How to Answer “What are pro forma adjustments and why do we make them?” in Investment Banking Interviews

Start with a clean definition: pro forma adjustments are changes you make to historical or forecast financials to present an “as-if” view of the business—typically to reflect a transaction, normalise for unusual items, or align accounting policies.

Be explicit about the usual outputs in investment banking: you most often adjust EBITDA/EBIT for valuation and leverage, and you may also adjust net income/EPS for accretion/dilution. In models, adjustments can be (1) reclasses (presentation), (2) add-backs/knock-outs (earnings normalisation), or (3) new ongoing items that will exist post-deal (financing costs, incremental D&A).

A helpful sentence to include in financial modeling interview prep contexts: “Pro forma is not ‘made up’; it’s a documented bridge from reported numbers to a consistent, post-transaction run-rate.”

Give 3–4 reasons that map to real workstreams. First, comparability: investors and buyers need apples-to-apples periods and peers (e.g., consistent accounting, removing a one-time legal settlement). Second, normalised run-rate performance: valuation should reflect sustainable earnings/cash generation, not temporary noise.

Third, deal impact: in M&A and LBO contexts you need to show the combined company “as if” the transaction happened at the start of the period—capturing synergies, incremental costs, new financing, and purchase accounting effects.

Fourth, decision-making and covenants: lenders and internal investment committees focus on metrics like leverage and interest coverage that often use adjusted EBITDA; the point is to reflect recurring capacity to service debt, while being conservative about what truly recurs.

Anchor your answer with examples that interviewers recognise:

• Non-recurring items (normalisation): remove one-time restructuring charges, litigation settlements, asset sale gains/losses, disaster-related costs—only if truly non-recurring.
• Run-rate synergies (deal case): cost savings from headcount reduction or vendor consolidation, typically phased in and sometimes haircut for timing/one-off costs.
• Transaction costs: banker/legal/accounting fees are usually excluded from adjusted EBITDA, but you still model cash outflows and tax effects where relevant.
• Financing effects: incremental interest expense from new debt, commitment fees, debt issuance amortisation; this affects net income and cash flow.
• Purchase accounting: step-up in depreciation/amortisation from fair value adjustments and intangibles (impacts EBIT/NI), plus deferred tax effects.
• Accounting policy alignment: e.g., leases, revenue recognition timing, capitalisation policies—done to improve comparability in a combined model.

Tie it back to “pro forma adjustments explained”: each item should have a rationale, a source, and a clear place in the statements.

Interviewers like to hear restraint. Mention a few guardrails:

• Recurring vs. non-recurring: if it happens every year, it’s probably not an add-back.
• Double counting: don’t add back restructuring charges and also assume full run-rate synergies without modelling the one-time costs to get there.
• Cash vs. non-cash: an EBITDA add-back might still be a real cash cost (or vice versa); keep the cash flow statement honest.
• Tax and minority interests: if you adjust pre-tax earnings, be consistent when you translate to net income/EPS.
• Reconciliation: you should be able to bridge from reported to adjusted numbers in a simple schedule that someone can audit.

Close this step with the investment banking technical questions lens: “The goal is a defendable set of numbers that a buyer, lender, and IC can all follow.”