What is ARR (Annual Recurring Revenue)?
ARR (Annual Recurring Revenue) is the annualised value of a subscription business’s recurring revenue: the run-rate of contracted, repeating income: excluding one-time fees, services and usage spikes. It is the primary sizing metric for SaaS companies and the number most term sheets, valuations and covenants hang from.
How to calculate it: correctly
Two accepted routes: MRR × 12 (annualise monthly recurring revenue) or the sum of active contracts’ annualised values. What never belongs in ARR: implementation and setup fees, one-off services, non-recurring usage overages, and signed-but-not-started contracts (that is bookings). Example: a startup with 120 customers at $500/month plus $40,000 of one-time onboarding this year has ARR of 120 × 500 × 12 = $720,000: the onboarding money is revenue, but not ARR.
Why investors are strict about it
ARR is not a GAAP figure, so definitions drift, and inflated ARR is one of the most common due diligence findings. Diligence teams rebuild ARR from invoices and contracts, then check the quality behind it: net revenue retention, churn, and the share of ARR from discounted or short-term deals. In venture debt and revenue-based financing, ARR definitions become contractual: a loose definition in the loan agreement can trip a covenant later.
Is ARR the same as revenue?
No. Revenue is a recognised accounting figure for a past period; ARR is a forward-looking run-rate of recurring income only. A company can have $1M revenue and $600k ARR, or the reverse.
What ARR multiple do SaaS companies raise at?
It moves with markets, growth and retention; the durable point is that the multiple applies to defensible ARR, which is why definitional hygiene is worth real money.
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