Pro Forma Adjustments

Calendarization adjusts financial data for companies with different fiscal year-end dates so they can be compared on a common period. For example, if you are building a comparable companies analysis and Company A has a December fiscal year-end while Company B has a June fiscal year-end, you need to calendarize Company B's results to a December year-end. The standard approach is to weight two fiscal years proportionally: for a December calendar year, take 6/12 of Company B's June 2025 fiscal year and 6/12 of its June 2026 fiscal year. This ensures all companies in the comp set are measured over the same time period, which is critical for accurate multiple comparisons. Most banking teams calendarize to a December year-end or to the target company's fiscal year-end.

Stub periods arise when you need financial data for a partial year — commonly in M&A deals that close mid-year or when the latest available data is an interim quarterly filing. To calculate last-twelve-months (LTM) figures, bankers use the formula: LTM = Latest Fiscal Year + Latest Stub Period − Prior-Year Stub Period. For example, if a company has a December year-end and the latest filing is Q3, LTM Revenue = FY2024 Revenue + Q3 2025 YTD Revenue − Q3 2024 YTD Revenue. Stub period adjustments ensure that valuation multiples reflect the most current operating performance rather than potentially stale annual figures. In an M&A context, stub period analysis determines how much of the target's earnings the acquirer will capture from close date to year-end.

Normalization removes non-recurring items that distort a company's underlying operating performance. Common adjustments include removing restructuring charges, litigation settlements, asset impairments, gain/loss on asset sales, and pandemic-related disruptions. The goal is to arrive at adjusted EBITDA and pro forma financial statements that reflect sustainable, run-rate profitability. Bankers must exercise judgment about what qualifies as truly non-recurring — a company that has 'one-time' restructuring charges every year is arguably not non-recurring. Sell-side bankers tend to adjust more aggressively (higher adjusted EBITDA), while buy-side investors scrutinize each add-back carefully.

In an M&A context, pro forma adjustments combine the acquirer and target financials as if the transaction had already occurred. This includes adding the target's revenue and expenses to the acquirer's, reflecting new debt and equity issuance from the deal financing, recording purchase price allocation adjustments (new D&A from asset step-ups, goodwill creation), eliminating intercompany transactions if the companies had a pre-existing relationship, and incorporating expected synergies on a phased-in basis. The resulting pro forma income statement shows the combined company's earnings, which is the starting point for accretion/dilution analysis. Pro forma balance sheets are similarly adjusted to reflect the new capital structure and asset base post-closing.