Don't Let a Tenuous Twelve Months Cost You Ten Years of Value.

It's important for law firm founders to understand “Trailing Twelve Months” aka TTM or LTM (Last Twelve Months), which simply means the firm's financial performance during the most recent twelve months.

Most founders never think about TTM until a Legal MSO tells them it's a problem. They see the business they've spent decades building. Many MSOs see the last twelve months of financial performance. Whether that matters, depends entirely on the legal MSO. Every Legal MSO has its own investment thesis, meaning the strategy and criteria it uses to evaluate acquisitions. Some place significant weight on TTM because their investment policies require it. Others understand that law firms, especially consumer practices, do not conveniently schedule contingency fee settlements or high-net-worth divorces, based on what will look best in the soon to be submitted Excel spreadsheet.

Law firms simply do not produce perfectly predictable financial results – especially consumer-facing law firms. A personal injury firm may have several exceptional years followed by a quieter one because a handful of significant cases have not settled. A business firm may invest heavily in lateral recruiting or geographic expansion, without realizing the long-term gains in the current year. Neither of those situations necessarily reduce the long-term value of the business. They merely create a temporary disconnect between recent financial performance and the firm's true earning capacity. Investors who understand that, tend to have more flexibility when it comes to TTM. They’ll look at your current inventory of cases, pending settlements, or recently hired rainmakers whose invoices and billings haven't yet been paid.

Of course, there are circumstances where waiting is unquestionably the better strategy. If your firm is within a few months of receiving a settlement that will create a record-setting year, why not stack the odds in your favor?

The lesson here is remarkably simple. A disappointing TTM does not automatically mean your firm should wait. If your current numbers tell the wrong story, have your advisor vet vet the MSOs for flexibility in that regard, or wait until your financial statements catch up with the business you have already built. Don't let a tenuous twelve months cost you ten years of value.

Frederick Shelton is the CEO of Shelton & Steele. He represents and advises law firms through Legal MSO transactions. He can be reached at fs@sheltonsteele.com