ARR

What it means

ARR is recurring revenue expressed as an annual figure, and in practice it is almost always the current monthly recurring revenue multiplied by twelve rather than a sum of what was actually billed over the last year. That makes it a run rate, a statement of what the business would earn in a year if today's subscriptions simply continued. It is the standard unit for talking about software businesses of any size.

Why software is priced on it

Subscription software has predictable enough margins that revenue implies profit, so buyers price it on revenue multiples where they would price a content site on profit. Small products commonly change hands in the region of 2x to 4x ARR, with retention and growth deciding the position inside that range. The same logic does not extend to businesses whose costs scale with sales, which is why ARR multiples are not used on ecommerce.

Where the figure gets inflated

Three ways, all common. Annualising an unusually strong month, which turns a spike into a permanent-looking run rate. Counting revenue that is not recurring, particularly setup fees and lifetime deals. And including contracts that have been signed but have not started billing, which is a forecast dressed as a fact. Ask which month the figure came from, what it excludes, and how it compares to the last twelve months of actual receipts.

What to present alongside it

ARR without retention is half a number. Pair it with monthly churn, net revenue retention, and the concentration of your largest accounts, because a buyer's real question is how much of the ARR survives twelve months after they own it. Growth matters too, but a business growing 30% a year with 6% monthly churn is a leaky bucket being filled faster, and experienced buyers price it as one.