Summary
Summary
- Revenue is what the accounts recognise for a period under accounting rules. ARR is the annualised value of recurring subscription contracts in force at a point in time.
- ARR is a forward-looking run rate; revenue is a historic measure. A growing SaaS company usually has ARR above last year's revenue.
- ARR should include only contracted, recurring subscription value. One-off implementation fees, services, usage spikes and unsigned pipeline do not belong in it.
- Buyers test ARR quality with gross and net revenue retention, logo churn, cohort behaviour, customer concentration and how ARR reconciles to billings and recognised revenue.
- A clean, contract-backed ARR schedule that ties to the accounts is one of the most valuable things a software seller can prepare.
01 · Guides
The measures side by side
Five numbers that are often confused.
| Measure | What it is | Time frame | Defined by accounting standards? |
|---|---|---|---|
| Recognised revenue | Income earned in the period as service is delivered | Historic period | Yes (e.g. ASC 606, IFRS 15) |
| ARR | Annualised value of recurring contracts in force | Point in time, forward-looking | No |
| MRR | Monthly version of ARR | Point in time | No |
| Bookings | Value of contracts signed in a period | Period | No |
| Billings | Amounts invoiced in a period | Period | No, but derivable from accounts |
A customer signing a three-year contract at $36,000 a year, invoiced annually, adds $36,000 of ARR on the start date, $108,000 of bookings when signed, $36,000 of billings each year, and roughly $3,000 of recognised revenue each month.
02 · Guides
What counts as ARR
Recurring, contracted and in force.
| Item | Usually in ARR? | Note |
|---|---|---|
| Subscription fees under signed contracts | Yes | Annualised; monthly plans x12 |
| Committed minimums on usage-based contracts | Yes | The committed amount only |
| Usage above the committed minimum | Sometimes | Only if stable and disclosed separately |
| Implementation and onboarding fees | No | One-off |
| Professional services and consulting | No | Unless genuinely recurring and contracted |
| Hardware or perpetual licence sales | No | Maintenance on perpetual licences may count if recurring |
| Free trials and unpaid pilots | No | No contracted value |
| Signed contracts not yet started | Disclose separately | Often shown as contracted ARR, not live ARR |
| Customers who have given notice | No, from notice date in many definitions | Disclose the policy |
03 · Guides
How buyers test ARR quality
Not just how much, but how durable.
- Gross revenue retention (GRR)ARR kept from existing customers after churn and downgrades, excluding expansion. Shows the floor.
- Net revenue retention (NRR)ARR from existing customers including expansion. Above 100% means the base grows without new customers.
- Logo churnShare of customers lost. Can differ from revenue churn if small customers churn more.
- Cohort analysisHow each year's customers expand or shrink over time.
- ConcentrationShare of ARR from the largest customers.
- Contract termsLength, auto-renewal, termination for convenience, price escalators.
- ReconciliationARR should tie to billings, deferred revenue and recognised revenue in the accounts.
Test growth and profitability together with the Rule of 40 calculator, and see how retention feeds price in the SaaS valuation calculator.
ARR waterfall
| Line | Amount |
|---|---|
| Opening ARR | $5.0M |
| New customers | +$1.2M |
| Expansion (upsell, price increases) | +$0.6M |
| Contraction (downgrades) | −$0.2M |
| Churn | −$0.4M |
| Closing ARR | $6.2M |
| Gross revenue retention | 88% |
| Net revenue retention | 100% |
Here the company grew ARR 24% in the year. Existing customers alone held flat (100% NRR); growth came from new customers. A buyer would explore why churn was 8% and whether expansion can be increased.
04 · Guides
Why the difference matters for valuation
Multiples are applied to a run rate.
Growth software companies are often priced as a multiple of ARR, because recognised revenue lags growth and profit is reinvested. A small difference in what counts as ARR therefore moves the price by that multiple. Mature or slower-growing software companies are increasingly valued on profitability as well, using EBITDA or free cash flow; see EBITDA vs net income vs cash flow.
- Contracted but not yet live ARR is usually valued at a discount, or handled through an earnout
- Usage revenue is often valued below committed subscription revenue
- Deferred revenue from annual upfront billing can be treated as a debt-like item in the price bridge; see enterprise value vs equity value
- High concentration or short contracts can reduce the multiple even with strong headline ARR
Estimate a range with the SaaS valuation calculator. For which buyers focus on recurring revenue, see our directory of software company buyers, and for the full sale process, how to sell a SaaS business.
Reference
Frequently asked questions
What is the difference between ARR and revenue?
Revenue is income recognised in the accounts for a past period under accounting rules. ARR is the annualised value of recurring contracts in force at a point in time, a forward-looking run rate.
Should implementation fees be included in ARR?
No. ARR should include only recurring, contracted subscription value. One-off fees and services are excluded.
What is the difference between ARR and MRR?
MRR is the monthly recurring revenue at a point in time; ARR is the annual equivalent, typically MRR multiplied by 12.
Is ARR an accounting measure?
No. It is not defined by US GAAP or IFRS, so companies should disclose how they calculate it and apply the definition consistently.
What is net revenue retention?
The ARR retained from a group of existing customers over a period, including expansion and after churn and contraction, as a percentage of their starting ARR.
Why do buyers reconcile ARR to the accounts?
To confirm the ARR figure is supported by contracts, invoices and recognised revenue, and that no non-recurring items are included.
Keep reading
Related analysis
Guides · M&A
EBITDA vs Net Income vs Cash Flow: Which Number Buyers Value
Buyers rarely value a private business on the profit line at the bottom of the accounts. They build up to EBITDA, adjust it, then check it against cash. Knowing which number each buyer uses, and why, explains most valuation conversations.
Guides · M&A
Enterprise Value vs Equity Value: From Headline Price to Cash in Hand
A buyer says "we value your business at $20 million". The owner hears $20 million in the bank. They are usually talking about two different numbers. Enterprise value prices the business; equity value is what the shareholders receive. The bridge between them decides the cheque.
Guides · M&A
Who Buys Software Companies? A Directory of Active Acquirers
Software companies are bought by very different owners: permanent holding companies, private equity platforms, strategic buyers and operators who rebuild products. Each looks for different things and treats founders differently. This directory sets out what active acquirers say they buy, in their own published words.
Research · Software and SaaS
Who Is Buying Software in 2026: A Public-Source Review of 27 Announced Deals
US private equity pulled back sharply from software in the second quarter of 2026. Strategic buyers did not. This review reads 27 announced and completed software, AI and fintech deals from July to mid-October 2026 against the published market data, to show who is buying, what they are buying and what that means for owners and acquirers.
Explore the sector:SaaS acquisitions/exits/
About the analyst
Joash Boyton
Founder and Managing Director, Acquiry · Melbourne, Australia · Global coverage
Joash Boyton is the Founder and Managing Director of Acquiry, an M&A firm built around buy-side acquisition origination. He works with strategic acquirers, private equity firms and advisers supporting buyers on mandates from USD $1M to $500M. Most of the work sits in technology, SaaS, fintech, payments, gaming and digital assets, and it is not limited to them: any sector, any market.