What the buyer’s model shows: “My company does $3M of EBITDA, the target does $1.5M, and once we combine we’ll save $500K in overlap. So the lender is underwriting a $5M-EBITDA business.”

What the credit team underwrites: something smaller, later, and more conservative, because they are lending against a combined entity that has never existed, has no combined tax return, no combined bank statements, and no track record of the synergies you’re promising. Pro forma EBITDA is an argument, not a fact, and the lender’s job is to discount the parts of the argument that haven’t happened yet.

What “pro forma” actually means here

Pro forma EBITDA is the earnings of the combined business as if the two companies had always been one, adjusted for changes the deal will cause. It has three layers, and the lender trusts them in descending order:

  1. Trailing actuals for each entity, the real, historical EBITDA of the buyer and the target, separately. This is the bedrock, and even here the target’s number gets scrubbed by a quality-of-earnings review.
  2. Cost synergies, overlapping expenses the combination removes: a duplicate back office, one insurance policy instead of two, a lease you’ll exit. Credible, but only if they’re specific and actionable.
  3. Revenue synergies, the cross-selling, the new territory, the pricing power. To a credit team, these are essentially worth zero at underwriting. You may believe them; the lender won’t lend against them.

How the credit team builds the number

A disciplined underwriter starts from the sum of the two trailing EBITDAs and then works downward, not upward:

  • Take the scrubbed trailing EBITDA of each entity. The target’s especially, re-derived from bank statements and ledgers, not the seller’s Excel.
  • Add only “hard” cost synergies with a paper trail. The lender wants to see the terminated lease, the redundancy already identified by name and salary, the vendor contract you can actually consolidate. “We’ll find efficiencies” scores nothing. “We give notice on the $8K/month second office in month one” scores.
  • Haircut or exclude soft synergies. Anything requiring you to execute flawlessly after close is discounted heavily or ignored.
  • Add back one-time deal and integration costs where appropriate, but underestimating integration cost is the classic first-timer error, so keep it honest.

The gap between the buyer’s $5M and the lender’s number, often $4–4.3M in the example above, is the difference between the deal you modeled and the deal you can actually finance.

Why they’re this conservative

A senior lender is committing several turns of leverage against this pro forma number. If they lend 3× against a $5M number that turns out to be $4.2M, they’ve quietly lent 3.6× against reality, and the covenant headroom you both counted on is gone before you integrate the first invoice. Their conservatism isn’t distrust of you; it’s the arithmetic of what happens if the synergies arrive late (they always arrive late) while the debt service arrives on schedule.

How to make your pro forma survive

The buyers who get their number accepted do three unglamorous things:

  • Document every synergy as an action, not an outcome. A schedule that lists each cost cut, its dollar amount, the responsible person, and the month it happens is worth more than any narrative.
  • Keep the two companies’ books clean and separate through diligence, so the trailing actuals are unarguable.
  • Present revenue synergies as upside, not as base case. Ask for the deal to work on cost synergies alone; let revenue synergies be the reason you’re excited, not the reason it pencils. A credit team relaxes considerably when the file works without heroics.

The timing wrinkle

Even a well-built pro forma takes weeks to validate, the quality-of-earnings work, the field exam, the synergy documentation. That validation runs on the lender’s calendar, not the deal’s, which is why the gap between LOI and senior funding exists at all. Buyers who plan capital for that gap don’t lose the target while the pro forma gets blessed.

Run your own file first

Before you model a combined entity, it helps to know how a credit team reads your existing one, the base you’re building on. Run the assessment or send us your documents and we’ll tell you straight.

Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction. Leverage and synergy treatment vary by lender and deal.