will a buyer credit a contract that is signed but has not started?
Sometimes, but less than the seller asks. Buyers look for a signed agreement with firm terms, a start date and a cost to serve it, and some wait for the first deliveries or invoices. When the buyer will not credit the contract in price, an earnout can pay for it if the contract performs.
Can I annualize my best months or my latest quarter?
Seldom. Annualizing a strong quarter assumes the rest of the year will match it, which a seasonal business cannot support, and buyers read it as a forecast. A run-rate claim works when the change is a fixed rate, such as a price list, and when the history shows volume held after it took effect.
Do pro forma adjustments ever lower EBITDA?
Yes, and buyers insist on them. A customer that has given notice, a contract that is expiring, a wage increase already granted, a lease reset to a higher rent or a product line being discontinued all reduce the earnings a buyer will own. A schedule with only positive items is read as one-sided.
How do pro forma items affect the purchase price?
Each dollar of EBITDA a buyer credits is multiplied by the valuation multiple, so a modest adjustment can move price by several times its size. Because buyers are cautious about items they must take on trust, they often accept part of an adjustment or move the rest into an earnout tied to results.
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Related guides
- LTM, Run-Rate and Forward EBITDA: Which Period Buyers Price: LTM, run-rate and forward EBITDA compared: how each is built, why buyers price the trailing twelve months, and when seasonality or growth changes the answer.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- 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.
- Non-Recurring Items in Adjusted EBITDA: What Really Counts as One-Time: How buyers decide whether an item is non-recurring in adjusted EBITDA: four tests, examples from settlements to start-up costs, and the support they expect.
- Earnouts Explained: How Contingent Consideration Works in a Sale: An earnout ties part of the purchase price to future results. Learn how earnouts are structured, why buyers propose them and how sellers can value the risk.
- Normalizing Owner Compensation: Replacement Salary, Bonuses and Family Pay: How to restate owner pay for EBITDA: price each role the owner fills at market cost, then treat bonuses, distributions, benefits and family members on payroll.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.