Annual Recurring Revenue - Metrics for Privately Held Companies

Below is one of the top universally tracked metrics we have seen in the market that strategic acquirers are focused on for privately held software companies. Prioritize this to have an edge during negotiations.

Annual Recurring Revenue (ARR)
ARR is an acronym for Annual Recurring Revenue, a key metric used by SaaS or subscription businesses that have term subscription agreements, meaning there is a defined contract length.

It is defined as the value of the contracted recurring revenue components of your term subscriptions normalized to a one-year period. ARR is the less frequently used alternative normalization method of the two common ones, ARR and MRR. It is used widely in B2B subscription businesses unless as well as being adopted in other recurring revenue services business, such as subscription IT Maintenance.  Often it is viewed as an annualized version of monthly recurring revenue (MRR), althought it does vary.

From an acquirers’ perspective, the predictability and stability of ARR ensures that the metric can be used to compare the company’s performance against its peers, as well as to compare it with its own performance across time.

ARR also adds essential context for other metrics. For example, say you have a churn rate of 5%. Is that reason to worry? Or is it acceptable? But when you look at the churn in a bigger picture with the ARR factored in, you know if it is reason enough to worry.  See Churn as well as ACS as complementary metrics.

Calculating Annual Recurring Revenue
To effectively use ARR as a metric in your business, you must have term agreements with a minimum duration of one year, or the majority of your term agreements must be one year or more. It is typically adopted by subscription businesses with multi-year agreements.

ARR = (Sum of subscription revenue for the year + recurring revenue from add-ons and upgrades) - revenue lost from cancellations and downgrades that year.

It's important to note that any expansion revenue earned through add-ons or upgrades must affect the annual subscription price of a customer. Any one-time options should not be included in this calculation.


TKV-6 Strategies is a boutique advisory firm with a focus on providing M&A advisory, capitalization, valuation, due diligence and other corporate development services to technology, technology-enabled and IP centric companies. Our sector expertise includes software, hardware, SaaS, IT managed services as well as tech enabled and IP driven companies