How to build an ARR bridge for due diligence from billing exports

How do you build an ARR bridge for due diligence?

Build an ARR bridge by starting from beginning ARR, adding new, expansion and reactivated ARR, subtracting contraction and churn, and landing on ending ARR for the same period, with every line tied to billing records. Keep only recurring subscription revenue in the bridge. One-time items, including a data license payment, stay out.

Buyers of software and subscription businesses commonly ask for this schedule in diligence, and they test it against invoices. This guide shows how to produce it from billing exports and where owners go wrong.

What goes in the bridge?

The standard layout has one row per movement type and one column per period, usually monthly or quarterly. Define each row in writing before you populate it.

Pick the annualization rule once. Monthly recurring value times twelve is common for monthly plans, and contract value divided by term for annual plans. Say which one you used.

Prerequisites before you start

• A billing or subscription export with one row per customer per period, including plan, quantity, price, currency and dates
• A list of contract start, end and renewal dates, including multi-year terms
• A definition of what counts as recurring: subscriptions, support contracts, hosting, but not setup fees, services or usage that is not committed
• Agreement between finance and sales on churn timing, such as cancellation date versus last paid date
• A reconciliation of billing totals to the general ledger revenue for the same periods

Steps to build it from billing exports

1. Export customer-level billing data for the full lookback period your process letter or buyer requests, from your billing system or subscription platform.
2. Clean the file: merge duplicate customer names, convert currencies at a stated rate and flag credits, refunds and free periods.
3. Compute each customer's ARR at the end of every period using your annualization rule, excluding one-time lines.
4. Compare each customer's ARR period over period and classify the change as new, expansion, contraction, churn or reactivation.
5. Sum by classification to produce the bridge, and check that beginning plus movements equals ending for every period.
6. Reconcile ending ARR to billing totals and to ledger revenue, and write a footnote for any difference.
7. Keep the customer-level list behind the bridge so a buyer can sample any line.

Where do one-time payments go?

One-time payments belong outside ARR. Implementation fees, usage overages without commitment, termination fees, and a data license payment are all non-recurring. A buyer will ask whether ARR includes one-time fees, and a yes erodes trust in the whole schedule.

A data license is a one-time payment for an agreed dataset, typically exclusive for AI training for an agreed term. The company keeps ownership of its data, and nothing is binding until it agrees price and terms and signs. If a company receives such a payment, show it on a separate line below the bridge, labeled non-recurring, and discuss its accounting treatment with your auditor or accountant. How it is reported in the financials is a question for your finance advisers. Do not annualize it and do not present it as a run-rate item.

Common mistakes

How do you test the bridge before a buyer does?

Run three checks yourself. First, foot every column: beginning plus new plus expansion plus reactivation minus contraction minus churn must equal ending. Second, sample ten customers across the size range and trace each from the bridge line to the invoice and the contract. Third, compare ending ARR to the most recent month of billed recurring revenue multiplied by twelve, and explain any gap.

Also prepare the supporting cuts buyers ask for next: ARR by customer cohort, by product, and by plan. Net revenue retention and gross revenue retention come straight from the same data, so compute them from the bridge rather than from a separate spreadsheet. A bridge that produces consistent retention figures is far easier to defend in a management presentation. Keep a short methodology note with the file that states the annualization rule, the churn timing rule, the currency treatment and the date of the export, so a new analyst can reproduce every number.

Illustrative example

Illustrative: a fictional 90-person software company starts a quarter at an agreed beginning ARR figure. Customer rows show new logos, upsells, two downgrades and three cancellations. Finance classifies each movement, checks that the movements sum to the ending ARR list, and reconciles to billing. A one-time payment from a data license, if the company were to receive one later, would appear below the bridge as non-recurring and would not alter any ARR row.

How does this connect to data licensing and diligence?

A clean bridge sits beside other diligence work: a data quality diligence checklist for the records behind the numbers, the engineering firm backlog guide for non-subscription revenue, and the AI washing diligence guide for claims about proprietary data. Buyers' teams, including corporate development, read these together. Sellers can see where AI data buyers fit in the wider process in the buyer list guide.

Companies with 50+ full-time employees at peak and years of connected records in billing, CRM and support systems may be candidates for a license. The company fit checker gives a preliminary, non-binding screen and who qualifies lists the baseline.

Next step

Finish the bridge first and keep licensing separate. If the company has deep records and an authorized sponsor, register as a partner to make an introduction, or have the owner apply directly at sourcex.si/apply.