How do I calculate ARR vs. MRR valuation impacts?

How to Calculate ARR vs. MRR Valuation Impacts in Software M&A

In the world of software M&A, few metrics are as foundational — or as misunderstood — as ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue). While both are essential indicators of a company’s revenue health, they can have very different implications when it comes to valuation, especially in the context of a transaction.

For founders, CFOs, and investors preparing for a capital raise or exit, understanding how ARR and MRR influence valuation multiples is not just a matter of accounting — it’s a strategic imperative. This article breaks down the differences, explores how each metric is used in valuation modeling, and offers guidance on how to position your business for maximum value.

ARR vs. MRR: Definitions and Use Cases

Let’s begin with a quick refresher:

MRR (Monthly Recurring Revenue) is the normalized monthly revenue from all active subscriptions. It’s typically used for short-term forecasting and operational metrics.
ARR (Annual Recurring Revenue) is simply MRR multiplied by 12. It represents the annualized value of recurring revenue and is often used in strategic planning, investor reporting, and valuation discussions.

While the math is straightforward, the implications are not. In M&A, ARR is often the headline number — but MRR can reveal the underlying health and momentum of the business.

Valuation Multiples: ARR vs. MRR

In most SaaS and subscription-based software transactions, valuation is expressed as a multiple of ARR. However, there are exceptions — particularly in earlier-stage deals or when revenue is volatile. Here’s how the two metrics typically impact valuation:

1. ARR is the Benchmark for Enterprise-Scale Valuations

For companies with $5M+ in ARR, buyers and investors almost universally use ARR as the basis for valuation. Multiples can range from 4x to 12x ARR depending on growth, retention, gross margin, and market positioning. For example, a SaaS company with $10M ARR growing 40% YoY and 90%+ net revenue retention might command a 7–9x ARR multiple in today’s market.

Why ARR? It provides a clean, annualized view of recurring revenue, smoothing out monthly fluctuations and aligning with how acquirers model long-term cash flows.

2. MRR is More Common in Early-Stage or SMB Transactions

For smaller businesses — say, sub-$2M in ARR — MRR is often used as the valuation anchor. This is especially true in deals involving bootstrapped SaaS companies or micro-SaaS platforms. In these cases, buyers may apply a multiple to MRR (e.g., 3x–5x MRR), which effectively translates to a 3x–5x ARR multiple, assuming stable revenue.

However, if MRR is growing rapidly or has seasonal volatility, buyers may discount the implied ARR to reflect risk. This is where key SaaS KPIs like churn, expansion revenue, and CAC payback period become critical in justifying a higher multiple.

How to Model the Valuation Impact

To understand how ARR vs. MRR affects valuation, consider this simplified example:

Company A:
- MRR: $250,000
- ARR: $3,000,000
- Growth Rate: 30% YoY
- Net Revenue Retention: 95%
- Gross Margin: 85%

Scenario 1: Valuation based on ARR
→ 6x ARR = $18M enterprise value

Scenario 2: Valuation based on MRR
→ 5x MRR = $15M enterprise value

In this case, the difference in valuation methodology results in a $3M delta — a 20% swing. This is not uncommon, especially when buyers are conservative or when the company’s MRR has recently spiked and hasn’t yet stabilized into a reliable ARR run rate.

Strategic Considerations for Founders

At iMerge, we often advise software founders to think beyond the math and consider the strategic narrative behind their revenue metrics. Here are a few key takeaways:

Stabilize MRR before going to market. If your MRR is volatile or recently spiked, buyers may discount your ARR. A few months of consistent MRR can justify a higher ARR-based multiple.
Use ARR for positioning, MRR for defense. In your Confidential Information Memorandum (CIM), lead with ARR to frame the opportunity. But be ready to defend it with MRR trends, cohort analysis, and retention data.
Align your metric with your buyer type. Strategic acquirers and growth equity firms typically prefer ARR. Micro-PEs or individual buyers may lean on MRR, especially in sub-$5M deals.

For more on how to prepare for buyer scrutiny, see our guide on Completing Due Diligence Before the LOI.

When ARR and MRR Diverge

In some cases, ARR and MRR may not align neatly. For example:

Annual prepayments: If a company collects most of its revenue upfront, MRR may appear low relative to ARR. Buyers will normalize this in their models.
Seasonal businesses: Companies with seasonal spikes (e.g., tax software) may show inflated ARR if calculated during peak months. A trailing 12-month MRR average may be more accurate.
High churn or contraction: If MRR is declining, ARR may overstate the company’s forward-looking revenue. Buyers will likely apply a lower multiple or adjust ARR downward.

In these situations, a quality of earnings (QoE) report can help validate the revenue base and support a stronger valuation. For more on this, see What’s a Quality of Earnings (QoE) Report and Do I Need One?

Conclusion

ARR and MRR are two sides of the same coin — but in M&A, the side you show can significantly impact your valuation. Understanding when and how each metric is used allows you to better position your company, anticipate buyer questions, and ultimately command a stronger multiple.

Firms like iMerge specialize in helping software founders navigate these nuances, from financial modeling to buyer negotiations. Whether you’re preparing for a strategic exit or exploring growth capital, aligning your revenue metrics with market expectations is a critical step in maximizing value.

Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.