Definition - What does Pro Forma mean?
A pro forma, in the context of the purchase and sale of a business, refers to a projected financial metric over a specific historical period that incorporates specific events or catalysts throughout the period. Usually, a pro forma is calculated for revenue and/or EBITDA and often relates to the trailing 12 months. Buyers may look for catalysts such as the addition of a new product or the entering of a new market during the period, and then compute the "pro forma TTM EBITDA" to estimate what EBITDA would have been had the new product been launched and in place for the trailing 12 months.
Divestopedia explains Pro Forma
When assessing a company for sale, buyers will often try to calculate the "run rate" EBITDA and free cash flow of a business. They use the pro forma projection to do this for businesses that are usually growing, have particular changes that have occurred or to include non recurring EBITDA normalizations.
For example, assume that a target has a TTM EBITDA of $5.0mm. However, four months ago, this target introduced a new product that will contribute incremental EBITDA of $200,000 per month. In addition, the target may have shut down a location six months ago with related overheads of $25,000 per month. The target would compute the pro forma TTM EBITDA at $6.75 million since the pro forma would include $1.6 million related to eight months prior of the new product's contribution to the EBITDA line plus $150,000 related to the saved overheads on the prior six months before the office was closed.