Recurring revenue is what earns a subscription multiple, so it is worth establishing exactly how much of the revenue qualifies. Three things get counted as recurring that are not: billing that merely repeats, revenue that is contracted but consumption-based, and one-off work booked through the same invoice.
TL;DR: Recurring is not the same as contracted, and neither is the same as repeatable. Here is how to separate genuine subscription revenue from setup fees, usage and one-off work.
Most billing systems put every charge on the same ledger, so a setup fee, an implementation project and a monthly subscription all appear as revenue in the same place. A seller reading their own totals will describe the whole thing as recurring because it all arrives through the subscription system. Separating the components requires looking at line items rather than totals, which most operators have never had a reason to do.
Four mechanisms account for most of the gap between this claim and what the raw rows show. They are not mutually exclusive and they compound.
One-time charges booked at the start of a relationship inflate revenue in the month they land and do not repeat. They should be excluded from MRR entirely and, if material, valued separately at a services multiple.
Consumption billing is contracted but not committed. It falls when your customers' own volumes fall, which means it carries their cyclicality. Separate committed minimums from overage and treat only the minimum as recurring.
Consulting, migration and custom development are real revenue at a much lower multiple. If they run through the subscription system they get counted in MRR by default.
An annual prepayment recognised entirely in the month it was received creates a revenue spike and distorts every month-over-month comparison around it. Normalise to a monthly amount before you compute anything.
Every step below runs on a subscription-level export in a spreadsheet. None of it needs access to the seller's live billing account, which matters, because as a buyer you will not get one.
These are the thresholds we use in our own reports. They are working thresholds rather than industry standards, and the right line for a given deal depends on contract length, tenure and how transferable the customer relationships are.
| What you find | Verdict | What to do about it |
|---|---|---|
| Committed recurring above 90% of revenue | Green | The subscription framing is accurate. Apply the multiple to essentially all of it. |
| Committed recurring 75–90% | Investigate | Normal. Value the non-recurring portion separately rather than at the subscription multiple. |
| Committed recurring below 75% | Price it in | This is a hybrid business being sold as a subscription business. The blended multiple should reflect the mix. |
| Overage more than 20% of revenue and volatile | Investigate | You are buying exposure to your customers' volumes. Model the downside case on committed minimums only. |
| One-time fees rising as a share of revenue | Investigate | Growth is front-loading. Each new customer contributes more up front and less over time, which makes the model more sales-dependent. |
Ask for these before the LOI. After the LOI you are renegotiating rather than negotiating, and a seller who will not produce subscription-level rows has told you something useful either way.
Illustrative. Reported ARR of $600,000, described as fully recurring. Line items resolve to $468,000 of committed subscription revenue, $72,000 of onboarding fees, $41,000 of usage overage and $19,000 of migration work. Committed recurring is 78% of the total. At a 4× multiple on the recurring portion and 1× on services and fees, the value is materially below 4× on the whole, and the gap is not a negotiating position — it is what the line items say. Separately, the overage tracks the customers' own transaction volumes, so the downside case has to be built on minimums.
This is a valuation question more than a risk question, and it is the one most often settled by assertion rather than by data. The fix is mechanical: classify line items, apply the multiple bucket by bucket, and state the classification in the memo so it can be argued about explicitly. Where usage revenue is significant, also build the downside case on committed minimums only, because that is the floor you actually own.
The relevant tool on this site is the free MRR health check, which runs the arithmetic above on a file you paste in. The full method is documented in the 5-risk buyer-side method and the due-diligence checklist.
Every check on this page can be run by hand in a spreadsheet, and if you have the time you should. If you would rather not: send us the target's subscription export and we run the full human-reviewed analysis — logo churn, revenue churn, customer concentration, annual-plan decay, zombie MRR and an A–F revenue-quality grade. The free Starter tier covers one CSV per month, which is enough to check a single deal.
See a sample report → · Get the free 23-point checklist →
Committed, contractual, repeating subscription revenue. Setup and onboarding fees are one-time. Usage overage above a committed minimum is contracted but not committed. Services and custom development are services revenue. All four can arrive through the same billing system, which is why they get blended together.
Generally not at the same multiple. The committed minimum behaves like subscription revenue; the overage behaves like your customers' business cycle, and it falls when their volumes fall. Separate the two and build the downside case on minimums only.
You need charge-level or line-item data rather than invoice totals, plus a mapping of product or price IDs to categories. Then classify every charge into committed recurring, usage, one-time and services, and recompute MRR from the first bucket alone. The gap against the reported figure is usually the entire finding.