The Pro Forma Balance Sheet
Add the two balance sheets, then post the deal adjustments: new cash, debt, goodwill, write-ups, and the target's wiped-out equity.
- ✓List the core pro forma balance-sheet adjustments
- ✓Explain why the target's old equity is eliminated
On close, most of the target's balance sheet is simply added to the buyer's. Then a handful of deal adjustments are posted so the combined balance sheet reflects how the deal was paid for and accounted for.
- Cash - subtract cash used in the deal; add net proceeds from new financing.
- Debt - add the new debt raised to fund the cash portion.
- Equity - add new buyer stock issued; subtract one-time .
- Goodwill & write-ups - add the created and the PP&E/intangible step-ups.
- Target's old equity - eliminate it entirely; the buyer now owns the assets, not the old shareholders.
The buyer purchased the target's assets and liabilities, paying through cash, debt, and new stock. The target's historical retained earnings and paid-in capital are replaced by the purchase accounting - so its old book equity is zeroed out.
If your balance sheet doesn't balance, the usual suspects are a missed , fees not run through equity, or calculated off the wrong .
On the pro forma balance sheet, the target's pre-deal retained earnings are: