LTM vs. NTM Multiples in SaaS: What Founders Should Know

SaaS financial metrics, especially understanding the nuances between LTM (Last Twelve Months) and NTM (Next Twelve Months) multiples is crucial for founders. These metrics play a significant role in determining how investors, potential buyers, or even management teams assess the value and growth potential of a company. They offer two different perspectives: one focused on the past, and one that looks ahead to the future.

What Are LTM and NTM Multiples?

Before diving into the pros and cons of each, let’s define these terms clearly.

LTM (Last Twelve Months) refers to the historical performance of your business. It represents actual financial data from the past year. LTM is often used interchangeably with TTM (Trailing Twelve Months), meaning both reflect a backward-looking view of your company’s revenue, profits, and performance.

For example, if you’re calculating your LTM revenue in October 2024, you’d use data from October 2023 to September 2024.

NTM (Next Twelve Months), on the other hand, is a forward-looking metric. It uses projections and forecasts to estimate what your company’s financials will look like in the upcoming year. This allows investors or potential acquirers to assess the future growth potential of your business.

For example, NTM revenue calculated in October 2024 would be a projection of your revenue from October 2024 to September 2025.

One key point to note: NTM is not the same as ARR (Annual Recurring Revenue), which simply multiplies your current monthly recurring revenue (MRR) by 12. ARR reflects your company’s current run rate, while NTM includes forecasted changes in growth.

Key Differences Between LTM and NTM Multiples

Although both LTM and NTM multiples are used to assess company value, they offer contrasting insights based on their use of past data or future projections.

1. LTM Multiples: The "Safe Bet" for Established Companies

LTM multiples are generally favored for companies that have more predictable and steady growth patterns. For SaaS companies that are small to mid-sized or those with relatively stable growth, LTM is often the go-to valuation metric. Since it relies on past performance, it’s less subjective and provides a more concrete picture of the business.

When to Use LTM Multiples:

• For mature SaaS companies with slower, more linear growth.
• When valuing businesses where past performance is a reliable indicator of future outcomes.
• In financial reporting to show accurate historical data that’s easy to track.

Pros of LTM Multiples:

• Objective: LTM is based on actual results, making it less prone to errors or biases compared to projections.
• Simple to calculate: It’s straightforward to gather data for the last 12 months from financial statements.
• Helpful for stable companies: LTM is ideal for companies whose revenue doesn’t fluctuate significantly month over month or year over year.

Cons of LTM Multiples:

• Not ideal for high-growth companies: For rapidly scaling SaaS startups, past data might not reflect current momentum or future potential.
• Can be distorted by non-recurring events: One-time expenses or irregular revenues can skew the LTM multiple, making the company appear stronger or weaker than it is.

For SaaS founders of mature companies, LTM multiples can be a solid tool to represent the steady progress you’ve made. However, for younger, faster-growing companies, relying solely on LTM might leave money on the table during valuation discussions.

2. NTM Multiples: The Forward-Thinking Approach for High-Growth Companies

NTM multiples focus on the future. They are particularly useful for high-growth or VC-backed SaaS companies where historical performance may not accurately reflect the company’s current trajectory. Investors often favor NTM multiples because they provide a snapshot of where the company is heading.

When to Use NTM Multiples:

• For high-growth SaaS startups, especially those scaling rapidly and expecting substantial future revenue growth.
• During strategic M&A discussions where future revenue potential is more relevant than past results.
• In investment rounds where investors are betting on future growth and want a forward-looking perspective.

Pros of NTM Multiples:

• Captures future growth potential: If your company is on an upward trajectory, NTM will better reflect your expected future value.
• Useful for strategic planning: Projecting revenue and other key metrics for the next 12 months can help guide strategic decisions, investments, and hiring plans.
• Common in M&A: Buyers in mergers and acquisitions often rely on NTM multiples to estimate future return on investment, especially when acquiring high-growth startups.

Cons of NTM Multiples:

• Subjective: Since NTM relies on forecasts, it's heavily dependent on management’s assumptions and projections. If those are off, so is the valuation.
• Requires accurate forecasting: If your team is not great at financial modeling or projecting revenue, NTM can lead to unrealistic expectations.
• Risk of over-optimism: In the competitive world of SaaS, there’s a tendency to be overly optimistic about future performance, which could lead to disappointment if targets aren’t met.

For SaaS founders of high-growth companies, NTM multiples can give you the upper hand in valuation negotiations. By highlighting your expected future performance, you position your company as a strong bet for future returns, which can attract investors or buyers.

How SaaS Founders Can Use LTM and NTM Multiples

Both LTM and NTM multiples offer valuable insights into your SaaS business, but knowing when to use which is key. Here are a few tips for SaaS founders:

1. Know Your Audience

• For investors or buyers focused on growth (e.g., venture capitalists or strategic acquirers), lead with NTM multiples. Emphasize your projected future revenue and explain the growth drivers behind those projections.
• For lenders or conservative investors, LTM multiples may be more appropriate, especially if they prefer to see consistent performance and historical data.

2. Prepare for Both

Most investors will want to see both LTM and NTM figures. Be prepared to explain any discrepancies between the two. For example, if your NTM multiple is significantly higher than LTM, justify the reasons—perhaps you have a new product launch or key enterprise clients in the pipeline.

3. Use Metrics That Reflect Your Business

For mature SaaS companies, LTM is a reliable way to show stability. However, if you're in a high-growth phase, focusing on NTM will paint a more accurate picture of where your company is headed.

4. Be Conservative with NTM Forecasts

NTM is useful, but only if you’re realistic. Investors can spot over-optimism a mile away, and inflated projections can damage credibility. Be conservative, especially in uncertain economic times, and show how you plan to achieve those growth forecasts.

5. Communicate Clearly

Whether you’re presenting LTM or NTM multiples, communicate clearly how you arrived at the numbers. Be transparent about assumptions, particularly when it comes to NTM projections.

Continue growing your SaaS

Understanding LTM and NTM multiples is critical for any SaaS founder looking to navigate funding, mergers, or acquisitions. While LTM gives a stable, historical view, NTM provides a forward-looking perspective that can capture future growth potential. By knowing the strengths and limitations of each, you can better communicate your company’s value to investors, buyers, or your own leadership team.