MRR and ARR: Recurring Revenue Explained

Recurring revenue (MRR and ARR)

Also known as: MRR, ARR, subscription revenue, annual run-rate revenue

Definition

Recurring revenue is revenue a company expects to receive regularly under ongoing contracts or subscriptions. MRR (monthly recurring revenue) is the subscription revenue for a month. ARR (annual recurring revenue) is MRR multiplied by twelve.

Updated November 2026

Recurring revenue, explained simply

MRR and ARR measure the predictable base of a subscription business. One-off fees for setup, training or consulting are excluded. Software and other subscription businesses are often valued on a multiple of ARR, so overstated ARR means an overstated price.

Diligence tests that MRR agrees to invoices and cash, that cancelled customers have been removed, and that ARR reconciles to GAAP revenue and deferred revenue.

MRR movement in a month

Illustrative

Lumen Ops Software, $ thousands

Net revenue retention is 98%: existing customers shrank slightly, so all growth came from new customers.

Calculation

FormulaClosing MRR = opening MRR + new customers + upgrades − downgrades − cancellations

ARR = closing MRR × 12 = $530k × 12 = $6.36 million. Net revenue retention = (500 + 15 − 5 − 20) ÷ 500 = 98%.

Lumen Ops Software is a fictional company. All figures are illustrative.

Why it matters in a deal

Software and subscription businesses are priced on ARR, so how it is defined and whether it is supported by billing data and cash is central to value.

Red flags

One-off fees counted as recurring
Customers who have stopped paying still counted in MRR
Free trials or heavily discounted contracts counted at full price

Frequently asked questions

What is recurring revenue (MRR and ARR) in M&A?

Is ARR a GAAP measure?

No. Definitions vary, so diligence checks how each company calculates it.

Is ARR the same as annual revenue?

No. ARR is a snapshot of the current subscription base. Revenue is what was recognized over the year.