In business, assessing and understanding a company’s recent financial performance is crucial for various stakeholders, ranging from investors and analysts to business owners contemplating strategic decisions.
One such key metric that plays a pivotal role in this evaluation is the trailing 12 months (T12M) strategy. In this article, we explain the significance of this metric as a comprehensive and up-to-date measure of a business’s financial health and stability.
What is Trailing 12 months (T12M)?
Trailing 12 months (T12M) is a financial term used to describe the financial performance of a business over the past 12 consecutive months.
Here’s how trailing 12 months is calculated:
- Select a Starting Point: Choose a specific date as the starting point. For example, if you’re looking at T12M financials as of January 1, 2024, you would consider the 12 months leading up to that date.
- Aggregate Financial Data: Gather and sum up the relevant financial data for the selected 12-month period. This can include revenues, expenses, net income, cash flow, or any other financial metric of interest.
- Rolling Calculation: As time progresses, the trailing 12 months calculation is updated regularly. As each month passes, the calculation “rolls” forward, dropping the oldest month and adding the most recent month to maintain a continuous 12-month period.
Why is Trailing 12 months (T12M) important?
For a business owner planning to sell their business, the trailing 12 months (T12M) is particularly important for several reasons:
Current Performance Snapshot
Prospective buyers are keen to understand the current financial health and performance of the business. T12M provides a recent and comprehensive snapshot of the company’s financials, allowing potential buyers to assess its stability and growth trends.
Demonstrates Consistency
T12M helps showcase the consistency of the business’s performance over the most recent 12-month period. Buyers are often interested in businesses with stable and predictable financials, and T12M figures help highlight the business’s ability to generate consistent revenue and profits.
Reflects Operational Changes
If the business has undergone any significant operational changes, such as cost-cutting measures or new revenue streams, T12M will reflect these adjustments. This data is essential for prospective buyers to comprehend the influence of recent strategic choices on the company’s financial performance.
Cyclical Adjustments
Some businesses may experience cyclical fluctuations in performance. The trailing 12 months aids in mitigating these fluctuations, presenting a more precise depiction of the business’s capacity for earnings and its overall financial stability.
Valuation Basis
T12M financials are often used as a basis for business valuation. Buyers and business brokers use these figures to estimate the fair market value of the business. The more current and reliable the financial data, the more accurate the valuation.
Negotiation Leverage
Strong T12M performance can give the business owner greater negotiating leverage. An upward financial trajectory can substantiate an increased valuation and more favorable terms in a deal. Conversely, if there are recent challenges, the business owner can proactively address them during negotiations.
Risk Mitigation
By presenting T12M data, a business owner can help mitigate concerns related to historical financial data that might be outdated. This is particularly crucial if there have been recent enhancements or alterations that have positively influenced the business’s prospects.
Due Diligence Facilitation
T12M financials streamline this process by providing a recent and focused dataset, making it easier for buyers to assess the business’s financial health and potential risks.
For a business owner looking to sell, the trailing 12 months is a critical timeframe that helps present a clear, current and compelling financial picture of the business. It acts as a fundamental component in the sales process, playing a pivotal role in fostering a more knowledgeable and successful transaction.
Find out the steps on how to sell a business with a business broker like Brentwood Growth
Brentwood Growth is a valuable partner for business owners in the home service and facility management industries who are making a life-changing decision as they sell their businesses.
Whether it’s a small business or large, the first crucial step as you sell your business is to understand how much it’s worth. Our business brokers provide business owners a free business valuation so you can gauge the financial health of your business.
From there, as we gain a nuanced understanding of your timeline and objectives and meticulously analyze financial statements, including T12M, we can help identify areas of strength and potential improvement and craft effective strategies to enhance your business’ appeal to potential buyers so you can sell it at a fair and compelling asking price.
We’ve been in your shoes and know how big of a decision this is. Small business owners and other business owners alike face a host of considerations as they go through the selling process. We will guide you every step of the way from the valuation positioning to what business assets and intellectual property to include in the purchase agreement through the due diligence process and the closing of the business deal.
We look forward to the opportunity to work with you. Contact us today to get started.