Key Insight
ARR is the most optimistic way to present a revenue number — it assumes every active contract renews and nothing churns. Verify the churn rate before treating ARR as a reliable valuation input.
How ARR Is Calculated
ARR = Sum of all active annualized contract values
For monthly subscriptions: ARR = MRR × 12 For annual contracts: ARR = sum of annual contract values
ARR is always forward-looking — it represents the revenue you'll earn over the next 12 months if no contracts churn. This differs from trailing revenue, which is what was actually earned.
ARR vs. Revenue
A business with $1.2M ARR may have only earned $900K in the last 12 months if it added significant contracts late in the year. Or it may have earned $1.4M if it had contracts that didn't renew. ARR is a snapshot of the current contracted run rate, not a trailing performance metric.
What Multiples Look Like on ARR
SaaS and software businesses are often valued as a multiple of ARR (e.g., 3-5x ARR for SMB SaaS). For services businesses with contracted recurring revenue, valuations are typically expressed as a multiple of SDE or EBITDA, but the recurring revenue percentage significantly influences which multiple applies.
Churn Rate: The ARR Modifier
ARR is only valuable if it renews. The net revenue retention rate — what percentage of ARR renews each year, including expansions and contractions — is the critical companion metric to ARR.
A business with $1M ARR and 85% net retention will have ~$850K ARR next year (all else equal). A business with $1M ARR and 105% retention (customers expanding) is compounding.
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