Pro forma financial statements project hypothetical financial performance under specified assumptions — what the business will look like post-financing, post-acquisition, or post-expansion. Required for SBA acquisition loans.
Pro forma (Latin: 'as a matter of form' or 'for the sake of form') financial statements present projected or adjusted financial data based on a hypothetical scenario. Common uses: (1) post-financing projections (showing that the business can cover its new debt service from projected revenue), (2) acquisition pro formas (combining two businesses' financials to show combined entity performance), (3) expansion projections (showing revenue and cost impact of a new location or product line). For SBA 7(a) acquisition loans, the SBA requires pro forma financial statements for the proposed combined entity, projecting at least 2 years. The pro forma must show that the acquired business will generate sufficient cash flow to service the acquisition debt — the SBA's credit decision partly rests on the projected DSCR. Pro formas are prepared by management (often with CPA or financial advisor assistance) and are inherently speculative. Lenders evaluate the quality of the assumptions — revenue growth rates, cost structures, synergy claims, integration timelines. Aggressive or unsupported assumptions are a credit concern. Conservative, well-documented pro formas are more persuasive. Pro formas should be distinguished from historical financial statements. Historical statements report what happened; pro formas project what management believes will happen. They carry no CPA assurance (unless an agreed-upon-procedures engagement is performed on the specific assumptions).
No — they're specifically required for acquisition/change-of-ownership transactions (where the buyer is acquiring an existing business) and expansion projects where the business is new or significantly different from historical operations. For working capital and equipment loans to established businesses, historical statements and tax returns typically suffice.
Management typically prepares it, often with guidance from a CPA, business broker, or financial advisor. The key is credible, documented assumptions. Lenders scrutinize revenue growth rates, margin assumptions, and integration cost projections. A pro forma prepared by the borrower alone with no supporting data is less credible than one with comparable company data, market research, and industry benchmarks.
CPAs can perform agreed-upon procedures on pro forma assumptions and report on whether the arithmetic is correct and the stated assumptions are reasonable — but they cannot audit the future. Any CPA report on a pro forma is limited to the procedures performed and does not constitute an opinion on whether the projections will be achieved.