Anonymised, illustrative composite. The seller's asking price was current monthly revenue times twelve. Every one of those subscribers could cancel with a single email, and the buyer's diligence team wanted to know how many actually would.
At a glance
A buyer evaluating a vertical software business received a term sheet built on the seller's own math: current monthly recurring revenue of $92,000, multiplied by twelve, for a run-rate figure of $1,104,000 that the seller's asking price used as its revenue base. The company's related glossary entries for run-rate revenue and trailing twelve months describe exactly this kind of annualisation — and exactly why it needs testing before it prices a deal.
Every one of the company's subscriber agreements was month-to-month. None carried a minimum term, an annual commitment, or a cancellation notice period longer than the current billing cycle — a deliberate product decision the founders had made years earlier to keep the sales cycle short, with no thought at the time to how it would read to a future buyer.
A naive run-rate calculation assumes today's revenue simply continues. For a subscriber base with no minimum term, that assumption has no contractual support at all — every dollar of the $1,104,000 figure could, in principle, cancel inside thirty days. The buyer's diligence team pulled twenty-four months of subscriber-level billing history to test what the historical pattern actually showed, rather than accepting the point-in-time snapshot as a forward projection.
The seller's own explanation for the $92,000 figure was that it was simply “this month's number,” picked because it was the most recent and, not coincidentally, one of the strongest months in the trailing period. Nothing about the underlying subscriber agreements made that month more representative of the next twelve than any other.
Naive annualised run-rate: $92,000 × 12 = $1,104,000. Measured monthly revenue churn from 24 months of billing data: 4.1%, implying 95.9% monthly retention. Compounded over twelve months: 0.959^12 ≈ 0.605. Churn-adjusted 12-month floor: $1,104,000 × 0.605 ≈ $668,024. Gap between the naive figure and the churn-adjusted floor: roughly $435,976.
Because no subscriber contract carries a minimum term, there is no contractual floor under the revenue the way an annual-contract SaaS business would have — the only defensible basis for pricing forward revenue is the business's own observed retention curve, run forward on a no-new-sales, pure-runoff basis. The buyer priced the cash-at-close portion of the deal against the $668,024 churn-adjusted floor rather than the $1,104,000 naive figure, and structured the roughly $436,000 gap as a holdback released against revenue actually realized over the following twelve months, rather than revenue merely observed on the day of the snapshot.
The same discipline is what an independent valuator is required to bring to any conclusion of value: CBV Institute's Valuation Practice Standards — Standard No. 100 (Valuation Conclusions and Valuation Reports) and its companion disclosure, scope-of-work and file-documentation standards, Nos. 110, 120 and 130, effective January 1, 2026 — “set the minimum requirements for a valuator to establish a credible and properly supported conclusion of value for shares, assets, liabilities, or any other business interest.” A bare point-in-time MRR figure, with no contractual commitment behind it, does not on its own meet that standard. Note what this is and is not: a professional standard binding on a Chartered Business Valuator, not a statute, and no statute governs how a private buyer annualises revenue.
Had the buyer paid the full $1,104,000 naive run-rate in cash at closing, with no holdback structure, and actual realized revenue over the following year come in at or near the historical runoff floor — which is what the retention curve predicted and what closing-anniversary billing data in fact showed — the buyer would have overpaid by the same roughly $436,000, with no mechanism left to recover any of it. The holdback is what converted that exposure from a sunk loss into a contingent one.
The seller's counter-argument was that the historical churn rate reflected a period before recent product improvements, and that forward retention should run better. That may well be true, and the deal structure did not have to resolve the argument at signing — the holdback simply let the following twelve months of actual billing data answer the question, and pay the seller for whichever outcome actually happened rather than for the outcome either side predicted.
The tell is a single diligence question, asked before any revenue figure is annualised: does any subscriber carry a term commitment longer than the current billing period? Where the answer is no across the board, the current MRR snapshot is a ceiling to be tested against historical retention, not a floor to project forward as if it were contractually guaranteed.
A 30-minute call is enough to tell you whether a structuring or diligence gap like this one is sitting in your pipeline.
