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What is ARR or MRR and why is it relevant to business?

What is ARR? Why is it a relevant metric for valuing a company? What types of companies are valued by ARR? Why do investors value some companies by ARR and others by EBITDA? What ARR multiples are commonly applied?

ARR stands for Annual Recurring Revenue, which translates into Annual Recurring Revenue. ARR is a metric that measures the recurring revenue a company expects to earn in a year.

Why is it a relevant magnitude for valuing a company?

ARR is a relevant metric for valuing a company because it is an indicator of its ability to generate revenues in a predictable way. Companies with a high ARR are more likely to be profitable and to grow in the future.

What types of companies are valued by the ARR?

Companies that are typically valued by ARR are those that have a subscription-based or recurring payment business model. For example, SaaS companies, subscription service companies, media companies and telecommunications companies are often valued by ARR.

Why do investors value some companies by ARR and others by EBITDA?

Investors value some companies by ARR and others by EBITDA for different reasons. ARR is a more relevant metric for companies with a subscription-based or recurring payment business model, while EBITDA is a more relevant metric for companies with a traditional business model.

What multiples of ARR are usually applied?

The ARR multiples typically applied vary depending on the industry and the specific characteristics of the company. In general, ARR multiples for SaaS companies are higher than ARR multiples for companies in other industries.

Some examples of multiples of ARR are shown below:

  • SaaS companies: 20-30x ARR
  • Subscription service companies: 15-25x ARR
  • Media enterprises: 10-15x ARR
  • Telecommunications companies: 5-10x ARR

It is important to note that these multiples are only a benchmark, and that the actual value of a company is determined by a number of factors, including ARR, EBITDA, net income, revenue growth, profit margin and risk.

Conclusion and final advice

Not understanding how to value your startup can make you lose a LOT of money. Do not hesitate to consult a financial advisor or a commercial lawyer or M&A lawyer if you have any doubts.

If you enjoyed this article, you may also find it interesting to read the following one:

Why Finance Lawyers are Crucial to Startup Success

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