ACV and ARR Modeling Question

I'm preparing to complete a case study for a Tech-focused PE firm and have a pretty basic question regarding SaaS metrics. Assuming all customers/users pay the same amount per contract over a 3 year period for example, would the company's subscription ACV x the number of users in a given annual period be the same as the ARR. I ask because I'm thinking through how to best project ARR when building out the LBO. Obviously you'd utilize an ARR snowball and make assumptions for churn, upsell, down sell % if you are told mgmt expects net retention to stay consistent. I'm getting confused on if the best way to project new users for the snowball is to simply do ACV x # of new users in a year to get New ARR. It seems like a flawed approach but probably the best given limited time and information. Anyone that can provide thoughts or clarity on how to best approach this would be much appreciated

Comments (10)

  • Associate 2 in PE - LBOs
Jul 6, 2022 - 6:36pm

Assuming all customers/users pay the same amount per contract over a 3 year period for example, would the company's subscription ACV x the number of users in a given annual period be the same as the ARR

Yes. To your question about projecting, sure that works for a model test. There are more creative ways of making projections for certain business types in real diligence situations. For example a business that sells large enterprise contracts, you could project new ARR based on new rep hiring and quota ramp / attainment history. For venture like PLG companies, you could forecast as a % of TAM. Many other ways.

  • Analyst 2 in IB - Cov
Jul 6, 2022 - 6:56pm

Thanks! That's really helpful. I'm not as familiar with how the P&L for most saas businesses is forecasted and have been overthinking things like bookings, etc.

  • Associate 2 in PE - LBOs
Jul 7, 2022 - 12:15pm

Y'know the other thing is - you might be aware of this but making sure you don't fall into this trap - ARR =/= revenue for modeling purposes. Your ARR roll takes time to be recognized as revenue. Once the contract is signed it is ARR, but then you might not start servicing that contract for a month, and THEN it is revenue. You should read up on how that flows monthly into deferred and the whole cash adj. EBITDA thing.

Most Helpful
Jul 7, 2022 - 5:18pm
Finance Bueller, what's your opinion? Comment below:

At the end of the day, for SaaS companies, the best way to model out their projections really depends on their go-to-market strategy.

For inbound leads, using customer marketing and sales funnel as the base can be a great mechanism. Specifically, within this, you would use the Company's historical marketing funnel (Source Sessions, Leads, MQLs, etc.) and then into the historical Sales Funnel (SQLs, demos, deal shaping, etc., close) as the basis for projecting total users. As a perquisite for this methodology, one would need detailed information into a Company's conversion rates throughout the funnel, as well as knowledge on any seasonality trends and the respective funnel the Company uses.

From there, you can bifurcate the model into different schedules for the inbounds through the funnel in conjunction with a separate schedule for the the outbound reps and quota and to capture both sales segments we typically see in a SaaS business. If the Company also has affiliates and channel partnerships as their main source for new customers, this would also require a separate schedule.

As a last point, agreed with Associate 2 on the ARR to revenue -- will certainly want to construct a deferred revenue schedule in order to correctly classify the ARR into recognized revenue at the appropriate timing intervals. With this, also important to understand how their contracts work (annual versus quarterly versus monthly). I typically like to create different sections for various contract lengths as combining them in a single section can be tricky.

  • Associate 2 in PE - LBOs
Jul 7, 2022 - 10:18pm

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