Pro-Forma

Legitimate Pro-Forma Adjustments

Historical normalization (most common and legitimate): Removing the owner's above-market compensation, eliminating personal expenses, and stripping one-time items from historical financials. This is standard practice and reflects what the business would have earned under arm's-length management.

Completed acquisitions: If the business acquired another company mid-year, annualizing the full-year contribution of the acquired revenue is standard. Requires documentation that the acquisition closed and the revenue is genuinely running.

Organic contract additions: If the business signed a new contract during the measurement period, annualizing to a full year is reasonable — if the contract is signed, executed, and generating cash.

Aggressive Pro-Forma Adjustments (Red Flags)

Pipeline revenue: Adjusting for contracts "expected to close" or in advanced negotiation. Pipeline is not revenue. Any adjustment for contracts not yet signed or generating cash should be challenged.

Synergies: Adjustments for cost savings the buyer might achieve under new ownership. Sellers don't get credit for operational improvements the buyer will make.

Removed expenses the business needs: Eliminating a cost category that genuinely recurs under any ownership structure (e.g., removing all marketing spend because the owner "handled it personally").