Quick answer: Buyers usually price trailing twelve-month (LTM) adjusted EBITDA, because it is the latest complete record, covers every season once and comes from monthly statements they can test. Run-rate EBITDA annualizes a current level and earns credit only for documented changes already in effect. Forward EBITDA is management’s forecast, and buyers treat it as an argument, not a basis for price, unless it is paid for through structure such as an earnout.
Key points
- Trailing twelve-month EBITDA is the usual basis for price because it is the latest complete measure, spans every season once and comes from monthly statements that a buyer’s accountants can test.
- A run-rate figure earns credit only for changes already in effect and documented, and buyers adopt a lower run-rate far faster than a higher one.
- Forward EBITDA is a forecast, so it enters a deal as a cross-check or through an earnout and rarely as part of the earnings the multiple is applied to.
- A multiple has meaning only against the earnings measure it was built on, so the same price reads as a different multiple on each basis.
- Seasonality, rapid growth and decline each weaken the trailing figure as a guide, and the seller’s task is to show the monthly pattern behind it.
Five measures of earnings and what each is for
Five earnings figures come up in a sale, and each answers a different question. Buyers price one of them and treat the others as arguments or checks. The table defines each and shows how it is built.
| Measure | What it is | How it is built | Role in price |
|---|---|---|---|
| Fiscal-year EBITDA | Adjusted EBITDA for a completed fiscal year, calendar or otherwise | The year’s statements, with adjustments applied | History and trend; goes stale as months pass after year-end |
| Year to date | Results from the start of the current fiscal year through the latest closed month | Monthly statements for the current year | Builds the trailing figure and is compared with the same months of the prior year |
| Trailing twelve months (LTM) | The latest twelve closed months | Last fiscal year plus current year to date, less the same year-to-date period of the prior year, or twelve monthly figures added | The usual basis for price |
| Run-rate | A current level, annualized | The latest month or quarter scaled to a year, or the trailing figure plus a documented change already in effect | Credited for fixed-rate changes, refused for peaks |
| Forward | Management’s budget or forecast for the coming year or the next twelve months | Driver-based projections | Cross-check, growth-buyer multiple or earnout target |
Every one of these is built from adjusted figures, so the adjustments have to be calculated month by month, as the guide to the EBITDA bridge describes. Adjustments applied only to annual totals cannot produce a trailing figure.
Why buyers anchor on the trailing twelve months
The trailing figure is the most recent complete measure of what the business earned. It spans every season exactly once, so a seasonal business is neither flattered nor penalized by the month a process starts. It comes from monthly statements, which are the records a buyer’s accountants test in a quality of earnings review. And it is the basis on which most purchase multiples are quoted, so a price stated on it can be compared with other transactions and with the buyer’s own return model. The explanation of valuation multiples shows why a multiple means something only against the earnings measure it came from.
A lender’s credit analysis also starts from historical results, so a buyer financing with debt has a further reason to hold to the trailing figure. The cost of the habit is lag. In a growing business the trailing figure understates current earning power, and in a declining one it overstates it.
When a buyer prices beyond the trailing figure
Buyers move off the trailing figure when a change has already happened and a document proves it. A price increase now in effect, a contract rate that started part-way through the period, a closed location and an acquisition completed during the period all make the trailing figure a poor guide to what the buyer will own. The seller asks for the run-rate effect, the buyer asks for evidence, and the result is a pro forma adjustment on top of the trailing figure, as the guide to pro forma and run-rate adjustments explains.
Buyers do not move for forecasts. A budget is a statement of belief by management, and the buyer builds its own case, as the guide to management case versus buyer case describes. Forward EBITDA reaches the negotiation in three ways. It serves as a cross-check on the trailing price, it supports the multiple a growth-minded buyer will pay, and it sets the target in an earnout, where the buyer pays for the forecast only if it is delivered.
Direction matters. Buyers adopt a run-rate quickly when it is lower than the trailing figure, because a lost customer or a granted raise is a fact to them. They adopt a higher run-rate slowly, because the seller must prove it. A schedule that lists only upward changes invites the buyer to go and find the downward ones.
Illustrative example: One growing company priced on three earnings figures
A company has a calendar fiscal year, and a sale process is under way with June as the latest closed month. The table shows adjusted EBITDA by quarter. The last two quarters of the current year are management’s forecast.
| Period | Q1 | Q2 | Q3 | Q4 | Total |
|---|---|---|---|---|---|
| Prior fiscal year (actual) | $400,000 | $450,000 | $500,000 | $550,000 | $1,900,000 |
| Current year (two actual, two forecast) | $520,000 | $580,000 | $640,000 | $700,000 | $2,440,000 |
| Measure | How it is built | EBITDA | Value at 6.0x |
|---|---|---|---|
| Last fiscal year | Four quarters of the prior year | $1,900,000 | $11,400,000 |
| Trailing twelve months | Third and fourth quarters of the prior year plus the first and second of the current year | $2,150,000 | $12,900,000 |
| Run-rate | Latest quarter times four | $2,320,000 | $13,920,000 |
| Forward | Current-year budget | $2,440,000 | $14,640,000 |
The trailing figure checks against the shortcut: $1,900,000 plus the current year to date of $1,100,000, less the prior year to date of $850,000, is $2,150,000. A buyer prices the trailing figure and treats the others as arguments. Each quarter of the prior year was higher than the one before it, so the buyer asks whether the pattern is growth or season. The second quarter of the current year is $130,000 above the second quarter of the prior year, which supports growth, but the buyer still declines to annualize the latest quarter without evidence that it will repeat.
The gap between the trailing value and the forward value is $1,740,000. A seller who wants credit for it can seek a higher multiple on the trailing figure or an earnout paid if the budget is met. The same $12,900,000 price is 6.0x the trailing figure, about 5.6x the run-rate figure and about 5.3x the forward figure, so a multiple quoted without its earnings basis cannot be compared. The numbers are invented to show the mechanics and are not benchmarks.
Seasonality, rapid growth and decline
The trailing figure is a weaker guide in three situations, and each calls for a different presentation.
Seasonal businesses. A trailing year holds a full cycle, so it is the right base. The danger sits in shorter windows. A buyer who compares the latest quarter with the one before it sees a seasonal swing, and annualizing a peak quarter overstates the year. The remedy is to set each month beside the same month a year earlier and show that the gain is not a calendar effect. A process that starts just after a peak or a trough changes how the trailing figure reads, so be ready to show the cycle for every year in the history.
Fast growth. The early months of the trailing year are weaker than the late months, so the trailing figure understates current earning power. Show monthly results and the change against the same month a year earlier, tie the growth to drivers such as new customers, signed contracts and price changes, and avoid asking the buyer to annualize the best month. Growth that is visible in many consecutive months with documented causes earns a better hearing than a budget. Launching a few months later moves the trailing figure closer to current earnings, at the risk that growth stalls first.
Decline. The trailing figure overstates current earning power. A buyer moves to the lower run-rate fast, and a seller who has not explained the cause will see the lower figure used without discussion. Present the cause, the evidence for it and any recovery already visible in the latest months.
Year-ends, stub periods and the period named in the letter of intent
Most owners think in calendar years, but a fiscal year can end in any month, and the choice shapes what a buyer sees. A sale launched shortly after a year-end has a recent completed year, often with an outside accountant’s work behind it, and the trailing figure sits close to the fiscal figure. Launched months later, the completed year is stale and the buyer asks for the months since, called the stub period, which come from internal statements. The trailing figure then straddles two fiscal years.
Year-end entries matter here. Bonuses, inventory counts and accrual true-ups are often booked at year-end, so a trailing period that contains a year-end carries those entries once, while a short window that misses it may lack them. The buyer’s accountants rebuild the trailing figure from monthly statements and compare it with the fiscal totals.
The trailing figure also rolls forward as a process runs. Each closed month adds one month and drops one, so the number in the memorandum, the number in the letter of intent and the number at closing can all differ. Name the earnings period and the basis of the multiple in the letter of intent, use the same period in every document, and expect the buyer to retest price if recent months come in below the months they replace.
Frequently asked questions
What is the difference between LTM EBITDA and run-rate EBITDA?
LTM EBITDA is what the business actually earned in the latest twelve closed months. Run-rate EBITDA takes a current level, such as the latest month or quarter or a price now in effect, and annualizes it. The first is a fact from the records. The second is a claim about the future that a buyer credits only when documents show the level will hold.
How is LTM EBITDA calculated?
Add the monthly or quarterly results for the latest twelve closed months. A shortcut gives the same answer: take the last full fiscal year, add the current year to date, and subtract the same year-to-date period from the prior year. Apply the adjustments month by month, so the trailing figure is adjusted EBITDA and not reported EBITDA.
Why do buyers use trailing EBITDA instead of forecast EBITDA?
Trailing results are facts that can be tested against bank statements, invoices and monthly closes. A forecast is a belief about what will happen under the next owner, and the buyer would be paying a multiple on earnings that do not yet exist. Buyers use forecasts to understand the story and to set earnout targets, not to set the earnings base for price.
Can a growing company get credit for forward earnings?
Sometimes, through structure. A buyer may pay a higher multiple on trailing earnings, or it may add an earnout that pays only if the forecast is met. Credit through the base earnings requires documented changes already in effect, such as signed contracts and price increases billing at the new level, and not the growth management expects to achieve.
Does a seasonal business use LTM or a calendar year?
Either can work if it covers a full cycle, but the trailing twelve months is more current and is what buyers use during a process. A seasonal business should show the same months of the prior year beside the current ones, because comparing a peak quarter with a trough quarter says nothing about growth. Annualizing a peak quarter is the usual error.
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Related guides
- Pro Forma and Run-Rate Adjustments: Credit for Changes Not Yet in the Numbers: How pro forma and run-rate EBITDA adjustments work: price increases, contracts, lost customers, savings, acquisitions and closures, and the evidence buyers require.
- Valuation Multiples Explained: EV/EBITDA, EV/Revenue and More: What valuation multiples are, how EV/EBITDA, EV/revenue and EV/EBIT work, what drives a higher or lower multiple, and how to use public data with care.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- How to Read a Letter of Intent: The Terms That Decide What You Receive: A plain-language guide to the letter of intent in a business sale: price, structure, working capital, exclusivity, diligence and the terms that move your proceeds.
- Earnouts Explained: How Contingent Consideration Works in a Sale: An earnout ties part of the purchase price to future results. Learn how earnouts are structured, why buyers propose them and how sellers can value the risk.
- Normalizing Owner Compensation: Replacement Salary, Bonuses and Family Pay: How to restate owner pay for EBITDA: price each role the owner fills at market cost, then treat bonuses, distributions, benefits and family members on payroll.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.