The ARR that is not ARR

ARR is not an accounting standard. It is a management convention, and management sets the convention.

The most common inclusions, in rough order of frequency. One-year contracts with no auto-renewal, counted at full annual value, where the customer decides again every twelve months. Implementation and onboarding fees, which are non-recurring by definition. Managed services and support retainers priced separately from the subscription. Training and professional services. And, increasingly, usage overages annualized from a strong month.

Every one is legitimate revenue. None belongs in the number that a buyer is paying a multiple of.

The size of the distortion shows up in the margin data. The 2026 Aleph and Benchmarkit benchmarks put 2025 median software gross margin at 80 percent and median total gross margin at 76 percent, and the report is explicit that the gap between the two is where services and non-software revenue sit. A company whose blended margin is materially below its stated software margin is telling you the mix, whether or not the ARR slide does.

Where the reconstruction actually happens

Not in the ARR schedule. In the billing system.

Invoice-level data separates recurring from non-recurring cleanly, because the billing engine had to make that distinction to raise the invoice. Contract terms tell you which revenue renews automatically and which requires a decision. Together they produce a recurring base that is often meaningfully smaller than the headline, and, more usefully, a base whose cohorts can be tracked.

The second question follows immediately: who pays it. Consider a company with forty logos where the top three customers fund the business and the other thirty-seven are broadly cost-neutral to serve. The logo count says diversified. The cash flow says three relationships. Concentration on the revenue line and concentration in the cash flow are different measurements, and the second one is what determines whether a bad quarter is survivable.

Why this is worth doing properly

Retention is the whole argument. SaaS Capital’s 2025 benchmarking puts median net revenue retention for bootstrapped companies between three and twenty million dollars of ARR at 104 percent, with the ninetieth percentile at 118 percent. Those figures are calculated on genuinely recurring revenue. Run the same calculation on a base that includes services and one-year cancellables and the number is not comparable to anything, including itself in the prior year.

Which is the real risk. Not that the number is wrong, but that it is incomparable. A buyer who accepts the seller’s ARR definition is benchmarking against a peer set that used a different one, and every conclusion downstream inherits the error.

This is the workstream that most often changes a price, and it cannot be done without the seller’s data.