Pro forma EBITDA is the earnings a lender credits to a business as if an acquisition had already happened: the buyer's own EBITDA, if it has a company, plus the target's trailing twelve months, plus adjustments for costs that will not continue and savings the combination creates. Lenders credit historical, documented earnings in full, give partial or no credit to savings that have not been achieved, and almost never credit revenue synergies. Adjustments are often capped in the credit agreement. The credited figure sets both loan size and covenant headroom.
- What it is
- Combined EBITDA as if the acquisition had closed at the start of the period
- Starting point
- Trailing twelve months for the buyer and each target
- Credited in full
- Documented historical earnings and verified one-time items
- Haircut or capped
- Cost savings not yet achieved; expected synergies
- Rarely credited
- Revenue synergies and projected growth
The layers of a pro forma EBITDA figure
A pro forma figure is built in layers, and a lender treats each layer differently. The closer a layer is to what already happened, the more of it the lender credits.
- Historical EBITDA for the buyer, if it owns a company, and for every target, over the same trailing twelve months; see what LTM means. If one company's fiscal year ends in a different month, the periods are aligned before they are added.
- Normalizing adjustments to each company's own results: the seller's pay above a market salary, one-time legal or transaction costs, personal expenses run through the business. These are EBITDA add-backs, and lenders test them the same way inside a pro forma figure as outside it.
- Negative adjustments that the change of ownership creates: a general manager to replace a departing owner, rent at market under a new lease from the seller, the cost of services a corporate parent used to provide in a carve-out. They are easy to leave out of a buyer's own figure, and lenders look for them first.
- Cost savings from actions already taken: positions eliminated, a facility closed, a duplicate contract terminated. The saving is real but not yet visible in twelve months of results.
- Expected synergies: purchasing leverage, overlapping overhead, consolidated insurance or software. Planned, not yet done.
- Revenue synergies: cross-selling, new territories, price increases. The layer lenders are least willing to credit.
A worked example
A buyer that owns a platform company is acquiring a competitor. The buyer's management presents combined pro forma EBITDA of 5,400. The lender works through it line by line.
| Layer | As presented | As credited | Why |
|---|---|---|---|
| Platform LTM EBITDA | 3,000 | 3,000 | Reviewed statements, ties to tax returns |
| Target LTM EBITDA | 1,500 | 1,500 | Confirmed by quality of earnings work |
| Target add-backs | 200 | 150 | 50 of claimed one-time costs recur every year |
| Replacement manager for the selling owner | 0 | −120 | The owner's job still has to be done |
| Cost savings, positions already eliminated | 150 | 150 | Payroll records show the roles are gone |
| Cost savings, planned facility merger | 250 | 125 | Half credited; not yet executed |
| Revenue synergies from cross-selling | 300 | 0 | Not credited |
| Pro forma EBITDA | 5,400 | 4,805 |
The difference is 595 of EBITDA, about a ninth of the presented figure. At a lender that sizes senior debt at, say, three times EBITDA, that is nearly 1,800 of loan capacity the buyer expected and will not get. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, so the credited figure, not the presented one, is what the equity check and any seller note have to fill around.
Build the pro forma the way the lender will. A figure the lender has to cut undermines every other number in the package.
What documentation supports each adjustment
| Adjustment | What proves it | Usual lender treatment |
|---|---|---|
| Target's trailing earnings | Monthly financial statements, tax returns, and on larger deals a quality of earnings report | Credited as verified |
| Normalizing add-backs | General ledger detail, invoices, a trail to the tax return | Credited where traced; rejected where recurring |
| Owner replacement and new rent | An offer letter or market salary evidence; the signed lease | Subtracted, whether or not the buyer presents it |
| Savings already achieved | Payroll registers, termination notices, cancelled contracts | Usually credited, sometimes only from the date achieved |
| Planned cost savings | A plan with named actions, dates and costs to achieve | Haircut, capped, or credited only once realized |
| Revenue synergies | Projections | Rarely credited |
Two points decide most arguments. First, a saving has a cost: closing a facility means severance, lease exit and moving costs. A lender that credits the saving will usually subtract, or at least ask about, the one-time cost of getting it. Second, the target's figures must be current. Lenders want the latest full year and year-to-date results for every company being bought; an older year does not substitute for missing recent figures. See what lenders need to finance an acquisition.
Where lenders haircut and cap
Credit agreements carry the lender's view of pro forma EBITDA into the covenants, through the EBITDA definition. The common limits:
- A cap on cost savings and synergies, stated as a share of EBITDA before the adjustment. Everything above the cap is ignored, however well documented.
- A realization window: savings count only if the actions are taken, or expected to be taken, within a set period after closing. After the window, only realized savings remain.
- Officer certification: a senior officer signs that the savings are reasonably identifiable and supportable, and may have to update it each quarter on the compliance certificate.
- No double counting: once a saving shows up in actual results, the pro forma adjustment for it falls away.
Sizing and covenants can use different figures. A lender may size the loan on a conservative credited figure and still let the covenant definition include a capped allowance for planned savings, which gives the borrower headroom in the first year. Negotiating that difference is worth more than arguing over one add-back; see lending on run-rate, pro forma or projected EBITDA and covenant headroom.
Banks and private credit credit it differently
Banks lean on history. Conventional bank lenders commonly look for debt service coverage of at least 1.25x, and many test it on the combined historical results with documented add-backs, leaving planned savings out of the coverage calculation altogether. A bank may be willing to look at a pro forma figure for leverage and still insist that the history pays the debt.
Private credit lenders more often give some credit to planned cost savings, capped and time-limited in the credit agreement, which is part of why they can lend more against the same acquisition. They charge for that, and they test the savings as hard as a bank tests the history. Neither type credits revenue synergies in any meaningful way. Types of lenders in the lower middle market covers how each one underwrites.
How to present it
Show the bridge, not just the total: each layer on its own line, with the evidence behind it and a column for what you expect the lender to credit. Include the negative adjustments yourself. A lender that finds a missing replacement salary will discount everything else in the file; one that sees it already deducted reads the rest with more confidence. The financing model and the underwriting memo are where that bridge belongs, with each adjustment explained in the terms a credit committee uses. Midas Partners builds that package in a day once the documents are in, and a senior banker checks every page before the client approves it. For platforms buying repeatedly, see financing add-on acquisitions.
Common questions
- Is pro forma EBITDA the same as adjusted EBITDA?
- Not quite. Adjusted EBITDA normalizes one company's own results. Pro forma EBITDA combines companies as if an acquisition had already happened, and may add savings from the combination on top of each company's adjusted figure.
- Will a lender credit synergies?
- Cost savings from actions already taken are often credited. Planned savings are usually haircut, capped or credited only once realized. Revenue synergies are rarely credited at all.
- Does the replacement salary for a departing owner reduce pro forma EBITDA?
- Yes. If the owner's pay is added back, someone still has to do the job, and lenders subtract a market salary for that person whether or not the buyer shows it.
- Do banks and private credit funds credit pro forma adjustments the same way?
- No. Banks tend to test coverage on documented historical results and leave planned savings out. Private credit funds more often credit a capped share of planned savings for a set period. Both reject most revenue synergies.
- What period does pro forma EBITDA cover?
- Usually the trailing twelve months for every company in the combination, aligned to the same end date, as if all of them had been owned for the whole period.