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Arpeet Ravalji
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// The ARR Diligence Cheat Sheet

Walk into the data room ready.

One page. The readiness checklist, the do's and don'ts, the exact questions a buyer will ask, and the red flags that create valuation pressure.

01

The Readiness Checklist

If you can't honestly check all twelve, that's your build list.

  • We calculate ARR one way, and it's written down.
  • One person owns the ARR methodology (ideally the CFO).
  • ARR reconciles to subscription revenue every month.
  • Every dollar of ARR traces to a customer, contract, and transaction.
  • New / expansion / contraction / churn are tagged at the source.
  • Retention runs on one fixed base (UFR), consistently.
  • We can produce ARR by customer with start and renewal dates.
  • Multi-year, usage, and migrations have documented treatments.
  • Committed-but-not-live ARR is identified and separable.
  • Customer concentration (top-10 %) is known and tracked.
  • A data-quality score is tracked and owned.
  • We could hand a buyer a data-room ARR pack this week.
02

Do's & Don'ts

ARR Definition
Do
  • Lock one basis and document edge cases
  • Enforce it in the systems, not just a doc
Don't
  • Let sales, finance, and CS each count their way
  • Tweak the methodology to hit a number
Reconciliation
Do
  • Bridge ARR to GAAP monthly, same format
  • Investigate every gap over threshold
Don't
  • Reconcile only when auditors arrive
  • Leave permanent differences unexplained
Retention
Do
  • Fix one base (UFR) and hold it
  • Decompose churn vs. contraction, logo vs. dollar
Don't
  • Switch bases between board decks
  • Net churn against expansion silently
Data Quality
Do
  • Map entities; track a DQ score
  • Fix the process upstream of the number
Don't
  • Run ARR out of a spreadsheet two people get
  • Patch symptoms downstream and move on
Audit Trail
Do
  • Log every change; keep it immutable
  • Make provenance one click away
Don't
  • Rely on memory to explain a move
  • Reconstruct history during diligence
03

Questions a buyer will ask

  1. 01“Walk me through exactly how you calculate ARR.”
  2. 02“Show me the reconciliation to your financial statements.”
  3. 03“Show me ARR by customer, with start dates and renewal dates.”
  4. 04“Why did ARR change by $X in that month?”
  5. 05“What are your gross and net retention, and on what base?”
  6. 06“How much ARR is committed but not yet live?”
  7. 07“What's your customer concentration in the top 10?”
  8. 08“How do you treat multi-year deals, usage, and product migrations?”
04

Red flags that trigger a discount

  • Three different ARR numbers depending who you ask
  • Methodology changed to hit a quarterly target
  • Reconciliation is manual and only annual
  • No single owner for ARR
  • Retention base shifts between decks
  • Professional services counted inside ARR
  • LTV modeled on an infinite customer life
  • “We'll clean it up post-close”
05

The diligence flow

What a buy-side team actually runs, from kickoff to a defensible quality-of-revenue pack.

  1. 01→
    Kickoff & Scope
    Deal type, model, systems, depth.
  2. 02→
    Data Request
    Vendor-specific tables & fields.
  3. 03→
    Profiling & DQA
    30+ checks; surface gotchas.
  4. 04→
    Mapping & Build
    Standard model; ARR constructed.
  5. 05→
    Bridge & Retention
    Movements, cohorts, top movers.
  6. 06
    QoR Pack & Q&A
    Deliverable; anticipate questions.

The best time to pass diligence is a year before it starts.

Score yourself on the Readiness Ladder, then use Build ARR from the Ground Up to close every gap this checklist just exposed.