Pro Forma Reality Check

A pro forma is only as honest as the assumptions behind it. The problem is that most pro formas for facility expansions are built by optimists — and they get approved by lenders who are also reading an optimistic picture. The assumptions that kill projects are rarely obvious errors. They are plausible-looking inputs that happen to cluster in the favorable direction, producing a model that works on paper but doesn’t survive contact with reality. Here is how to find those problems before you commit.

The Ramp-Up Problem

The most common pro forma error is not in the steady-state projections — it is in the ramp-up period. Most operators model revenue starting at or near current production levels from day one of the new facility. In practice, new or expanded facilities almost never perform at full capacity immediately. Patients take time to transition. New staff take time to reach full productivity. Scheduling systems need time to optimize. Referral patterns shift.

A realistic ramp-up model might look like this: 60% of projected capacity in month 1–3, 75% in months 4–6, 85% in months 7–9, reaching full projected capacity by month 10 or 12. Compare that to a model that assumes 100% from month one, and the revenue gap over the first year can easily represent $200,000 to $500,000 in uncollected production for a mid-sized practice — production that your debt service does not pause to wait for.

The Staffing Cost Blind Spot

Expanded capacity requires expanded staffing. A facility with 40% more operatories, treatment rooms, or patient bays cannot run at full capacity with the same team. New hires take time to recruit, time to train, and several months to reach full productivity. During that period, you are paying for capacity that is not yet generating revenue.

Pro formas frequently model revenue from new capacity without modeling the full cost of the staff required to produce it. The result is an optimistic margin assumption in the early years that collapses when the actual payroll materializes. Build your staffing model from the schedule forward: how many patients or clients can the facility serve at full capacity, and how many clinical and support staff does that require? Then model when those hires need to be made, what they cost, and what productivity ramp-up looks like for each role.

Interest Rate Sensitivity

Most operators build their pro forma around the interest rate they expect to receive at closing, which is typically the rate they got quoted at the beginning of the process. By the time the project closes — often 12 to 18 months later — rates may have moved. A 1% increase on a $3 million loan changes your annual debt service by approximately $30,000. That is a real number that needs to stress-test your model.

Run your DSCR calculation at your expected rate, at that rate plus 1%, and at that rate plus 2%. If the deal only works at the most favorable rate assumption, it is fragile. A deal that works at expected plus 2% has meaningful margin of safety built in.

The Expenses That Get Left Out

Beyond staffing, there are operating expense categories that routinely get undermodeled in expansion pro formas. Each of these is individually small; together they can represent 8–15% of revenue in a mature operation and their absence in year-one modeling creates a materially overstated margin picture.

• Utilities in the new facility: A purpose-built facility with more square footage, more equipment, and more operatories costs meaningfully more to heat, cool, and power. Obtain actual utility estimates from your mechanical engineer before finalizing the model.
• Maintenance and janitorial: More space means more maintenance cost. This seems obvious, but per-square-foot operating costs rarely scale linearly — they often scale faster in specialized clinical environments.
• Marketing and new patient acquisition: A new location or significantly expanded capacity typically requires investment in marketing to drive utilization. This is a real budget line, not a rounding error.
• Technology and software subscription costs: New facility means new workstations, expanded licenses, potentially new systems. These costs often go unmodeled until the invoices arrive.
• Insurance: Commercial property insurance on a new building, plus any required builder’s risk coverage during construction, is more expensive than renewing an existing tenant policy.

How to Build a Defensible Model

A sound pro forma is built bottom-up, from operational assumptions, rather than top-down from a desired outcome. Start with capacity: how many patients, procedures, or clients can the facility serve per day at full utilization? What is the realistic utilization rate in year one, year two, and at stabilization? Apply your actual average transaction value or production per patient to those volume assumptions.

Then model expenses the same way — from actual costs, not percentages borrowed from industry averages. Your specific market, your specific payroll structure, and your specific facility drive your costs, not an industry benchmark.

• Build three scenarios: a base case (most likely), a conservative case (80% of base revenue, 105% of base expenses), and a stress case (65% of base revenue, 110% of expenses)
• Your project should service its debt in the conservative case. If it only works in the base case, you are making a bet, not a plan.
• Have someone who was not involved in building the model review it specifically looking for optimistic assumptions — a fresh set of eyes finds what familiarity hides