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.
If this is on your desk
Templates and checklists are free in the Founder Academy; for a specific situation, book a 30-minute intro call.
Founder AcademyBook an intro call