Pro Forma Financial Statements
Pro forma financials answer 'what would the combined company's financials look like after this deal?' — they're the core output of any merger model.
Definition
Pro forma financial statements are hypothetical financial statements that show what a company's (or combined companies') financials would look like after a proposed transaction, restructuring, or other significant event. In M&A, pro forma statements combine the acquirer and target, adjusting for deal-related items like synergies, new debt, and purchase accounting.
Building a Merger Model
Five steps from standalone projections to accretion/dilution
Accretion / Dilution Analysis
The most important output of a merger model
+$0.25
Accretive by +8.3%
Key Drivers
Target Net Income
+$200M
Cost Synergies (after tax)
+$75M
New Interest Expense
-$80M
New Shares Issued
50M shares
The deal is accretive because the target's earnings contribution plus synergies ($150M) exceed the financing cost (new interest expense of $80M and dilution from 50M new shares).
Building Pro Forma Statements
Start with the standalone financials of both acquirer and target. Combine each line item, then layer in adjustments: (1) synergies (cost savings, revenue synergies), (2) new financing costs (interest on acquisition debt), (3) purchase accounting (intangible amortization, inventory step-ups), (4) lost interest income on cash used, (5) new shares issued (for stock deals). The result shows pro forma revenue, EBITDA, net income, and EPS.
Pro Forma in M&A Pitch Books
Pro forma financials appear in the 'Transaction Impact' section of M&A pitch books. Key pages include: pro forma income statement, pro forma credit statistics (Debt/EBITDA, interest coverage), and accretion/dilution analysis. These help the acquirer's board and investors understand the financial impact of the deal. Pro forma statements are also required in SEC filings (Form 8-K) within 75 days of a deal closing.
Pro Forma in LBOs
In an LBO, the pro forma balance sheet reflects the new capital structure: old equity is eliminated, new debt is loaded on, and the sponsor's equity contribution replaces existing equity. Goodwill is created for the premium over book value. The pro forma opening balance sheet is the starting point for the entire LBO model and drives the projected debt paydown schedule.
Worked Example — With Real Numbers
Acquirer has $2B revenue and $400M EBITDA. Target has $500M revenue and $100M EBITDA. Pro forma combined: $2.5B revenue and $500M EBITDA. After $50M cost synergies: $550M adjusted EBITDA. After $40M new interest expense and $20M purchase amortization, pro forma net income is calculated. If the deal is financed with $600M new debt, pro forma Debt/EBITDA = ($600M + existing $800M) / $550M = 2.5x.
Key Takeaways
Pro forma statements combine acquirer + target financials with deal adjustments
Key adjustments include synergies, new financing costs, purchase accounting, and share issuance
Pro forma credit metrics (Debt/EBITDA) are critical for assessing deal feasibility
In LBOs, the pro forma balance sheet establishes the opening capital structure for the model
Common Mistakes in Interviews
Forgetting to include all deal adjustments — especially purchase accounting amortization and lost interest income
Presenting synergies as fully realized in Year 1 when they typically phase in over 2–3 years
Not distinguishing between pro forma at close vs. pro forma run-rate (fully synergized)
Confusing pro forma for actual financials — pro forma is hypothetical and not GAAP
How Interviewers Test This
If asked 'walk me through a pro forma income statement for a merger,' start with combining revenue and expenses, then adjust for synergies, new interest expense, purchase accounting amortization, and the tax impact. Conclude with pro forma EPS and whether the deal is accretive or dilutive.
Related Concepts
Directly referenced in this topic
Merger Model
A merger model (also called an [accretion/dilution](https://www.ibflash.com/conc...
Accretion / Dilution Analysis
Accretion/dilution analysis determines whether a proposed acquisition will incre...
Synergies in M&A
Synergies are the incremental value created when two companies combine that neit...
Sources & Uses Table
A Sources & Uses table is a summary that shows where the funding for an M&A or [...
More M&A & LBO
35 more concepts in this category
Topic Guides
Firms That Test This
Practice Pro Forma Financial Statements questions
400+ interview questions with AI feedback. Free to start.
Start PracticingMaster Pro Forma Financial Statements and 100+ More Concepts
Get the full IB Flash experience and walk into your interview with confidence.
AI Interview Coach
Real-time feedback on your answers
1,000+ Practice Questions
Across IB, PE, HF, VC & more
Financial Modeling Tests
Excel-based skill assessments
Or explore our free tools to get started