What Is ARR, and How Do Buyers Recalculate It in Diligence?

ARR means annual recurring revenue: the yearly value of the subscription revenue you expect to keep collecting from current customers. There is no standard rulebook for it. Every company draws the line a little differently, and every buyer redraws it.

The short version

Your ARR number gets you into the room. The buyer's ARR number sets the price. In diligence the buyer takes your customer contracts and billing data and rebuilds the figure from the ground up. If their number is lower than yours, the multiple is applied to the lower one.

A recent public example of how much the definition matters. In early October 2026, OpenAI told investors it had reached roughly $50 billion in annualized revenue at the end of September. A figure of $68 billion had been widely reported weeks earlier. According to CNBC, a person familiar with the matter said the larger number included gross revenue from OpenAI's partners. Same company, same quarter, a gap of about $18 billion that came down to what you count and how. AI-linked stocks fell on the day the lower number was reported.

Your company is not OpenAI, but your buyer will ask the same question.

Where buyers usually adjust ARR

1. Contracted but not live. Customers who have signed but are not yet using or paying are often excluded until they go live. 2. Discounts and credits. Buyers want ARR at the price customers actually pay, after promotional discounts, free months and credits. 3. Usage and one-off revenue. Usage-based fees, implementation fees, services and pilots are treated separately from true subscription revenue, and valued lower. 4. Gross versus net. If you resell, share revenue with a partner, or pay a marketplace fee, a buyer may want net revenue instead of gross. 5. Churn and notice. Customers who have given notice, or are clearly not renewing, come out even if the contract has months left. 6. Multi-year and annual prepay. Buyers look at the annualized value, not the cash received in the period. 7. Monthly annualized. Taking one strong month and multiplying by 12 is a run rate, not ARR. Buyers will ask for the trailing months.

Run rate, ARR and revenue are three different things

• Revenue is what you recognized under accounting rules in the period.
• ARR is the recurring subscription portion, annualized.
• Annualized run rate is any period, often one month or one quarter, multiplied up.

If your deck says ARR and the number is really a run rate, that is the first credibility problem in diligence, and the buyer will find it.

What this does to price

If a buyer values your company at 4x ARR and rebuilds your ARR 15% lower, the price moves by the same 15% before they negotiate anything else. Smaller adjustments hurt less, but they stack. The surprise is often worse than the number: a late downward restatement hands the buyer leverage and starts a retrade.

What to do before you start a process

• Write down your definition of ARR and apply it consistently for the last 8 to 12 quarters.
• Reconcile ARR to billing and to recognized revenue every month. If you cannot, find out why before a buyer does.
• Build the bridge yourself: reported ARR, less not-yet-live, less discounts and credits, less non-recurring, less churn on notice, equals buyer-view ARR.
• Decide in advance which version goes in the deck. Show the bridge, not just the headline.
• Consider a quality of earnings review before you launch. See what a quality of earnings report covers and what diligence tends to find.

When it matters most

If you are within 6 to 18 months of a sale or a raise, if you have usage-based revenue or partner revenue, or if your growth story depends on a recent step-up, assume ARR will be the first number tested.

This is general information, not accounting or legal advice. Talk to your finance lead and your advisers about your own numbers.

Want a second pair of eyes on your own ARR bridge before a buyer sees it? A Founder Clarity Session is 60 minutes with Jason on your actual numbers and a live decision. $1,995. Book it at https://exitboard.ai/strategy-session. Or ask the Board first, free: https://exitboard.ai/ask

Related questions

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• What happens to my valuation if I miss my ARR target before an M&A process? (/ask/what-happens-to-my-valuation-if-i-miss-arr-target-before-ma-process)
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