Annual Recurring Revenue
Annual recurring revenue (ARR) is the value of a company's active subscription contracts, normalised to one year: monthly recurring revenue multiplied by twelve, with one-off fees, usage charges and services left out. For a software or fintech business sold on subscriptions, it is the number a buyer prices first and audits hardest.
- Also known as
- ARR, Run-rate revenue, Annualised revenue run-rate
- Used at
- every board pack, every fundraising deck, the first page of an information memorandum
- Binding
- no — ARR is a management metric, not an accounting figure, so the sale agreement defines it before any price is tied to it
- Typical range
- fintech and vertical SaaS companies changed hands at 4–8× ARR in 2024–2025, with the top decile above 10×
- Parties
- founders and their finance team, who compute it; investors and acquirers, who recompute it
How ARR works in practice
ARR is simple to state and hard to agree. Take every customer contract in force on the measurement date, annualise the recurring part — the monthly or annual licence — and add them up. What goes in is where the arguments start. A twelve-month contract at €4,000 a month is €48,000 of ARR. A pilot on a three-month term is not, however hopeful the sales team. Implementation fees, a one-off data migration and the variable transaction fees a payments company earns on volume are revenue, but they are not recurring, and a buyer will strip them out.
Buyers then read the movement rather than the level. Net new ARR is what was added by new customers and expansions, less what was lost to churn and downgrades; net revenue retention is this year's ARR from last year's customers divided by last year's ARR from the same customers. A company at €10m ARR with 120% net retention grows without selling anything new; one at 85% is filling a bucket with a hole in it.
In a sale, ARR is defined in the agreement to the contract and the date: which contracts count, whether notice-served customers are excluded, how multi-currency contracts convert. Quality-of-earnings work traces a sample of ARR back to signed contracts and to cash received, and the buyer's model separates the ARR that is contracted for another year from the ARR that renews month to month.
Example
A compliance-software company reports €6.0m ARR. Diligence finds €0.4m of it is annualised professional-services fees, €0.3m is a contract on which the customer has served notice, and €0.2m is a free-trial cohort booked at list price. Adjusted ARR is €5.1m. At the 6× multiple in the letter of intent, the €0.9m of adjustments moves the price from €36.0m to €30.6m — a €5.4m difference, before anyone argues about the multiple itself.
Common mistakes
- Annualising a good month: ARR from a record December is not the run-rate of the business. - Counting contracted but not yet live customers, whose revenue may never start. - Leaving usage-based revenue in ARR because it "usually recurs"; the buyer will take it out and the multiple with it. - Reporting gross ARR and hoping nobody asks for net revenue retention. - Tying a price to ARR in the letter of intent without defining the word.